Income Inequality and FDI: Evidence with Turkish Data

Abstract

This article explores how foreign direct investment (FDI) and other determinants impact income inequality in Turkey in the short- and long-run. We apply the nonlinear auto-regressive distributed lag (ARDL) modelling approach which is suitable for small samples. The data for the study cover the years from 1970 to 2008. The empirical results indicate the existence of a co-integration relationship among the variables with asymmetric adjustment of the income distribution in the short- and long-run. The negative impact of FDI on the Gini coefficient decreasing income inequality is statistically significant in the short- and long-run though with a quantitatively small impact in both cases. In the short run GDP growth increases inequality initially an effect that is reversed in the next period increases in domestic gross capital formation decreases inequality and increases in the literacy rate have very minor adverse effects on income equality. However in the long run these variables have no statistically significant effects on the Gini coefficient. A reduction in the population growth rate reduces inequality in the short run but has no effect in the long run whereas an increase in the rate reduces inequality in the long run but has no effect in the short run.