Conceptualising the Linkages between Financial Development, Human Development, and Income Inequality: Cross-Country Evidences

Abstract

In the present era of finance capitalism, it is a great challenge for any country to strengthen its financial sector so as to realise the vision of financial inclusive society. Beside this major challenge, the government has to ensure the well-being of the society. Well-being of the society is not only indicated by the income level of an individual, but also by the noneconomic factors like health and education level of the people. But now-a-days, more and more emphasis is given on the concept of well-being of the population in the context of limiting role of GDP in ensuring equitable distribution of wealth. Formulation of a policy in achieving both the policy objectives (i.e., development of financial sector and ensuring well-being of the population) essentially calls for an understanding on the linkages between financial development and well-being of the population. In this context, this paper attempts to develop a conceptual framework on the linkages between the financial development and the human well-being in the context of inclusive development paradigm. In addition, this paper also tries to conceptualise the theoretical framework on the implications of financial development and/or human well-being on the level of income inequality or the other way round. The empirical analysis in this paper shows that there is positive and significant bidirectional relationship between the financial development and human development across selected countries of the world. Government intervention in the development in the financial sector (or achieving a higher level of well-being of the population) can also reduce the extent of inequality in the distribution of income.

Keywords: Financial Development, Human Development, Income Inequality, Well-Being

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