An Interaction Effect of Human Capital and Democracy on Income Inequality in South Asia: A Panel Data Analysis

Abstract

The global rise in the disparity of income has been the subject of numerous political and public discussions in the wake of the most recent economic crises. The objective of the current study is to empirically investigate the impact of human capital and democracy on income inequality. This study analyzed the interaction between democracy and income inequality from 2000 to 2020. The balanced panel data is collected from South Asia and regressed by applying three different statistical techniques (Pooled OLS, Fixed Effect Model, and Random Effect Model). The Levin-Lin Chu test, the Hardri LM test, and the IM-Pesaran-Shin test have all been used to address the order of integration in the study. The White test, the Brush-Pagan test, the Brush-Pagan LM test, and the Hausman test were all used in this study to increase reliability. The outcomes of every diagnostic test support Fixed-Effect Model estimation (FEM). The results revealed that human capital and the interaction term (human capital*democracy), govt. health expenditures are negatively associated with income inequality whereas, population growth, trade openness, and infrastructure have been positively related to the income inequality in South Asian countries during the specified period. The study concludes that democracy plays an essential role in reducing income gaps, by enhancing human capital. The outcomes suggest that the role of democracy in reducing the income inequality gaps should not be overemphasized particularly in South Asian countries.