The Effect of Income Inequality on Economic Growth in Developing Countries: Evidence from Panel Threshold Regression (PTR) model

Considering the importance of the impact of income inequality on economic growth, this study examined the causal relationship between income inequality and economic growth and the hypothesis of income inequality's inconclusive and asymmetric effects on economic growth in 25 developing countries from 1996-2018. The Panel Granger causality test results showed only a unidirectional causal relationship between income inequality and economic growth from income inequality to economic growth. Also, the study of the hypothesis of the asymmetric effect of income inequality on economic growth using panel threshold regression (PTR) by Hansen (1999) showed that income inequality affected economic growth in the form of a two-regime structure (with a threshold value of 48% for the Gini coefficient), although the findings do not confirm the existence of an inverse U relationship between these variables. Therefore, it can be said that our findings confirmed Barrow (2000)'s view that "income inequality weakens economic growth in developing countries." Therefore, based on the findings of this study, it is recommended: first, contrary to classical economic theory, developing countries need to implement policies to reduce income inequality not only to establish social justice, but also to increase economic growth. Secondly, because of the unidirectional causal relationship between income inequality to economic growth in developing countries, policies to increase economic growth in these countries do not lead to improvement in income distribution. Therefore, these countries must implement independent policies to improve income distribution.