Table 16 presents the effects of human capital (columns 1–2a) and financial markets (coulmns 3–4a) on growth in LLMC. Empirical evidence shows that human capital has positive and significant effects on economic growth (except column 2a). Because, as we previously stated, while income inequality negatively affects human capital, financial development positively affects human capital. Therefore, the finding that human capital supports economic growth, as illustrated here, indirectly supports the credit markets imperfections channel. For this reason, as the financial market develops in developing countries, if individuals use credit opportunities to invest in their human capital, economic growth will increase.

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There are few studies in the empirical literature questioning the positive impact of income inequality on economic growth. While income inequality positively affects human capital (Chletsos & Fatouros, 2016), contrary to the theory it can have a negative effect on savings and investments (Nel, 2003) and similarly on patents (Braun et al., 2019). As stated in the positive channel, the fact that the positive https://www.investec.com/ effect of income inequality on R&D and innovations cannot be determined is explained by the financial development level of the country, and developed financial systems can reduce the negative effect. After testing several channels, they state that income inequality can have both positive and negative effects on economic growth, and thus the complexity of the relationship is emphasised.

Method and Dataset

The primary purpose of this study is to test whether the positive and negative channels specified in theory are valid, rather than the direct effect of income inequality on economic growth. Thus, the study is expected to provide a more comprehensive explanation of how the relationship between income inequality and economic growth emerges. Since many macroeconomic variables and policy recommendations may differ between the two country groups, different consequences for subsamples are likely to occur in the relationship between income inequality and economic growth. Therefore, examining countries with varying levels of development together may cause misleading results.

1 The Effect of Income Inequality on the Channel Variables

In this view, high inequality favours low taxation to consume more or high taxation to increase public education. As seen in the table, the differences in the results obtained in the studies suggest that countries should be grouped according to their level of development and perhaps income inequality. On the other hand, Ciegis and Dilius (2019) reveal that the impact of inequality on economic growth through fiscal policy varies according to countries’ https://www.liberty.co.za/ income and income inequality levels. In countries with relatively high income and inequality due to the increase in the income of the wealthiest population, inequality positively affects growth through fiscal policy. The negative effect of inequality on economic growth is due to increased social protection expenditures.

Income Inequality and Economic Growth

• The fact that a high inflation level, as an indicator of macroeconomic instability, harms the economic growth in these countries supports Stockman (1981).
• However, when these results are evaluated together with the findings from the channel estimates for LLMC (Table 3), it can be considered that the political instability channel is not valid, even if there is evidence for the second stage.
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• The negative impact of these channels on economic growth is more pronounced in relatively low-income countries.
• Therefore, according to the results here, the fact that the increasing fertility rate harms the economic growth supports both the theory and numerous studies in the literature, showing that the channel is valid.

However, the effect of income inequality on economic growth is positive only for this channel. The fact that https://satrix.co.za/ inequality does not increase the saving rate in low-income countries as in high-income countries may be related to the relatively low number of wealthy people in these countries. Moreover, this wealthiest part of the population can retain its savings so that future generations can invest in human capital. Finally, Table 7 shows the effect of inequality, a positive channel, on patent and saving rates. Contrary to the theory stated above, inequality has a significant adverse effect on the patent, similar to Braun et al. (2019) (except column 2).

2 The Effect of Income Inequality and Channel Variables on Economic Growth

The result of the control variables in the growth africa gold capital investment patrice motsepe estimates for UHC is slightly different from LLMC. Unlike LLMC, trade openness has a significant positive effect on economic growth in the former country group. Trade openness is more likely to stimulate technology and increase total factor productivity in developed countries than developing countries, so the positive impact on economic growth is not surprising. The estimates for the inflation rate are similar to those of LLMC, and the effect of the inflation rate on economic growth is significant and negative in all models. This finding supports many studies in the empirical literature, as stated in the section discussing the results for LLMC. Primary school enrolment used for human capital is positive in models where it is significant, but unlike LLMC, this finding is confirmed in fewer models.

The analysis is conducted using the System Generalized Moments Method by taking the 5-year averages of the data for the period 1980–2017. The fourth section includes the analysis results and growth estimates on the channel variable of inequality. Table african gold capital investment 15 presents the effects of political instability on growth in LLMC from columns (1) to columns (2a). The political instability negatively affects economic growth in reduced models (columns 1 and 2) for both indicators, so it can be said that the increase in instability causes a waste of resources in line with the theory.