The effect of inequality on poverty and severity of poverty in SSA: the role of financial development institutions

Abstract

The present study investigates the incidence of financial institutions' dynamics of depth and access in the effect of income inequality on poverty and the severity of poverty in 42 Sub-Saharan African countries from 1980 to 2019. The Gini index is used to measure income inequality while poverty is measured as the poverty headcount ratio, and the severity of poverty is generated as the squared of the poverty gap index. An interactive quantile regression approach is used as an empirical strategy. Income inequality unconditionally increases poverty dynamics while the financial institutions' depth and access mitigate the adverse effects of income inequality on poverty dynamics. Financial institutions’ policy thresholds or minimum financial institutions levels needed to completely dampen the adverse effects of income inequality on poverty dynamics are provided. The findings are contingent on existing levels of poverty, poverty measurement and proxies for financial institutions. Policy implications are discussed.