Capital Formation, Rate of Return on Capital, and Economic Inequality in the Mena

Abstract

Economic inequality is one of the most pressing issues in the twenty-first century, given that a small minority controls the global economy and most influential power. This has led to an escalation of political instability and a decrease in social inclusion, as evidenced by studies related to the Arab Spring and the ongoing turmoil in the MENA. This quantitative study investigates the effect of capital formation and the rate of return on capital on economic inequality in countries of the region. The results demonstrated that the factors used to measure the formation of capital, such as total domestic savings and total fixed capital formation, positively correlate with economic inequality - increasing the inequality gap. Conversely, factors used to measure the rate of return on capital, such as real interest and the interest rate on deposits, correspond negatively with economic inequality. When the interest rate on deposits increases, economic inequality decreases. It is necessary to review fiscal and monetary policies to reform taxes and benefits to increase their impact on equity and redistribution, and to avoid the impact of capital and power accumulation.