Financial Development, Income Inequality, and Poverty Reduction: Democratic Versus Autocratic Countries

The aim of this paper is to test the relationship between financial development (FD), political institutions (PI), income inequalities (II), and poverty. We tested this relationship using different estimation methods and two separate samples. The first sample consists of a panel of 93 democratic countries and the second includes a panel of 31 autocratic countries. Results indicate that, unlike in autocratic countries, FD and democratic institutions, taken separately, help to bridge the gap between the rich and the poor by reducing poverty in democratic countries. To the contrary of autocratic countries, the interaction between FD and PI, strangely enough, does not reduce II and poverty in democratic countries. Analysis of the sub-democratic group yields opposite results, particularly in low-, mid-, and upper-mid-income countries compared with high-income countries.