Financial Development and Income Inequality in Pakistan: An Application of Ardl Approach

The main objective of present paper is toil to investigate the impact of financial development on income inequality for the case of small emerging economy like Pakistan. Greenwood and Jovanovic, (1990) seem to hypothesize that financial sector seems to deteriorate income distribution at early periods of its development and income inequality lowers with the maturity of financial sector. This theory of finance reveals that developed or sound banking sector increases the access of poor people by lowering credit restraints. In such circumstances, easy access to finance increases investment opportunities for small entrepreneur or deprived people. This easy access to financial resources will also enable the poor individuals to make investment in the education and health of their children or descendants. On the same way, investment in human capital enables them to increase their income levels through better employment opportunities. It leads to stimulate economic activity and seems to decline the persistent levels of income inequality. The association between financial development and income inequality is important to examine that how economic policies have income distribution improving impact in the case of Pakistan. In doing so, we have utilized time series data over the period of 1971 upto 2005 to investigate the impact of financial development on income inequality. The study seems to use ARDL bounds testing approach to examine cointegration for long run and ECM (error correction method) for short run relationships. The unit root problem has been handled by ADF unit root test. The empirical evidence indicates that financial development is associated significantly with equal income distribution. The estimate of economic growth is