Paper short abstract:

Higher growth rates for lower income countries can reduce global inequality based on the theory of the catch-up effect with a similar higher level of investment-GDP ratio. The aim of this paper is to identify the role of the banking sector in achieving this objective.

Paper long abstract:

Global inequalities remain one of the major problems which are faced around the world. Although various efforts were made to alleviate it, the achievements are still far from their targets. As the concept of global inequality is very broad (e.g. inequality in income, consumption, wealth, etc.), the list of approaches and the sectors that can play crucial roles is also quite long. The aim of this paper is to identify the role of one of these sectors, the banking sector, in reducing global inequality. It is not difficult to comprehend that higher growth rates for lower income countries can reduce this problem. Based on the theory of the catch-up effect and the experience of the recently developed (e.g. ASEAN) countries, it is hoped that a similar higher level of the investment-GDP ratio can help these low-income countries to achieve higher growth rates. However, it is not easy for these countries to invest at their optimum level not only due to lack of funds but also due to various obstacles covering the banking and other sectors. It has been observed that repressive financial policies like credit controls and entry barriers in the banking sector can lead to higher income inequality (Johansson and Wang, 2014). With data from various countries, this paper shows the possible steps that the banking sector could take to remove these as well as other constraints and, in the process, help in raising the investment-GDP ratio for achieving higher growth rates in the low-income countries.