Income inequality and economic growth in developing countries: an empirical Since the 1950'
, income inequality and its impact on the economy
has frequently been studied by many authors.
Even though numerous studies have considered
many aspects of this impacts, there are still many
questions that remain. One of the lingering questions
involves the nature of the relationship between
income inequality and economic growth. Studies
indicate conflicting conclusions about this relationship.
This paper attempts to use income inequality data
from several developing countries and shed new light
on it. Based on panel data estimation over the 1966-
1991 time period, the empircal evidence shows that
countries with higher income inequality do not grow at
a slower rate than developing countries with a more
equal income distributionINTRODUCTION
Over the last half century, an intriguing topic among
economists and policy makers has been the possible
impact of income inequality on the economy, especially
on the rate of economic growth. Understanding the
relationship between these two very important economic
variables is important, because higher income inequality
is more often found in less developed countries.
If there is a clearer understanding about this relation,
specific economic policies could be adopted in less
countries in the appropriate manner to deal with
income inequality and to stimulate economic growth.
This paper does not provide definitive or conclusive
answer on the relationship between income inequality
and economic growth; rather an attempt to provide
additional empirical evidence in the search for the
focus on income inequality and economic growth
began in the 1950's when Simon Kuznets (1955)
presented his idea of an inverted U relationship
between per capita GNP and inequality in the
distribution of income. Based upon income
distribution data available at that time, Kuznets
suggested that as per capita income rose in lesser
developed countries, income inequality also rose,
reached a maximum, and then declined as income
levels rose further. Kuznets developed this theory
by studying data estimating income distribution in a
few rich and a few poor countries and by studying
trends in distribution in a few European countries
over time (Perkins et al, 129). His findings were
later described as an "inverted-U hypothesis."
Following this ground breaking theory, many
countries tolerated rising income inequality
arguing that income would become more equally
distributed with advanced development, as
Kuznets observed. Thus, developing countries
facing high income inequality need not to be
concerned with such rising inequality. If, however,
income inequality does not reverse itself with
advanced development, it is important to understand
the possible effects of income inequality on the
economy. Whatever may be the theoretical
justification of the Kuznets hypothesis, the
empirical validity of this phenomenon still remains
questionable at best.
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