Abstract:
The relationship between income inequality and economic growth has attracted a lot of
attention among scholars and policy makers. This dissertation revisits inequality - growth
nexus by investigating the complex relationship in the specific context of Western Balkan
(WB) Countries. Specifically, we add to the recent literature by incorporating financial
market development and quality of institutions to the empirical model, using up-to-date
data covering WB countries and employing comprehensive methodological approaches.
This study contributes to previous studies by employing various methods of investigation
while paying attention to endogeneity issues addressed in previous literature and analyzing
the interplay between these variables in an integrated empirical framework. We use four
methodological approaches (panel regression analysis, instrumental variable, two-stage
least squares and simultaneous-equation models) and compare the results obtained relying
on different econometric techniques. Through rigorous analyses and empirical
investigation, our findings shed some light on the impact of financial market development
and quality of institutions on economic growth and income inequality relationship in
selected WB countries. Our estimates generated three key results. First, there is evidence of a positive relationship
between GDP per capita growth and income inequality. Thus, we found no evidence of
trickle-down effect over the course of transition, as economic growth goes hand with hand
with growing income inequality. Second, we find strong evidence that income inequality
spurs economic growth, indicating highly unbalanced economic growth pattern, and
persistent dual-economy over the course of transition. These findings suggest that income
inequality has played important role in stimulating economic growth in the WBC,
plausibly due to persistent structural weaknesses of WB economies. Third, our results
support the proposition that financial market development proxied by credit and bank
branches have positive impact on income per capita while simultaneously improving
distribution of income. Additionally, institutions are found to have a dual effect, they
enhance GDP per capita while simultaneously reducing inequality. Specifically, the results
obtained from different methods of investigation including FE, IV, 2SLS, FE2SLS and
FE3SLS regressions indicate that the rule of law and credit growth positively impact
economic growth while simultaneously reducing income inequality
