Finance, governance and inequality: A non parametric approach

The aim of this paper is to examine the multi-faceted relationship between financial development, governance and inequality. Using data for 39 countries during 1996-2009, the construction of composite indicators shows that Latin American & Caribbean countries present a less developed governance and financial system than European & North American countries. Non-parametric correlations tests show that these dimensions are significantly and positively correlated. The financial system development requires good governance. PCA suggests that governance improvement would lead to equal income distribution. Good governance should be pursued as a basic development goal especially for the Latin America & the Caribbean region. To maximize its effect, the context-specific nature of the linkages between governance and financial development must be recognized.