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Studies on the relationship between income inequality and Growth initiated from the pioneering research by Simon Kuznets (1955) where deliberated economic growth and income inequality and came up with a hypothesis that is currently called as the Kuznets hypothesis or the inverted U-Curve. That matters because it wordlessly whispers a powerful message: if you want progress, inequality is inevitable. on. Let Professional Writer Help You, 6000 Fairview Road, SouthPark Towers, Suite 1200, Charlotte, NC 28210, USA. Don't use plagiarized sources. Kuznets: Economic Growth and Income Inequality (1955) August 25, 2015. According to Helpman (2004), Tachibanaki (2005), Weil (2005) studies shown that the positive relationship between income inequality and economic growth might be explained as follows. They do not have the opportunity of investing, and extremely poor people in income inequality cannot even participate in product activity. In developed countries, the saving rate of rich people is higher than that of the poor. 1 (February 1956): 65–94. As a result, we can conclude that income inequality makes economic growth lower and income equality makes it higher. Further, Galor et al. (2020, Aug 10). In addition to Panizza, Stewart and Moslares (2012) studied the Indian states for the period of 1980-2010, and demonstrated that income inequality affects growth negatively, and achieve that regional Gini coefficients affects the growth rate negatively, by means of the literacy rate and the coefficient of variation of the growth rate as control variables. Instead, he finds weak evidence of a negative result. American Economic Review 45, no. Delbianco, Dabus & Caraballo, (2014) they studied the linkage between the inequality of income distribution and the economic growth of 20 Latin American and Caribbean countries from 1980 to 2010. Lewis’s labour-surplus model suggests that as economic growth takes place with withdrawal of surplus labour from low-productivity agriculture to the high-productivity modern industrial sector, income inequality will first increase and then after a point tends to decrease. Li and Zou (1998) considered a more general theoretical framework found that income inequality is positively and most of the time significantly associated with economic growth. This shift would lead to the inverted U-shaped relationship between real GDP per capita and inequality. https://phdessay.com/economic-growth-and-income-inequality/. Inequality has increased since the late 1980s in most advanced economies and remains high in most emerging markets and developing economies, despite the progress made in many of these countries. The Kuznets hypothesis formed the foundation from which most early studies analyzed the relationship between income inequality and growth. Likewise, Abida and Sghaier (2012) they look empirical relationship between economic growth and income inequality for four north Africa nations namely (Tunisia, Algeria, Morocco, and Egypt) for the 1970-2007 periods. Nguyen (2014), Nguyen (2015) or Le and Nguyen (2016) studied the link between economic growth and inequality of Vietnam By using Gini coefficients to represent income inequality, these authors analyzed the positive relationship between economic growth and inequality in Vietnam in recent periods. A popular method of measuring degree of income inequality is Kuznets’ ratio after the name of Simon Kuznets who has been a pioneer in the study of income inequality. KUZNETS: ECONOMIC GROWTH AND INCOME INEQUALITY 3 groups that, judged by their secular levels, migrate upward or down-ward on the income scale. It means the evidence is “approximately heterogeneous.”. The two separate literatures on the Kuznets curve and the EKC provide an-other possible explanation for the environmental impact of inequality. How can economic policies be designed to tackle inequality while avoiding or mitigating possible negative repercussions for efficiency and growth? Data from developing economies indicate that the earlier phases of economic development tend to be characterized by increasing income inequality, as those engaged in the small but growing modern sector of the economy pull away from those still left in agriculture and other subsistence activities. The analysis is restricted by 24 countries and covers 13 years, between 2003 and 2015. This is because in the study of Robinson (1976), Kuznets process is analyzed with the existence of within-sector inequality. This in turn would affect incentives, and thus decrease growth. Income redistribution from rich people to poor people reduces the saving rate of the economy as a whole and thus could lead to a decline in economic growth. Looking at annual income levels over the course of roughly 50-75 years Kuznets finds that beginning in as early as the nineteen-twenties, the inequality of income distribution in the UK, US, and Germany narrowed rather than widened. The Russian-born Simon Kuznets left Soviet Russia in 1922, emigrating to New York. In addition, income inequality and economic growth have co-integrated movement in long run (Khattak, Muhammad & Iqbal, 2014). 9. Similarly Bjornskov (2008) considered the relationship between income inequalities and economic growth and found that it can certainly depend on the political ideology of the government which positive sign holds under conservative governments and the negative sign under liberal governments. Furthermore, Galor and Moav (2004) describe a unified theory that combines two contradictory approaches at different stages of the development process. Summary:. Income inequality might lead to political and social instability, and consequently to economic growth decline. Even if we had data to approximate the income structure just out-lined, the broad question posed at the start-how income inequality changes in the process of a country's economic growth-could be Tiwari, Shahbaz and Islam (2013) investigated the impact of financial development on the rural‐urban of Indian data for period 1995-2008 and found that the relationship is positive in the urban areas and negative in the rural areas. Some researchers shown support to Kuznets Hypothesis e.g. Keefer and Knack (2000) find evidence of a negative correlation between income inequality and growth, but this correlation becomes insignificant once a measure of property rights is included as a control variable. These actions can even threaten the country’s political system, which may make a more insecurity in the country’s governmental institutions. This is therefore consistent with Kuznets’ inverted U-hypotheses. The hypothesis was first advanced by economist Simon Kuznets in the 1950s and 1960s. Similarly, Abida and Sghaier (2012) they look empirical relationship between economic growth and income inequality for 4 countries in North Africa (Tunisia, Algeria, Morocco, and Egypt) for the 1970-2007 periods. Consequently, they found a negative effect of inequality on income, both for the sample as a whole and for groups within the sample. Retrieved from https://phdessay.com/economic-growth-and-income-inequality/, We use cookies to give you the best experience possible. The rise in … One of the major stylized facts about long-run processes of economic development is the Kuznets curve—the inverse-U shaped pattern of inequality. As a result, we can infer that income equality makes economic growth lower, and income inequality makes it higher. Don’t miss a chance to chat with experts. The impact of migration on inequality is explored by Kuznets (1955) in his AER article “Economic Growth and Income Inequality”, which forms a basis for Kuznets’s inverted U-curve theory. Barro (1990) Contribution in such activities leads to a direct misused of resources that harmful to economic growth. According to Kuznets, a shift towards the secondary and the third sectors has in nature two effects in the short term. GDP was not designed to assess welfare or the well being of citizens. Executive Summary. Whereas Clarke (1995) obtains a negative correlation for both democracies and non-democracies. The Quote: "This paper is perhaps 4 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking. There are also other arguments that associate higher inequality with lower future growth. As countries grow and develop, the income gap between the rich and the poor should decrease. (2009) suggest that inequality may bring out incentives for the wealthy to hamper institutional policies and changes that facilitate human capital formation and economic growth. As countries develop they shift more and more resources from agriculture to industry (and later to services), and this will in time decrease the income gap between the industry and agriculture simply because there will be more and more workers working in the industrial sector. So, the long run relationship between inequality and GDP per capita is negative. This theory anticipated that the marginal tendency to save increases with income and that savings are equal or similar to investment. It was no surprise, then, that Kuznets took his master's creed to heart: that the painstaking collection of empirical data was a priority. Labour productivity growth is found to have contributed to rising market income inequality, while this was partly mitigated through government redistribution, on average across OECD countries over the past three decades (Chart 1, Panel A). "Economic Growth and Income Inequality." In 1955, Simon Kuznets published a paper asserting that the correlation between economic growth and income inequality resembles an inverted U-shaped curve. Kuznets (1955) assumed that in the initial stages of economic Growth, both a nation’s economic growth and its inequality increase. metropolitan Lima, Disentangling women's participation in research and its relation to economic In this scenario, the poo rest goup’s share of total income would decrease as economic g rowth However, Forbes\'s (2000) studied, using panel data on countries, finds in contrast to Persson and Tabellini\'s a positive short term linkage between inequality and growth. Based on the study of Shahbaz (2010), the Kuznets’ inverted U-curve in Pakistan is existed. Kuznets collected data on income inequality and economic growth in three developed countries: the United States of America, United Kingdom, and Germany. Get Your Custom Essay Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review 45, no. Panizza (2002) criticizes Partridge’s Finding. Income Inequality and Economic Growth Most of the economics literature on the relationship between income inequality and economic growth has its origin in Kuznets (1955), who proposed that income inequality initially rises and then declines as per capita income increases further.

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