Impact of Macroeconomic Factors on Income Inequality and Income Distribution in Asian Contries

Abstract

This study examines the macroeconomic determinants of income inequality using dynamic panel data analysis. Specifically, the study employs dynamic panel data analysis based on the generalized method of moments over 1990–2013 across 33 Asian countries. The World Bank data series was widely used as data for macroeconomic variables while the Gini index was collected from the World Income Inequality Database. In addition to the macroeconomic factors, the study incorporates a series of political economic and demographic factors to provide more realistic estimates. The study found an inverted U-shaped (parabolic) relationship between gross domestic product (GDP) and inequality, supporting the well-known concept, the Kuznets curve. Apart from that, official development assistance (ODA), education, and labor force participation reduce inequality while higher inflation, political risk, terms of trade, and unemployment increase inequality in Asian countries. The study further observed that an initial increase in GDP redistributes income from the bottom 20% of people to the middle class and richest groups. However, further increases in GDP redistribute the income from the top 20% to middle-income and poor groups. Similarly, inflation, unemployment, terms of trade, and ODA are also significant factors of income distribution among Asian countries. This study recommends ensuring higher and steady long-term economic growth, and enhanced access to education and employment while maintaining price stability and political stability to sustain more equal income distribution followed by lower-income inequality in the region.