Soc Indic Res (2018) 140:1211–1224

https://doi.org/10.1007/s11205-017-1824-9

Education Enrollment Level and Income Inequality:

A Case of SAARC Economies

Noman Arshed1 · Awais Anwar2 · Nabeela Kousar3 · Samra Bukhari1

Accepted: 7 December 2017 / Published online: 13 December 2017

© Springer Science+Business Media B.V., part of Springer Nature 2017

Abstract  This study is based on the idea that education forms a quadratic relationship
with the income inequality. To evaluate it for South Asian Association for Regional Coop-
eration (SAARC) countries, this study uses the panel data from 1990 to 2015. Long run
panel data necessitated the use of panel co-integration approach, followed up with fully
modified OLS model to generate long-run coefficients. The results depict that initially pri-
mary and secondary enrollment increases inequality while tertiary enrollment decreases it.
However, after a certain threshold level of enrollment (76% for primary, 42% for secondary
and 7% for tertiary), their effect reverses. Thus, it makes inverted U shape for primary and
secondary enrollment and U shape for tertiary enrollment. Hence education shows dimin-
ishing marginal return effect. Only the countries of India, Sri Lanka, Maldives and Nepal
in SAARC economies have high enough education enrollments to cause a negative effect
on income inequality.

Keywords  Education · Income inequality · DMR · Panel co-integration · Panel FMOLS

JEL Classification  I24 · O15 · O53

* Awais Anwar
awaisanwar007@sdu.edu.cn
Noman Arshed
noman.arshed@umt.edu.pk
Nabeela Kousar
nabilach777@gmail.com
Samra Bukhari
sambukhari56@gmail.com
1
Department of Economics, University of Management and Technology, Lahore, Pakistan
2
Center of Economic Research, Shandong University, Jinan, China
3
Department of Economics, Government College University, Faisalabad, Pakistan

13
 1212 N. Arshed et al.

1 Introduction

Income inequality has long been a debatable issue among the economists and policy mak-
ers. Unlike poverty, income inequality has severe repercussions. When resources in the
economy are unequally distributed among its residents and the flow of resources continue
to grow from poor to rich, such situation is described as income inequality (Staff 2009).
Consider traffic is moving on a two lane road, suddenly it gets stuck on both lanes. In this
case, the drivers see everyone stationary so they continue to wait because no one in the sur-
rounding is prospering. Whereas, if one lane is open and other is stuck, firstly it will create
hope but not for long. In order to make their own way, the drivers in the jammed lane will
try to obstruct the moving lane impatiently. This phenomenon works in the same way if
there is income inequality in the economy (Hirschman and Rothschild 1973).1 World Eco-
nomic Forum reports that it is mere 5 years ago when there were about 35 people owning
resources equal to 50% of the poor world. Now, the inequality has grown sharp. Presently,
8 people own resources equivalent to 50% poor world resources which makes up to 3.6 bil-
lion poor people (Byanyima 2017; Oxfam 2017). Amina Mohammed, the vice chair of the
global agenda council on sustainable development, quotes that the poor half of the popu-
lation is controlling less than 10% of its wealth. She proposes that the Asian economies
can solve their inequality issue to a great extent by increasing their literacy rate (Benabou
1996).
Development theory is mainly involved in addressing disparities in living standards i.e.
differences in income, health, and education. These disparities hinder people in exploit-
ing their potential fully. Resultantly, they cannot achieve higher resources for themselves
(National Equality Panel 2010). Kuznets (1956) proposed a hypothesis that in the early
stages of the development, income inequality usually rises. Gradually, with trickle-down
effect income inequality starts to decline. This trend highlights the non-linear relationship
between development and income inequality. So, the economies which are unfortunately at
a low level of development face issues in handling the growth. Several studies reveal that
high inequality is harmful to the growth of the economy (Aghion et al. 1999).

2 Literature Review

Solow (1956) proposed the production function approach using labor and capital as inputs.
This model depicts that increase in ether of the input will lead to increase in the total out-
put, while they are interconnected such that increase in capital will boost the labor pro-
ductivity too. Mankiw et al. (1992) proposed the human capital augmented (Solow 1956)
growth model using the attainment of education by the labor. The role of human capital on
growth was reasserted in Endogenous Growth Theory (Aghion and Howitt 1992; Aghion
et al. 1999). Several studies asserted the positive influence of education on growth (Schultz
1961; Barro 1991, 1996; Bils and Klenow 2000; Hanushek and Kimko 2000; Hanif and
Arshed 2016) for the reasons like increase in efficiency, faster absorption of technology
and returns on skills and effort. Several studies have hinted the growth promotion as a pos-
sible policy option to narrow the inequality (Ahluwalia 1976; Barro 2000; Deininger and

1
  The Tunnel Effect—http://www2.warwick.ac.uk/fac/soc/economics/news/2013/4/tunneleffect/.

13
Education Enrollment Level and Income Inequality: A Case of… 1213

Squire 1998; Ravallion 2001; Robinson 1976) starting with the concept of trickle-down
effect proposed by Anand and Kanbur (1993) and Kuznets (1956, 1995).
Ahmad (2013) elucidates that education is not the only factor influencing income ine-
quality. Education complements with the other indicators of GDP growth in explaining
income inequality. If the government has more to spend on education for the common gain
of public; the inequality decreases. Fields (1980) describes the relationship between edu-
cation and income distribution in the case of developing countries. The increase in edu-
cation leads to increase in the wage rate. This will cause a change in the distribution of
wage among people via opening up new chances for those who attain modern education.
However, results show that education reduces the level of poverty and inequality. Further-
more, the saturation of public and private schools also causes inequality (Park 1996). The
young people, who go to private schools and pay for their education will get a good stand-
ard of education as compared to others. The wage rate of private school graduate rises as
compared to government school graduate. Under such mechanism, the poor child grows
up with poor neighborhood and rich child grows up with rich neighborhood and this way
deepening of income inequality happens.2
Marin and Psacharopoulos (1976) estimate the positive relationship between a number
of years spent in school and income inequality. While, Lin (2007) finds that increase in
a number of years spent in school reduces the income disparity in Taiwan for the period
of 1973–2003. On contrary to the above findings, Checchi (2001) estimates the negative
relationship between educational attainment and income inequality. Empirical findings of
Weede (1993) and Nielsen (1994) also support the negative relationship between educa-
tion and income inequality, while work by Gupta et al. (2002) provided evidence for nega-
tive effect of secondary enrollment on income inequality. Many researchers like Simpson
(1990), Crenshaw (1992) and Crenshaw and Ameen (1994) estimate the inverted U-shaped
relationship between education and income inequality.
Nielsen and Alderson (1997) reveal that improvement in skills related to any practical
subject leads to increase in income inequality. Attainment of useful skills captures some
high wage positions. This will increase income inequality, while (Barro 2000; Alderson
and Nielsen 2002) found the negative relationship between secondary school enrollment
and income inequality. On the other hand, Barro (1999) estimated that increase in primary
and tertiary education will decrease the level of inequality in a country by using seemingly
unrelated regression (SUR). The data of 4 years (1960, 1970, 1980 and 1990) with differ-
ent number of countries for each year. The study also showed that tertiary education played
a significant role in declining income inequality. These results are consistent with the find-
ings of Gregorio and Lee (2002).
Checchi (2001) finds the positive relationship between income inequality and govern-
ment expenditure on education. Karim (2015) shows spending on education reduces the
level of inequality in Bangladesh. Nonetheless, the wealthy persons appear to earn more
from every level of the education. Brasington (2002) describes that better education has
a spillover impact on economic development. However, benefits vary at every level of the
education. The higher education contributes more to economic development. Kanwal and
Munir (2015) observe the effect of education on wage inequality in South Asian nations.
The data in this study has been taken from 1980 to 2010. Fixed and random effect models
are applied for estimation. The results prove the positive association between education and

2
  Outlook Global Agenda 2015—Deepening Income Inequality. http://reports.weforum.org/outlook-global-
agenda-2015/top-10-trends-of-2015/1-deepening-income-inequality/.

13
 1214 N. Arshed et al.

income inequality. The results reveal that the existence of U-shaped Kuznets curve imply-
ing diminishing returns (market forces first increase the income inequality and afterwards
decreases).
Gupta et al. (2002) in his study stated that social spending of the government increases
the income growth of bottom 20% population. The potential to promote income equality
also exists if government spends on education (Sylwester 2002). Similar conclusion is
drawn by following studies Chu et  al. (2000), Moene and Wallerstein (2001) and Ostry
et al. (2014). However, Barro (1990) introduced government spending in the endogenous
growth model, whose implications can be connected to income inequality. There are many
other social and economic consequences of income inequality such as economic growth,
trade liberalization, employment status and Population structure3 but the main objective
of the study is to check the certain level of education and its impact on income inequality.
The distinction of the present study is that it uses three types of education attainment
(i.e. primary, secondary and tertiary) as instrument of human capital. Here the effect of
level of attainment on inequality is assessed via quadratic equation approach. It will help in
checking the diminishing marginal effect of each type of education on income inequality.
Moreover this study has used the variables which is confirmed from the theory. For this the
data is taken from SAARC countries from 1960 to 2015. The focus of this study is SAARC
countries, as all of these nations are in the most populous, diversely cultured, politically
and economically dynamic and highly poor region (Collier and Dollar 2001). These coun-
tries are facing inconsistent growth because of a very low rate of literacy compounded with
conflicts caused by ethnic, religious and language fractionalizations (Maass 1996).

3 Data and Methodology

3.1 Data Framework

This study has used the panel data framework because it leads to decrease in the collinear-
ity among the independent variables, it accounts for the significant spillover effect,4 and
it accounts for the cross-sectional heterogeneity5 and lastly it provides efficient estimates.

3.2 Sample of the Study

For the estimation of the impact of education on income inequality, this study has selected
group of SAARC countries including Afghanistan, Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka. These economies are significant in this regard as this is a
very populous region having high poverty and malnutrition. It is engaged in an internal and
external conflict which led them to build military infrastructure. Based on the availability
of the data the time period selected is from 1960 to 2015.

3
  Confirmed by Ravallion (2001) and Alderson and Nielsen (2002).
4
  Dependent variable showed significant cross sectional correlation.
5
  Mean of the dependent variable is significantly different across cross sections.

13
 Table 1  Data description
Indicator Symbol References Description

Income inequality (index) GINI Solt (2009), WDI (2016) Gini index measures the extent to which the existing distribution of income of indi-
viduals and households differ from the perfect equal distribution
Economic growth (constant LCU) GDP WDI (2016) At constant purchaser’s prices, GDP is sum of gross value added by resident pro-
ducers in economy
Government expenditures on education (% of GDP) EXP WDI (2016) General government expenditures (current, capital and transfers) as a percent of
GDP
Total capital (Constant LCU) CAP WDI (2016) Capital is gross fixed capital formed including land improvement, plant, machinery,
equipment purchases and construction
Education Enrollment Level and Income Inequality: A Case of…

Total labor no. of people LF WDI (2016) Total labor include people with ages 15 and older who supply labor for production
Primary enrollment (% of total enrollment) PRI WDI (2016) Total children enrolled in primary education as ratio of total enrollment
Secondary enrollment (% of total enrollment) SEC WDI (2016) Total children enrolled in secondary education as ratio of total enrollment
Tertiary enrollment (% of total enrollment) TER WDI (2016) Total children enrolled in tertiary education as ratio of total enrollment
1215

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 1216 N. Arshed et al.

Education and Income Inequality

Quadratic Effects
Income Inequality

Income Inequality
30 40 50 60 70

30 40 50 60 70
0 50 100 150 0 20 40 60 80 100
Primary Education Secondary Education
GINI Fitted values GINI Fitted values
Income Inequality
30 40 50 60 70

0 5 10 15 20 25
Tertiary Education
GINI Fitted values

Fig. 1  Education enrollment is expected to have inverted U-shaped relationship

3.3 Data Source and Variables

This study will use following indicators with their descroption provided in Table 1 in order
to achieve the set objectives.
This study will use the natural logarithm form of the variables. The intention behind
is to linearize the model by reducing the intensity of heteroskedasticity6 and converting
the coefficients into elasticities (Benoit 2011; Gujarati 2009). Kuznets (1956) reveals that
increase in economic growth will lead to increase in income inequality but after a threshold
level, it starts declining. The expenditures on education for common gain will reduce the
level of inequality (Ravallion 2001; Robinson 1976). Furthermore, if capital ownership is
equally distributed then egalitarians do not worry about increasing in capital share, it is
only if capital ownership and income are highly unequally distributed that capital shares
matters for income inequality (Crenshaw 1992). The increase in education will lead to
increase the level of wage rate as compare to less educated people due to absorption of new
technology and skills, which further increase in income inequality (Barro 1991, 1996; Bils
and Klenow 2000; Hanushek and Kimko 2000).This study also uses the square form of
primary, secondary and tertiary enrollment to incorporate the quadratic effect of education
elasticity of inequality, such that the effect of enrollment depends on the level of enroll-
ment, this nonlinear effect of education enrollment is evident from the scatter plot shown
in Fig. 1.

6
  Which is because of high kurtosis of the variables.

13
Education Enrollment Level and Income Inequality: A Case of… 1217

3.4 Stochastic Equation

In order to fulfill the above given objectives, this study forms following stochastic equation
which will be used in the econometric analysis.

LGINIit = β0i + β1 LPRIit + β2 LPRI2it + β3 LSECit + β4 LSEC2it + β5 LTERit + β6 LTER2it

+ β7 LLFit + β8 LCAPit + β9 LGDPit + β10 LEXPit + et
(1)
3.5 Econometric Model

This study initially estimates pooled OLS to create a benchmark. The post regression diag-
nostics indicate that there is heteroskedasticity and autocorrelation in the model. For the
case of heteroscedasticity, it is accounted for by incorporating the cross section specific
intercepts just like fixed and random effect models. For the case of autocorrelation, since it
is because of long time periods, the model is made robust to it by using panel co-integra-
tion approach. Both of these features are the part of Panel FMOLS (Fully Modified Ordi-
nary Least Square) model which is used by this study.
Phillips and Hansen (1990) suggest the Panel FMOLS estimator which employs a semi-
parametric correction to remove the complications affected by the long run relationship
among the co-integrating equation and stochastic regressor’s innovations. The resultant
Panel Fully Modified Ordinary Least Square (FMOLS) estimator is asymptotically unbi-
ased and has fully efficient estimator (Pedroni 2001). This study uses this approach to
estimate the long-run coefficients. This Panel FMOLS approach provides country specific
intercepts and the first stage residuals are based on heterogeneous long run coefficients to
account for the country heterogeneity.

3.5.1 Panel Unit Root Test

The implications of human error learning behaviour becomes significant if the data has
long time periods (t > 20) (Pedroni 2008; Eberhardt 2011), in such cases, it will violate the
assumption of OLS by variables not having constant mean and variance in time. This leads
to the problem of autocorrelation in the data (Gujarati 2009). The presence of this property
in panel data can be confirmed by using panel unit root tests. This study will use LLC
(Levin et al. 2002), IPS (Im et al. 1997), ADF fisher and PP fisher (Fisher 1925; Maddala
and Wu 1999). The null hypothesis of these tests is that the mean and variance of the vari-
able is not constant in time such that it is non-stationary while the alternative hypothesis
is that variable is stationary. Table 2 shows that the results, where the majority of tests are
insignificant at the level and significant at first difference, confirming that all the variables
are non-stationary at level and stationary at first difference [i.e. I(1)] in nature.7 Only few
instances like LLF, and LPRI in LLC, LGINI and LPRI in ADF Fisher and LPRI in ADF
PP test indicate the few instances where the variable could be I(0) (integrated of order 0)
but census points towards I(1) (integrated of order 1) nature of variables.
Note Panel Unit root tests are conducted using intercept only specification. The lag
selection as based on SIC method. Since the tests are conducted in Eviews 8, it only reports
probability values.

7
  Hence series have become time variant causing invalidity of simple OLS estimates (Gujarati 2009).

13
 1218

13
Table 2  Panel unit root tests
Test Variable LGINI LGDP LEXP LLF LCAP LPRI LSEC LTER

LLC Level − 1.19 (0.11) 2.50 (0.99) − 0.37 (0.35) − 3.02 (0.00) 1.22 (0.88) − 2.63 (0.00) − 1.52 (0.06) 4.95 (1.00)
First difference − 33.41 (0.00) − 13.11 (0.00) − 9.43 (0.00) − 3.97 (0.00) − 13.63 (0.00) − 13.21 (0.00) − 11.48 (0.00) − 32.19 (0.00)
IPS Level − 0.19 (0.19) 6.04 (1.00) 0.61 (0.72) 0.66 (0.74) 3.00 (0.99) 0.48 (0.68) 2.15 (0.98) 2.31 (0.98)
First difference − 13.60 (0.00) − 12.04 (0.00) − 10.61 (0.00) − 5.49 (0.00) − 13.56 (0.00) − 11.98 (0.00) − 10.80 (0.00) − 21.81 (0.00)
ADF Fisher Level 24.10 (0.04) 9.08 (0.90) 18.76 (0.28) 13.66 (0.62) 7.73 (0.95) 29.62 (0.02) 6.17 (0.98) 16.43 (0.42)
First difference 84.90 (0.00) 159.3 (0.00) 138.9 (0.00) 64.31 (0.00) 171.6 (0.00) 152.1 (0.00) 133.1 (0.00) 161.6 (0.00)
PP Fisher Level 18.74 (0.17) 12.35 (0.72) 14.71 (0.54) 17.28 (0.36) 8.10 (0.94) 28.01 (0.03) 9.62 (0.88) 26.11 (0.05)
First difference 82.47 (0.00) 186.6 (0.00) 147.2 (0.00) 44.46 (0.00) 204.1 (0.00) 154.4 (0.00) 131.5 (0.00) 176.8 (0.00)
N. Arshed et al.
Education Enrollment Level and Income Inequality: A Case of… 1219

Table 3  Panel co-integration test Test t statistic Prob.

Kao residual co-integration test

ADF − 1.616084 0.0530

*Null hypothesis: No co-integration. Results are based on AIC lag

selection

Table 4  Fully modified least Independent variable Coefficient p value

squares
Fully modified least squares (FMOLS)
 Dependent variable: LGINI
  LPRI 10.00 0.00
  LPRI2 − 1.15 0.00
  LSEC 5.90 0.00
  LSEC2 − 0.79 0.00
  LTER − 0.12 0.00
  LTER2 0.03 0.00
  LLF − 0.33 0.00
  LCAP − 0.01 0.00
  LGDP 0.32 0.00
  LEXP − 0.12 0.00
 Regression diagnostics
  Jarque–Bera 76.13 0000
  R-squared 0.76
  Total panel (unbalanced) observations n = 7, t = 25,
total = 135

3.5.2 Panel Co‑integration Test

Since all the variables are I(1), in order to have valid estimates, the proposed variables
must form co-integration in their relationship. Panel co-integration test checks if the result-
ant of the model (residuals) significantly converges towards zero. This study has used Kao
(1999) panel co-integration test. Table  3 reports that co-integration test comes out to be
significant at 10% level confirming that there is co-integration relationship in the model
shown in Eq. (1).

3.5.3 Regression Estimates

Table  4 shows that all the variables in the models are significant at 1% level. In these
results, the primary enrollment has an inverted U-shaped relationship, such that 1%
increase in primary enrollment will lead to increase in 10% of inequality, and for each 1%
increase in the primary enrollment reduces its marginal impact on inequality by 1.15%.
Similarly, secondary enrollment has an inverted U-shaped relationship, such that 1%
increase in secondary enrollment will lead to increase in inequality by 5.90% and for each

13
 1220 N. Arshed et al.

Table 5  Status of education Primary (%) Secondary (%) Tertiary (%)

enrollment for SAARC
economies
Cut off level of edu- 75.8 41.8 7.4
cation enrollment
Average education enrollment
 Afghanistan 45.15 18.35 1.99
 Bangladesh 83.09 30.87 5.00
 Bhutan 58.55 17.81 2.53
 India 93.69 41.26 8.00
 Sri Lanka 100.48 70.81 5.05
 Maldives 120.30 22.42 9.39
 Nepal 93.69 32.13 5.26
 Pakistan 66.02 24.04 3.25

*Author calculations

1% increase in secondary enrollment its marginal impact reduces by 0.79%, these results
are similar to the study by Gupta et al. (2002). Both of these results comply with Kuznets
(1956) hypothesis. While tertiary enrollment forms U-shaped relationship, such that 1%
increase in tertiary enrollment leads to decrease in inequality by 0.12%, and for each 1%
increase in the tertiary enrollment its marginal impact will increase by 0.03%. This means
at low levels of primary and secondary education, increasing education creates inequality
while tertiary education creates equality (Barro 1999, 2000; Alderson and Nielsen 2002;
Gregorio and Lee 2002). While at high levels of primary and secondary education, increas-
ing education leads to income equality while tertiary education creates inequality.
The results indicate that increase in capital, labour force and government education
expenditures leads to decrease in the income inequality by 0.33, 0.01 and 0.12% respec-
tively, the results of education expenditures correspond to the few studies like Brasington
(2002) and Karim (2015). For the case of south Asian countries, increase in GDP lead to
increase in inequality by 0.32% on average, these results complement the study of Rod-
ríguez-Pose and Tselios (2010).

3.5.4 Linear Effects

Since the effects of education enrollment are non-linear such that they depend on the level
of enrollment, Table  5 below provides the cut-off values of primary, secondary and ter-
tiary education enrollment. Since for the primary education and secondary education, the
level coefficient was positive and square coefficient was negative, it suggests that educa-
tion level must be above a certain threshold (shown in Table 5) in order to have a negative
effect on inequality. While for the case of tertiary education the level coefficient is negative
and square coefficient is positive, this means that very high tertiary education will cause
inequality. Based on the calculations provided in Table 5, it can be seen that beyond 75.8
and 41.8% enrollment in primary and secondary and below 7.4% enrollment of tertiary
education will lead to a reduction in income inequality. In this table, the average primary,
secondary and tertiary educations for overall sample and for individual countries are also
provided.
Table 6 below represents the country wise linearized marginal effect of education using
the mean value on inequality. Since the model proposed in this study has used education

13
Education Enrollment Level and Income Inequality: A Case of… 1221

Table 6  Linearized effects of education based on average level of education

Country Primary education Secondary education Tertiary education Net effect
Mean Linear effect Mean Linear effect Mean Linear effect

Effect of education on inequality

 Afghanistan 3.81 1.24 2.91 1.30 0.69 − 0.08 2.46
 Bangladesh 4.42 − 0.17 3.43 0.48 1.61 − 0.02 0.29
 Bhutan 4.07 0.64 2.88 1.35 0.93 − 0.06 1.93
 India 4.54 − 0.44 3.72 0.02 2.08 0.004 − 0.42
 Sri Lanka 4.61 − 0.60 4.26 − 0.83 1.62 − 0.02 − 1.45
 Maldives 4.79 − 1.02 3.11 0.99 2.24 0.01 − 0.02
 Nepal 4.54 − 0.44 3.47 0.42 1.66 − 0.02 − 0.04
 Pakistan 4.19 0.36 3.18 0.88 1.18 − 0.05 0.76
 All 4.36 − 0.03 3.37 0.57 1.44 − 0.03 0.51

enrollment levels as indicator of human capital, hence this we can see that for the case of
primary education, only Afghanistan, Bhutan and Pakistan have low enough enrollment
that is causing inequality to increase, for the case of secondary education Sri Lanka has
high enough enrollment that is causing inequality to decrease, and for the case of tertiary
education, only India and Maldives have high enough enrollment that is causing inequality
to increase. Since these three levels of education are simultaneous, so the aggregate effect
will prevail in the economy. From Table 6, it can be seen that only India, Sri Lanka, Mal-
dives and Nepal are successful in using education to have a negative effect on income ine-
quality while controlling for other factors effecting income inequality and cross sectional
heterogeneity. Other SAARC economies are at the earlier stage of Kuznets curve where
they do not have high enough enrollment in primary and secondary education to reduce
income inequality.

4 Conclusion and Policy Implication

This study investigates the impact of educational achievement on income inequality among
SAARC nations for the period of 1960–2015. We incorporate there level of education i.e.
primary, secondary and tertiary as an instrument of human capital in endogenous growth
theory framework. The study examines the law of diminishing returns in relation between
income inequality and education. It also analyzes the effect of labor and physical capital on
income inequality with the expectation that each will affect the inequality differently. Study
incorporates panel unit root test (LLC, IPS, Fisher ADF and Fisher PP), to confirm the
stationarity at first difference at which the traditional ordinary least square based panel data
models provide us spurious results. Since the co-integration of long run was found among
all variables by using KAO panel co-integration test. Thus, the long run coefficients were
generated by using Fully Modified Ordinary Least Squared (FMOLS) Model.
At primary level, the analysis gets the positive sign showing that at low level of primary
enrollment increase in human capital will lead to inequality, however, for the quadratic
term, the sign is negative. This directs us to the understanding that there is evidence of law
of diminishing marginal returns, whereby large stocks of primary education based human

13
 1222 N. Arshed et al.

capital will lead to decrease in inequality. For secondary education level, enrollment gets a
positive sign at the start, while enrollment in a square form of the secondary level is nega-
tive with income inequality. It implies that at initial stage increase in secondary education
will increase income inequality, however, with mass spread of secondary educated human
capital, it plays its role in decreasing income inequality. The tertiary enrolment gets the
negative sign with income inequality at first. However, at the square form, it shows positive
coefficient with inequality. This means that if the country has low level of tertiary educated
human capital the returns to education leads to fall in income inequality in the economy,
while if the level of tertiary education increases, it leads to increase in income inequality.
In addition, labor force, capital stock and expenditure on education are negatively
related to income inequality. The coefficient of labor force is more elastic as compare to
capital because majority of SAARC countries are labor intensive, while economic growth
associates positively with inequality. The empirical results of this study show that promo-
tion of basic and secondary education contributes significantly to reduce income inequality.
Government must ensure the attainment of education for every individual. While promot-
ing private and public investment can go a long way in reducing inequality. Here increase
in GDP hints unequal distribution but this model has proposed a policy which channels the
increase in GDP to decrease in inequality.
These results have certain limitations which if solved could have improved the results.
Although the model used in this study has eradicated the problem of reverse causality from
inequality to education attainment. Still education enrollment is not fully exogenous to the
income distribution of the family, it certainly depends on the supply of education facilities
in countries like Afghanistan and on other side it depends on incomes of households, edu-
cation enrollment of parents and relevance of education to job market requirements.

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