Financial Development and Income Inequality Nexus in Sub‐Saharan Africa: Is Inequality of Opportunity the Missing Puzzle?

Abstract

ABSTRACT This study examines the moderating role of opportunity inequality through intergenerational mobility elasticity on the nexus between financial development and income inequality in sub‐Saharan Africa (SSA) between 1990 to 2021. We consider two measures of intergenerational mobility elasticities (income and education) and various regression techniques (Driscoll–Kraay method, generalized method of moments [GMM], instrumental variable methods and threshold regression model) for robust results. Findings reveal that the joint effect of low intergenerational mobility and financial development is positively associated with income inequality. This suggests that SSA countries with high levels of opportunity inequality (low intergenerational mobility) experienced smaller reductions in income inequality compared to countries with low levels of opportunity inequality for the same level of financial development. Equalizing the circumstantial inequality therefore stands as a crucial lever for an effective inclusive financial system.