Economic Inequality in Developing Countries: Does Financial Development Alleviate or Exacerbate Disparities?

ABSTRACT This study investigates the determinants of income and wealth inequality in developing countries. Utilizing a panel data set formed of 125 developing countries over the period 2002–2021, the analysis reveals that financial development significantly exacerbates income inequality while mitigating wealth inequality. Additionally, GDP per capita growth is found to negatively influence income inequality, highlighting the importance of sustainable economic growth. Conversely, inflation and government spending on education do not exhibit significant impacts on either type of inequality. Notably, population growth is positively associated with both measures of inequality, indicating demographic pressures that require targeted policy interventions. The findings emphasize the need for inclusive financial systems, enhanced educational quality, and innovative regulatory frameworks to address disparities effectively. By providing insights into the complex dynamics of inequality, this study contributes to the formulation of evidence‐based policies aimed at fostering equitable economic development in developing countries.