The heterogeneous effects of financial openness on income inequality in sub-Saharan Africa

Abstract

Background: The external determinants of income inequality include financial globalisation or financial openness. The world is increasingly financialised and forms of cross-border investment have grown significantly. Over the past two decades, income inequality and financial globalisation have increased in various countries. Aim: This study investigated the relationships between different de facto components of financial openness and income inequality. Setting: Annual panel data for 43 sub-Saharan African countries from 1990 to 2021. Method: The study employed a moments-quantile regression (MM-QR) estimation procedure that can reveal disregarded heterogeneous covariance effects in panel data models and allow for endogenous explanatory variables. Results: The findings revealed that foreign direct investment (FDI) and portfolio equity are associated with increases in income inequality, with FDI having a more pronounced effect in more unequal countries and portfolio equity having a less pronounced effect in such contexts. Debt reduces income inequality across all quantile levels, with the strongest effects observed in more unequal countries. Conclusion: The findings highlight the complex relationship between financial openness and inequality, shaped by its components and inequality levels. Contribution: The study contributes to the literature as only a limited number of studies have investigated the relationship between overall de facto financial openness, its various components and income inequality in sub-Saharan Africa. The use of a quantile regression approach contributes to the small number of empirical studies employing this approach when investigating the link between financial openness and income inequality.