Examining the impact of institutional quality on the relationship between economic growth and inequality

Abstract

Economic growth is one of the most important goals of economic policymaking, but increasing production and national income does not necessarily lead to a fairer distribution of income and a reduction in inequality. The distribution of benefits from economic growth can be affected by the quality of economic and political institutions. Accordingly, the present study aims to investigate the effect of economic growth on income inequality by considering the interactive role of institutional quality in a selection of developed and developing countries. For this purpose, panel data from selected countries in the period under study were used and the research model was estimated using the Feasible Generalized Least Squares (FGLS) method. In the empirical model, in addition to the direct effect of economic growth on income inequality, the interactive effect of economic growth and institutional quality was also examined. The results show that economic growth has a positive and significant effect on income inequality in both groups of developed and developing countries; This means that economic growth alone does not necessarily lead to a fairer distribution of income and, under existing institutional conditions, can be accompanied by increased inequality. Also, the unemployment rate has a positive and significant effect on income inequality, while trade openness has shown a negative and significant effect on inequality. The most important finding of the research is related to the interactive effect of economic growth and institutional quality, which is negative and significant in both groups of countries. This result shows that improving institutional quality can reduce the unequal effect of economic growth and pave the way for a broader distribution of the benefits of economic growth. Accordingly, the research results emphasize the necessity of combining economic growth policies with institutional reforms, strengthening the rule of law, controlling corruption, increasing transparency, improving government effectiveness, and implementing employment-generating and distributional policies.