Financial Development and Distribution of Income in MENA

One of the central concerns in Middle East and the North of Africa (MENA) has been the reduction of poverty and inequality so prevalent in the region. Theoretical predictions on the finance-inequality nexus are inconclusive and mixed. Greenwood and Jovanovic (1990) propose an inverted U-shaped relationship between finance and inequality, while a negative and linear relationship is predicted in some other theoretical models (e.g., Galor and Zeira 1993; Banerjee and Newman 1993). In this study, the relationship between financial development and distribution of income in Middle East and North of Africa is investigated. The study is done by using the GMM estimator based on Dynamic panel data model for 10 countries in MENA region during 2004-2008. The result of this estimation indicates that financial development significantly reduces income inequality in this region. Therefore, policies to improve financial development indicators in the region are suggested.