Determinants of Wealth Inequality in Central America: A Panel Data Analysis of Socioeconomic and Institutional Factors

This study applies a non-linear panel threshold regression model to examines the factors of economic development in Central America, with an emphasis on institutional and socioeconomic factors. Using data acquired between 2000 and 2023 the research evaluates how different variables like trade openness, FDI, financial development, education spending, inflation and population growth impacts the growth of GDP at different levels of institutional quality. The results demonstrate that institutional quality levels create a distinct threshold effect when trade openness and FDI fail to promote growth in weak institutional settings while inflation volatility strongly hinders growth. FDI and financial development show positive effects on economic growth when institutions reach an optimal standard and education expenses becoming essential for growth. Through its findings, this research demonstrates that better institution management enables traditional growth-enhancing factors to succeed. The recommended policies stress that organizations throughout the region should implement institutional changes for improved governance and transparency to support lasting economic development. The paper proposes different directions for upcoming research that comprises dynamic modeling approaches as well as assessments of regional cooperation effects.