Do less harm than good? Analyzing the effects of anti-money laundering regulations on income inequality in developing economies

Abstract

We examine the impact of anti-money laundering regulations (RAML) on income inequality in 69 developing economies, consisting of higher-income, upper-middle-income, and low-middle and low-income economies over the period of 2012–2021. For this purpose, we address endogeneity through the instrumental variable panel estimation strategies. The results show reasonable evidence that RAML limits income disparities in developing economies. Threshold analysis reveals that the negative effect of RAML on income inequality is conditioned on financial globalization at 46.8%. Furthermore, panel quantile analysis shows that the economies with moderate RAML have better chances of reducing income inequality than those with excessive regulations. Our threshold analysis also supports these findings. The extended analyses reveal that RAML is not effective in East Asia and Pacific and Sub-Saharan Africa, but exacerbates income disparities in Latin American and Caribbean regions. RAML is very effective in reducing income inequality in South Asia, Europe and Central Asia, and Middle East and North Africa. These findings are stable and robust enough to carry out robustness checks, including alternative estimations and additional control variables. The study concludes that RAML should be moderately and well implemented to improve the economic welfare of developing economies.