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The influence of Capital Account Liberalization & Foreign Banks Ownership on Income
Inequality in Emerging Economies

Abstract

Income inequality remains a pressing concern in the context of emerging economies, where the
distribution of wealth has significant socio-economic implications. This paper investigates the
influence of two key factors, namely Capital Account Liberalization (CAL) and Foreign Bank
Ownership (FBO), on income inequality in 126 emerging economies during the period 1995 to
2013. We use Penal Fixed Effect Model, instrumental variable Model and Sensitively analysis
technique. The objective is to shed light on the extent to which these factors contribute to
changes in income inequality, as measured by the Gini coefficient. Our research findings
highlight the significant impact of Capital Account Openness and Foreign Bank Ownership on
income inequality in emerging economies. Specifically, increased capital account openness is
associated with a notable rise in income inequality, while higher foreign bank ownership
correlates with expanded income disparities. Moreover, our analysis underscores the complex
interplay of factors, with per capita income, government spending, education, trade openness,
and unemployment rates demonstrating nuanced relationships with income inequality in the
context of emerging economies. Our findings will contribute to a better understanding of the
complex relationship between financial globalization and income inequality in emerging
economies. By examining the combined impact of Capital Account Liberalization and Foreign
Bank Ownership, we aim to provide valuable insights for policymakers, economists, and
scholars interested in promoting equitable economic development. As income inequality
continues to be a critical issue, understanding the drivers behind it is essential for the sustainable
growth and prosperity of emerging economies.

Keywords: Capital Account Liberalization, Foreign Bank Ownership, Income Inequality,

Emerging Economies

1. Introduction

Capital account liberalization refers to the eradication of restrictions on the international

movement of capital (Radhianshah, & Kurnia, 2021). This may include unhindered cross-border
financial transactions conducted by individuals domiciled in a specific country as well as foreign

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investments made by state entities in the domestic economy. The liberalization process can be
implemented in both urban and rural areas. There are various manifestations of capital account
constraints, including restrictions imposed by domestic banks on foreign borrowing and
regulations governing the entry of foreign capital into the economy. There are restrictions on the
industry sectors in which foreign investors are permitted to invest, as well as restrictions on the
return of investment funds to the local economy. In the discipline of economics, income
inequality has been a subject of considerable debate for a considerable amount of time. The issue
of escalating income inequality is of global importance and, as such, is of significant economic,
social, and political interest. In advanced economies, the gap between the wealthy and the poor
has grown steadily over many decades, whereas in emerging markets and developing countries,
inequality has become progressively more complex (Dabla-Norris, Ji, Townsend, & Unsal,
2021).

The relationship and connection between capital account liberalization and income disparity give
birth to conflicting philosophies within the economic theory (Greenwood and Jovanović, 2021;
Newman, 2016). Several academic studies (e.g., al., 2012; Levine, 2021; Rioja, 2015; Zoo, 1997)
have hypothesized the existence of negative consequences resulting from unrestricted capital
mobility and income inequality. Existing research on financial inequality is insufficient.
According to Greenwood and Jovanovic (2021), there is an increase in income inequality during
the initial stages of a financial expansion. However, they also argue that inequality begins to
decline once inflation exceeds a certain threshold. According to the research of Newman (2016),
the prevalence of developed financial markets can reduce the impact of income disparity.
Similarly, the prevalence of an efficiently functioning financial market plays a crucial role in
reducing income distribution disparities. In contrast, Ryan and Zingles (2021) argue that the
expansion of the financial industry has the potential to exacerbate income inequality. In recent
years, scholars, specialists, and policymakers have paid considerable attention to the relationship
between an open capital account system and income inequality (Agnello, Mallick, & Sousa,
2012; Ang, 2020; Perotti, 2021; Zoo, 1997). This interest extends to the investigation of the
effect of such a system on decisions concerning income inequality (A. et al., 2021; Atkinson,
2021; Lee, 1995).

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According to the findings of D. et al. (2021), there is evidence that the liberalization of the
capital account, as measured by the aggregate liberalization index, led to a rise in income
between 1997 and 2005. In addition, the authors have provided evidence indicating that the
implementation of privatization legislation, the eradication of credit constraints, and the
reduction of market entry barriers may result in a decrease in income disparity. While there is
some evidence of a decline in the negative effects of unrestricted capital mobility on income
inequality, it has been observed that this decline is negligible in developing nations. In addition,
the liberalization of stock markets has contributed to the escalation of income disparity. In a
study conducted by Gamot et al. (2021), it was found that globalization in the business sector
was associated with a reduction in income inequality.

Conversely, the phenomenon of financial globalization was found to be linked to an increase in

income disparity. As evidenced by the works of Babu (2002), Jenkins (2015), and Velunga
(2002), a large body of literature exists on the effect of foreign bank ownership structure on
financial activities. Numerous studies have investigated the effects of various foreign bank
ownership arrangements on economic transformation and sustainable development. According to
the findings of Atkinson (2021), there is a significant correlation between foreign bank
ownership and foreign money and increased productivity and wealth inequality. Perez-Gonzalez
(2021) conducted a study in Mexico that demonstrated that the presence of foreign bank
ownership and the implementation of international corporate governance practices had a positive
effect on the overall productivity of manufacturing firms. This effect is especially pronounced
for businesses that rely extensively on technological advancements made possible by their parent
companies. Nevertheless, it has a negative correlation with economic inequality. This study's
objective is to examine the effect of capital account liberalization and foreign bank ownership on
income disparity in BRICS nations, taking into account the pertinent background information.

However, it is important to analyzed and measure the relationship between Capital Account
Liberalization and Foreign Bank Ownership to see whether it enhances the risk of income
inequality or contribute to an increase in income inequality. This research aims to examine the
impact of financial globalization, encompassing both Foreign Banks Ownership (FBO) and
Capital Account Liberalization (CAL), on income inequality in 126 emerging economies during
the period of 1995 to 2013. By quantifying the influence of these variables and identifying the

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underlying mechanisms through which they affect income inequality, the objective is to
contribute to a comprehensive understanding of the dynamics shaping income disparities in
emerging economies.

In addressing these objectives, several research questions emerge. The first question delves into
whether the simultaneous presence of Capital Account Liberalization and Foreign Bank
Ownership exacerbates income inequality in the 126 emerging economies under scrutiny. The
second question seeks to uncover the intricate channels through which Capital Account
Liberalization and Foreign Bank Ownership affect income inequality, providing insights into the
underlying mechanisms driving these relationships. Lastly, the third question explores the
correlation between the dependent variable, income inequality, and the independent variables,
CAL and FBO, deepening our understanding of the interplay between financial globalization and
income disparities. By addressing these objectives and questions, this research aims to contribute
valuable insights to the field while identifying gaps in the existing literature.

2. Literature Review

The implementation of capital account liberalisation within the neoclassical paradigm yields
positive outcomes by enhancing the global allocation of resources. In developed economies
characterised by substantial wealth, the profit margin tends to be relatively small (Dietrich, &
Wanzenried, 2014). Conversely, in emerging economies with limited invested capital, the return
on capital is often significant. There exist multiple mechanisms for overseeing the foreign
exchange account, including the imposition of international credit limitations by local banks and
the implementation of legislation pertaining to the volume of foreign currency within the
economic system. This study examines the limitations imposed on international investors in
terms of their investment opportunities inside specific industrial sectors, as well as the
constraints placed on their ability to repatriate invested funds within the domestic economy
(Montes, & Cruz, 2020).

Capital account liberalisation refers to a policy choice made by a government to transition from a
closed capital accounting system, wherein the movement of capital is restricted, to an open
capital accounting system that allows for the free flow of capital both within and across national
borders (Aggarwal, Arora, & Sengupta, 2021). At a fundamental level, there exist two distinct

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schools of thought and perspectives regarding the understanding of capital account liberalisation
as a strategic choice for growing nations.

According to Levine (2021), the theory lacks specificity in its predictions on the effects of
Capital account liberalisation and foreign bank ownership on income disparity. The impact of
taxes on wider and more extensive rates may vary. Excessive interest pertains to the utilisation of
financial services by individuals who do not typically engage in such practises. To provide an
illustration, it may be argued that enhancing income can potentially serve as a means of support
for economically disadvantaged families seeking to obtain loans. There is variation among
models in adhering to this approach. The impact of economic advancement on income inequality
is multifaceted. The impact of the expansion of financial services on the accessibility of financial
services has been deemed inconsequential due to the limited progress made in enhancing the
quality and breadth of these services. According to Greenwood and Jovanović (2021), the quality
of financial services that have already been purchased is significantly and positively impacted.
The modest outcome of this phenomenon yields a multitude of advantages that encompass a
diverse spectrum of affluent individuals, hence augmenting the distribution of income.

The liberalisation of the capital account is anticipated to have a positive impact on domestic
income, hence necessitating the creation of employment possibilities. The demand for workers
with specialised skills will surpass the need for people lacking such skills. This scenario
amplifies the disparity in skill levels between proficient and unskilled workers. The presence of
wage inequality within the accounting profession can perhaps be attributed to a decrease in the
proportion of total employment income allocated to individuals in this field. Foreign direct
investment (FDI) enables companies to engage in exporting their products, hence reducing
manufacturing costs. However, it is important to note that FDI might potentially contribute to the
exacerbation of income inequality by diminishing the proportion of employee compensation.

Numerous scholarly investigations have been conducted to examine the effects of Capital
Account Liberalisation on Income Inequality. Several studies (Castello-Climent, 2020; Clark,
2013; Doepke, 2000; Moav, 2019; Piroti, 1998) have observed an inverse correlation between
capital account liberalisation and income inequality. Conversely, other studies (Ahluvalia, 1996;
Conbor, 2018; Sarkin, 2009) have identified a positive association between capital account
liberalization and income inequality.

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There exist diverse perspectives concerning the correlation between foreign bank ownership and
income inequality. The association between foreign bank ownership and income inequality has
been substantiated by previous studies (Aitken, 2017; Harrison, 2004). Conversely, other studies
(Borenstein, 2018; Lee, 1995; Mello, 2017) have demonstrated a negative relationship between
these two variables.

Bumann and Lensink (2016) developed theoretical frameworks for conceptualizing the role of
capital account liberalization and foreign bank ownership in relation to marginal differentials and
income discriminatory impacts. The classical school of thought posits that there are two key
economic elements. The first factor pertains to the investor and the return on savings, while the
second factor concerns the payment and investment made by employers. Scholars have posited
that achieving financial independence typically enhances the operational efficiency of banks,
hence leading to a decrease in borrowing costs. The restructuring of the financial market is
anticipated to result in an increase in pricing. Enhanced savings can facilitate the regulator in
expediting earnings, thereby mitigating the income disparity between lenders and investors.
Nevertheless, nations endowed with substantial financial resources have expanded their demand
for credit in response to highly fluctuating credit levels. Conversely, the inverse scenario is also
plausible. For instance, carers may amass financial reserves as their attainment of economic
autonomy facilitates a process of economic transformation. According to De Han et al. (2010),
the act of decreasing stock prices is associated with the occurrence of income disparity.

Various theoretical frameworks have been identified to underscore the significance of

conditional attributes. Countries with higher levels of financial depth tend to see reduced
volatility in the liquidity of their capital accounts, which in turn has been found to contribute to
income disparity. Investing in free accounts carries inherent risks, even in economically
prosperous nations (Agnello et al., 2012).

Numerous previous research, such as the work conducted by Furceri and Loungani (2018), have
elucidated three primary mechanisms that link the outcomes of financial liberalisation to the
ramifications on wealth distribution. One potential avenue for examining the relationship
between risk-sharing and monetary freedom is through the influence of monetary freedom itself.
From an academic perspective, the liberalization of investment accounts is expected to enhance
prospects for the division of idiosyncratic global risk and stimulate internal spending.

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Nevertheless, the significance of reputable financial institutions is crucial in capitalizing on these

prospects (Kaj, Prasad, & Tirone, 2021).

In countries characterized by robust financial institutions, the implementation of free

capitalization has the potential to mitigate income inequality and reduce expenses, while
simultaneously minimizing the disruptive effects of economic restructuring. In contrast, within
nations where there is equitable availability of reputable financial institutions and credit
facilities, unrestricted account accessibility may contribute to disparities in income within a
conducive setting lacking financial service accessibility.

On the contrary, a further avenue via which financial relief might have an impact is by mitigating
the income disparity resulting from poverty, so causing a significant decrease in the market value
of commodities and subsequently leading to a reduction in property prices. Moreover, in the
event that the economic crisis endures for a prolonged duration, it will pose a threat to the
welfare of the underprivileged. One of the key objectives is to enhance foreign direct investment
(FDI) in developing nations, as highlighted by Applebaum (1997).

3. Research Methodology

The capital account liberalization & foreign banks ownership are crucial factors within the
context of income inequality in emerging economies. A Panel Data Regression Model is
particularly suitable for this research due to its ability to account for both temporal and cross-
sectional variation. With a dataset spanning 126 emerging economies from 1995 to 2013, this
approach allows us to capture how changes in Capital Account Liberalization (CAL) and Foreign
Bank Ownership (FBO) impact income inequality over time and across different countries. By
including country-specific and time-specific effects, the model controls for unobserved
heterogeneity, while its increased statistical power enhances our ability to detect the effects of
CAL and FBO on income distribution. Furthermore, it enables the examination of lagged effects,
addressing endogeneity concerns, and providing a comprehensive analysis of how these policies
influence income inequality dynamics in emerging economies.

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Unit root tests, such as the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests, are
crucial in this research to assess the stationarity of variables, such as income inequality, Capital
Account Liberalization (CAL), and Foreign Bank Ownership (FBO), as their non-stationarity can
lead to spurious correlations. These tests help ensure the integrity of the time series data before
proceeding with econometric analyses. Additionally, the inclusion of endogeneity tests like the
Wu-Hausman F-test and Durbin chi-squared test is highly relevant as they allow for the
examination of potential endogeneity issues in the relationship between income inequality and
the explanatory variables, CAL and FBO. By addressing endogeneity concerns, these tests
enhance the robustness of the regression results, ensuring that causal relationships are accurately
identified and quantified in the analysis of income inequality dynamics in emerging economies.

To add on, The Gini coefficient plays a pivotal role in this research as it serves as the primary
measure for income inequality, the central focus of the study. By quantifying income inequality
within the selected sample of 126 emerging economies over the period from 1995 to 2013, the
Gini coefficient provides a comprehensive and easily comparable metric to assess disparities in
income distribution. As the dependent variable in the analysis, it allows for an examination of
how changes in Capital Account Liberalization (CAL) and Foreign Bank Ownership (FBO)
impact income inequality dynamics across these economies. Moreover, its numerical nature
facilitates statistical modeling and econometric analysis, enabling the research to identify the
potential causal relationships and effects of CAL and FBO on income inequality, thus
contributing significantly to the understanding of economic disparities in emerging economies.

3.1. Model Construction

3.1.1. Fixed effect model

The Fixed Effect Model is a widely accepted approach in the literature for panel data
analysis. It incorporates country-specific fixed effects that control for unobservable
heterogeneity across countries, such as cultural differences or country-specific policies affecting
income inequality. By doing so, it enables the identification of how changes in CAL or FBO
influence income inequality dynamics within individual countries, while also addressing
endogeneity concerns.

Econometric Equation:

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Yit = αi + β1Xit + ϵit

Where:

 Yit represents income inequality for country i at time t.

 αi denotes the country-specific fixed effect.
 β1 signifies the coefficient that measures the impact of the independent variable, such as
Capital Account Liberalization (CAL) or Foreign Bank Ownership (FBO).
 ϵit stands for the error term

3.1.2. Instrumental Variable (IV) Regression

The Instrumental Variable Regression addresses endogeneity concerns by using

instrumental variables that are theoretically unrelated to the error term. This two-stage approach
first estimates CAL and FBO and then uses the predicted values in the second stage to
understand their impact on income inequality. This technique ensures that potential endogeneity
issues are adequately considered.

Mathematical Equation:

Estimation of CAL and FBO: CALit = δ0 + δ1Zit + δ2Cit + νit

FBOit = λ0 + λ1Zit + λ2Cit + νit

Estimation of the effect on income inequality: Yit = α + β1CALit + β2FBOit + ϵit

Where:

 CALit and FBOit represent Capital Account Liberalization and Foreign Bank Ownership,
respectively.

 δ0 and λ0 are intercepts for the first-stage equations.

 Zit is the instrumental variable hypothesized to be exogenous and unrelated to the error
term.

 Cit represents control variables.

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 νit denotes the error term

 CALit and FBOit in second equation are the predicted values of CAL and FBO from the
first stage.

3.1.3. Sensitivity Analysis

Sensitivity analysis is conducted to assess the robustness and reliability of our

classification model, which is integral to our research on the influence of Capital Account
Liberalization (CAL) and Foreign Bank Ownership (FBO) on income inequality in emerging
economies. The sensitivity analysis helps us evaluate the model's performance under various
conditions and modifications. It is essential to assess the classifier's performance rigorously to
maintain the integrity of our findings.

3.1.4. Endogeneity

Endogeneity tests, such as the Wu-Hausman F-test and Durbin chi-squared test, are used to
determine the relationship between variables and error terms in a regression model. Endogeneity
can lead to skewed and inconsistent parameter estimations, while exogeneity indicates that
variables are not linked to the error term.

3.1.5. Unit Root

Unit root tests, such as the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP)
tests, involve statistical tests to assess the stationarity of the variables. Description: Unit root
tests are essential for verifying whether your time series data, including variables like income
inequality, CAL, and FBO, are stationary or exhibit non-stationary behavior. Non-stationary
data can lead to spurious correlations, making it vital to ensure that the variables are
appropriately transformed or differenced to maintain data integrity before conducting
econometric analyses.

4. Results and Discussions

Table 1: Summary and Definition of variables

Symbols Variables Definition Data Sources

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Nii Income Inequality

Cal Capital Account
Openness
Nfbo Foreign Banks
Ownership
Ngdp Per Capita
Income
Ngfce Government
Expenditure
Npop Population
Ntrd Trade openness
Nedu Education
Expenditure
Nunem Unemployment
Rate

Table 2: Statistic Summary

Variable Obs Mean Std. Dev. Min Max

Nii 2394 46.011 6.352 22.2 70.3

Cal 2393 .503 .495 0 1

Nfbo 2394 36.07 26.379 0 100

Ngdp 2394 2.766 4.999 -50.734 92.202

Ngfce 2394 15.75 5.51 .911 43.702

Npop 2394 1.313 1.459 -3.848 17.512

Nedu 2394 75.379 31.569 5.283 161.019

Ntrd 2394 79.043 48.944 14.773 442.62

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Nunem 2394 12.543 4.7664 2.5421 19.7643

The dataset shows moderate income inequality, with a Gini coefficient of 46.011, indicating
consistency in income inequality levels. However, there are differences across the dataset, with
some having higher levels and others having lower levels. The distribution of capital accounts is
almost equal between open and closed, with no significant favoritism. On average, 36.07% of
banks are owned by foreigners, indicating significant diversity in foreign bank ownership. The
average per capita income is 2.766, with a nearly 5-point standard deviation indicating moderate
variation. The average level of government spending is 2.766, with some regional or national
variation. The mean net population change is 1.313, with erratic population trends. The average
amount of education-related spending is significant, with some countries paying more than
others. The average degree of trade balance is indicated by the mean value, with higher numbers
indicating a more liberalized trade landscape.

Table 3: Correlation

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9)
(1) nii 1.000
(2) cal 0.166 1.000
(3) nfbo 0.170 0.054 1.000
(4) ngdp -0.053 -0.039 -0.008 1.000
(5) ngfce 0.147 0.199 -0.017 -0.090 1.000
(6) npop 0.062 -0.180 0.005 -0.150 -0.233 1.000
(7) nedu 0.035 0.458 -0.135 0.007 0.367 -0.504 1.000
(8) ntrd -0.0302 0.235 0.236 0.071 0.101 -0.107 0.232 1.000
(9) nunem 0.2345 0.456 0.3445 0.021 0.234 0.342 0.432 0.125 1.000

Efforts to minimize income inequality may not be fully successful if increased government
spending causes a little increase in income disparity in areas with greater per capita income. This

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may be the result of issues with income distribution or inefficient resource management by the
government. Since open capital accounts allow governments to use foreign capital to finance
public projects and programs, they may also result in increased government spending. Because
of labor mobility and wealth disparity, populations in areas with more open capital accounts may
grow or shrink. Because foreign investment gravitates towards open capital accounts, higher
levels of education spending are generally observed in these locations. Since foreign banks
facilitate cross-border trade, open capital accounts may also result in more export-oriented
sectors and more liberal trade policies.

Table 4: Unit Root Test

Variables Statistic P-Value

(1) nii -2.6351 0.0042
(2) nfbo -7.9372 0.0000
(3) ngdp -19.8170 0.0000
(4) ngfce -1.4668 0.0712
(5) npop -14.8445 0.0000
(6) nedu 0.3157 0.0000
(7) ntrd -4.6874 0.0000
(8) nunem 3.3456 0.00021

The Gini Coefficient (-2.6351) suggests a strong negative correlation with the presence of a unit
root, indicating that income inequality is likely stationary. The results also suggest that foreign
bank ownership maintains consistent statistical features and does not show a major long-term
trend. The Ngdp test statistic is strongly negative and significantly below the threshold values,
indicating a stable economic trend. The Ngfce test statistic is marginally greater than the typical
significance level, suggesting that government spending may not be perfectly stationary. The
population test statistics are extremely negative and much below the necessary values, indicating
a stable population with steady statistical features. The Ntrd test statistic is also negative,
indicating that trade openness exhibits steady statistical features over time and does not follow a
significant long-term trend in the economy.

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Table 5: Endogeneity Test

Ho: variables are exogenous

Durbin (score) chi2(1) 54.3737 (0.0000)
Wu-Hausman F(1,2385) 55.4519 (0.0000)

Endogeneity tests, such as the Wu-Hausman F-test and Durbin chi-squared test, are used to
determine the relationship between variables and error terms in a regression model. Endogeneity
can lead to skewed and inconsistent parameter estimations, while exogeneity indicates that
variables are not linked to the error term. The Durbin chi-squared test rejects the null hypothesis
of exogeneity, suggesting that at least one variable is endogenous or has a correlation with the
model's error term. The Wu-Hausman F-test and Durbin test refute the null hypothesis of
exogeneity, indicating that the model has at least one endogenous variable, potentially skewing
and inconsistent parameter estimates.

Table 6: Panel Data with Fixed Effects (FE)

Nii Coef. St.Err. t- p- [95% Interval] Sig

value value Conf

Cal .569 .109 5.23 0 .356 .782 ***

Nfbo .007 .002 3.08 .002 .003 .012 ***

Ngdp -.017 .005 -3.09 .002 -.027 -.006 ***

Ngfce .006 .011 0.52 .602 -.015 .026

Npop -.058 .036 -1.63 .104 -.129 .012

Nedu -.02 .003 -6.31 0 -.026 -.014 ***

Ntrd .006 .002 3.81 0 .003 .01 ***

Nunem 0.231 0,002 4.543 0 0.764 0.03 ***

Constant 46.488 .302 153.87 0 45.895 47.08 ***

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Mean dependent var 46.014 SD dependent var 6.351

R-squared 0.041 Number of obs 2393

F-test 13.882 Prob > F 0.000

Akaike crit. (AIC) 7432.645 Bayesian crit. (BIC) 7478.888

*** p<.01, ** p<.05, * p<.1

As the Gini Coefficient shows, there is a substantial correlation between capital account
openness and increased income inequality (Li, & Su, 2021). This shows that income inequality is
frequently enhanced in nations that liberalize their capital accounts to attract international
investment. Additionally, there is a positive correlation between foreign bank ownership and
income disparity, indicating that as foreign influence over local financial institutions increases,
so does income inequality. A more equitable distribution of income among the population is
suggested by higher per capita income (Vincens et al., 2018). Although other factors like larger
populations, higher education spending, increased trade openness, and higher unemployment
rates might shape income distribution, government spending does not significantly affect income
disparity. More people may have access to a greater variety of economic and job options, which
could boost income production and reduce income inequality. While more trade openness may
result in greater income inequality, increased education spending can support the growth of
human capital. High unemployment rates can worsen financial instability and income loss for
individuals affected, which exacerbates income disparity (Sekio, 1996).

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Table: 7 Instrumental Variables (IV) Regression:

Nii Coef. St.Err. t- p- [95% Interval] Sig

value value Conf

Nfbo .423 .093 4.57 0 .242 .605 ***

Ngdp .063 .05 1.24 .213 -.036 .161

Ngfce .138 .046 3.00 .003 .048 .228 ***

Npop 1.222 .243 5.03 0 .746 1.698 ***

Nedu .1 .022 4.57 0 .057 .143 ***

Ntrd -.071 .015 -4.70 0 -.1 -.041 ***

Nunem 0.5431 0.102 5.043 0 0.484 0.06 ***

Constant 24.863 3.948 6.30 0 17.124 32.601 ***

Mean dependent var 46.014 SD dependent var 6.351

R-squared 44.001 Number of obs 2393

Chi-square 47.644 Prob > chi2 0.000

*** p<.01, ** p<.05, * p<.1

"Nii" is the variable for which the coefficient is 0.423. Accordingly, assuming all other variables
remain constant, a one-unit rise in "Nii" corresponds to a 0.423-unit increase in the dependent
variable. 0.063 is the coefficient for the "Ngdp" variable. This implies that, while all other
variables are held constant, an increase of one unit in "Ngdp" is correlated with an increase of
0.063 units in the dependent variable. The link is not statistically significant at the traditional
significance level of 0.05, as indicated by the p-value of 0.213 (Fang et al., 2015).

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The "Ngfce" variable has a coefficient of 0.138. Assuming all other variables remain constant,
this suggests that a one-unit rise in "Ngfce" corresponds to a 0.138-unit increase in the dependent
variable. This link appears to be statistically significant based on the p-value of 0.003. However,
1.222 is the coefficient for the "Npop" variable. This shows that, when all other variables are
held constant, an increase of one unit in "Npop" corresponds to an increase of 1.222 units in the
dependent variable (Heerink, 2012). This association is statistically significant, as indicated by
the p-value of 0.

Likewise, 0.1 is the coefficient for the "Nedu" variable. This implies that, while all other
variables are held constant, an increase of one unit in "Nedu" is correlated with an increase of 0.1
units in the dependent variable. This association is statistically significant, as indicated by the p-
value of 0. Moreover, -0.071 is the coefficient for the variable "Ntrd". Assuming all other
variables remain constant, this suggests that a one-unit rise in "Ntrd" is correlated with a 0.071-
unit drop in the dependent variable. This association is statistically significant, as indicated by
the p-value of 0 (Lim et al., 2014). 0.5431 is the coefficient for the variable "Nunem". In other
words, assuming all other variables remain constant, a rise of one unit in "Nunem" corresponds
to a 0.5431 unit increase in the dependent variable. This association is statistically significant, as
indicated by the p-value of 0. Furthermore, 24.863 is the regression equation's constant term.
44.001% of the variation in the dependent variable can be explained by the independent variables
in the model, according to the R-squared value of 44.001.

Increased foreign bank ownership and income disparity are significantly correlated, according to
the Gini Coefficient. This finding raises the possibility that foreign banks specialize in serving
wealthy clients or engage in other financial practices that support greater salaries
(Boonlertvanich, 2019). Income disparity is not greatly impacted by per capita income, though.
Greater income inequality is linked to higher government spending, maybe because of
inadvertent benefits or policies (Thorbecke et al., 2002). Because of differences in income
between urban and rural areas, regional development, and a wide range of economic possibilities,
larger populations are associated with higher levels of income inequality. Spending more on
education could potentially widen wealth gaps or not be distributed far enough to reach
underprivileged groups, which would add to economic inequality. Since trade may create jobs
and opportunities for a larger variety of income groups, there is a correlation between increased

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trade openness and decreased income inequality. Significant correlations have also been shown
between rising unemployment and widening income gaps (Helpman et al., 2010). Income
disparity is correlated with encumbrance, population size, control of foreign banks, and spending
on education.

Table 8: Sensitivity Analysis

True
Classified D ~D Total
+ 948 365 1313
- 286 794 1080
Total 1234 1159 2393
Classified + if predicted Pr(D)>=.5
True D defined as cal !=0
Sensitivity 76.82%
Specificity 68.51%

The table presents a classification problem involving binary data items. The classifier accurately
predicted positive outcomes in 948 cases, while in 794 cases, it predicted negative results
(Chicco et al., 2021). However, its mis predicted positive results in 365 False Positives cases and
false negatives in 286 False Negatives cases. The classifier's sensitivity and specificity are
76.82% and 68.51% respectively. While it is effective in identifying positive situations, it may
overlook some. The specificity shows that while it can identify negative cases well, there is still
room for improvement. Overall, the classifier's performance is commendable (Gu et al., 2009).

5. Conclusion

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More in-depth analysis and insights into the economic and social facets covered by these
measurements are made possible by this comprehensive analysis, which offers a full grasp of the
characteristics and implications of each variable in the dataset.

In addition, the results of the unit root test suggest that many of the variables—income
inequality (Nii), ownership of foreign banks (Nfbo), per capita income (Ngdp), population
(Npop), spending on education (Nedu), and trade openness (Ntrd)—are probably stationary. This
indicates that their statistical features remain steady, and they don't show any noteworthy long-
term changes. Government spending (Ngfce), on the other hand, might be only somewhat steady,
indicating certain time-dependent traits. Furthermore, Endogeneity tests, like Wu-Hausman F-
test and Durbin chi-squared test, determine the relationship between variables and error terms in
regression models. They can lead to skewed parameter estimations and exogeneity, suggesting at
least one endogenous variable. These tests reject the null hypothesis of exogeneity.

Moreover, based on FEM we can conclude that capital account openness is linked to a significant
increase in income inequality, as indicated by the Gini Coefficient. This suggests that countries
that liberalize their capital accounts to facilitate foreign investment often see increased income
inequality. Foreign bank ownership is also positively correlated with income inequality,
suggesting that income inequality expands with foreign control of domestic financial institutions
(De Haan et al., 2018; ULLAH et al., 2022). Income inequality tends to decline with per capita
income, suggesting a stronger and more inclusive economy (Bumann et al., 2016). Furthermore,
government spending does not significantly affect income inequality, suggesting that other
factors may shape the distribution of income (Anderson et al., 2018; Malla et al., 2022). Larger
populations may be linked to lower income inequality, as they provide access to a wider range of
employment opportunities and economic activities (Bagdadli et al., 2021). Higher education
spending is closely correlated with less income inequality, as it encourages human capital
development. Increased trade openness is associated with higher income inequality, as certain
groups may benefit more from international commerce, leading to wider wealth disparities. High
unemployment rates are linked to greater income inequality, as they can lead to financial
instability and income disparity (Dorn et al., 2022; Mahesh, 2011; McNabb et al., 2013).

In case of IV regression the Gini Coefficient reveals a significant correlation between increased
foreign bank ownership and income inequality, suggesting that foreign banks may specialize in

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serving affluent customers or participate in financial activities favoring higher incomes.

However, per capita income does not significantly affect income inequality. Increased
government spending is associated with greater income disparity, possibly due to unintentional
benefits or policies. Larger populations are linked to higher income inequality due to income
disparities between urban and rural areas, regional development, and diverse economic options.
Increased education spending may also contribute to income disparity, potentially creating
wealth gaps or not reaching disadvantaged populations. Increased trade openness is linked to
decreased income inequality, as it can open jobs and opportunities for a wider range of income
groups. Unemployment rates are also significantly correlated with increased income disparity, as
they may result in income losses for underemployed individuals (Sen, 1997).

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