When Governance Meets Finance: Explaining Inequality in BRICS through Nonlinear Evidence

Why do fast-growing economies like BRICS (Brazil, Russia, India, China, and South Africa) remain trapped in persistent income inequality? This study tackles that puzzle by examining how governance quality and financial development jointly shape inequality, and how unemployment acts as a critical threshold that can amplify or dampen these effects. Using annual data from 2008 to 2023—spanning the global financial crisis, major reforms, and the post-pandemic recovery—we apply the Panel Smooth Transition Regression (PSTR) model. Unlike conventional linear approaches, PSTR uncovers non-linear and regime-dependent dynamics, revealing how the same policies can have very different consequences under varying economic conditions. The results are striking: stronger governance, particularly curbing corruption and enforcing the rule of law, consistently narrows inequality. Financial development helps when inclusive, but risks favoring elites without deliberate redistribution mechanisms. Economic growth shows mixed impacts, while unemployment reliably widens the gap, underscoring its role as a decisive trigger in the inequality process. This study makes the first non-linear contribution to the governance–finance–inequality debate in BRICS and offers a clear message for policymakers: reducing inequality requires coordinated reforms in governance, finance, and labor markets. Without such integration, growth will remain high—but unfairly shared.