Do higher government spending, financial development, and trade reduce income inequality in low-income countries? A Bayesian perspective

Abstract

We employed the Bayesian method to investigate the impact of government spending, financial development (measured by bank credit), and trade on income inequality reduction in 66 low-income countries (LICs) across Africa, Asia, America, and Europe from 2000 to 2018. Controlling inflation and unemployment, our results indicate that trade and inflation exacerbate income inequality in LICs, while financial development and government spending have no impact on reducing income inequality in these countries. Furthermore, the findings show that real GDP per capita reduces income inequality in LICs. To ensure the robustness of our results, we also conducted frequentist quantile regression, which yielded consistent findings that financial development, government spending, and trade do not reduce income inequality in LICs. We further discuss the potential channels through which trade, financial development, inflation, and government spending contribute to income inequality in LICs, and provide policy implications based on the empirical evidence.

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