Background
Growth and equality can be defined as development objectives which can be compared. National policy makers and the development economists have been interested in the study of the interface between growth and equality in the past, but recently there have been a revival of this subject. There has been various reasons that have led to the study of this particular issue under development. The fear that the increasing trends towards globalization in 1990s may result to more inequality is what has led to this study.
The main goal for the policy makers is to ensure there is growth and at the same time there is equality among people of different economic backgrounds. Growth can be realized when the standard of living of the people is improved and inequality is reduced when the gap between the poor and the rich is reduced. In this study, the argument on the development literature has been equipped by the analysis of growth at the initial stages of development.
The logics of the above argument have been debated at serious note. Considering various literature reviews that has been made, growth and inequality cannot be avoided. Therefore this paper is generally looking at the linkages between growth and inequality in accordance with the literature study.
Theoretical Frame Work
Growth and inequality may be interrelated. A study has been done by the Asian Dev elopement Bank on these interrelationships between growth and inequality. The diagram below seeks to explain this relation ship in a creative way so as to understand the linkages involved. It tries to show some of the policies and how they affect growth either directly or through redistribution effect. Education, redistribution and infrastructure are some of the policy that affects inequality directly.
Hypothesis
The perception in development literature is that there is a basic trade off between growth and inequality that cannot be removed. It was inspired by the work done by Kuznet that indicated the income inequality starts by increasing and when it reaches the maximum point it then starts to decline with the economic growth. Kuznets hypothesis also known as the “inverted U” hypothesis has highlighted that inequality is less common in countries with low and high income than in middle –income countries.
Literature Study
When Kuznet was putting forward his inverted u-hypothesis he noted that a lot of studies had been done to relate the equality and the growth. There have been several arguments on the two economic objectives. It has been noted that some authors claims that inequality could slow down the rate of growth. Some of the literature reviews includes the following.
According to Campano and Salvatore a study done to 95 countries showed the relationship between growth and income shares. He used regression analysis to come up with this relationship. The dependent variable was percentage income shares and the independent variable is the GDP per capita. According to his study it showed that the 20 percentage bottom proportion of the population seem to be unaffected by development process. There is need for the programs that will benefit the poor since they are not affected by the development process.
Ahluwalia performed a test on the Kuznets hypothesis on the issue that the inequality first increases and then decrease during development process in 60 countries. In the regression analysis the dependent variable are income share and independent are GDP per capital others were share of agriculture in GDP, share of urban population ,literacy rate, secondary school enrollment and population growth.. This result provided a good support for the Kuznet hypothesis. He further noted that human resources reduces the inequality whereas increase in the population growth, decrease in the share of agriculture in the GDP results to a rise in the inequality.
A study done by Send focuses on poverty reduction and the impact of the inequality and growth on poverty. He considered many variables that related to poverty eradication and analyzed them using regression analysis. The regression analysis covered thirty six countries. The dependable variable was the reduction on poverty and independent variable included growth in GDP per capita and the Gini coefficient. Some of the determinant of the growth in the GDP capita included income inequality, primary school enrollment, share of the government consumption and inflation among others. He found out that growth in the countries economy helps to reduce the poverty level. Increase in inequality reduces the impact of growth on poverty eradication. The initial stage of inequality does not show any significant impact on the growth.
Fishlow provided a study of how the global income inequality has resulted to a great level of poverty. He also studied the relationship of the inequality to growth. He tested the Kuznet hypothesis in 63 countries and concluded that reduced inequality has no influential impact on the reduction of poverty. He argues that income inequality and poverty reduction and growth are compatible because they are polices that are highly emphasized by the government. The major interventions according to him are the distribution of physical assets and accruing human capital.
Birdsall, Ross and sabot took a study of south-east and East Asia. They tried to explain the linkage between growth and inequality in these countries. These economies do not agree on the fact that the income inequality contribute to growth. In this study they came up with enough evidence that equality promotes growth. Other factor that stimulates the growth is investment in human capital, increase in human capital is seen as a key to sustain growth and reduce income inequality.
Alesina and Rodrik were interested in the test of the inequality on growth. Their interest was based on a test involving the regression analysis on 70 countries. He used a two equation model that involved the investment and the social political instability. He discovered that growth and inequality are positively related. The result proved that the income inequality leads to the social political instability which reduces the investment. One of the policies encouraged is the fiscal policy that encourages the tax burden being more to the rich than to the poor but it will lead to reduction on the level of investment.
Person and Tabellini also the impact of inequality on growth using secondary data on 9 developed countries. He also carries a study on 56 countries that were involved in wars. He involved both the democratic and non democratic country. He also used the regression analysis on various variables. The results from this countries shows that the inequality has an impact on growth. Human capital was cited to have an economic impact on growth it is taken as a means of increasing growth. They also found that the investment is a factor that promotes growth and that why the high income inequality pressurizes the democratic government to adopt policies that increases the level of growth.
Jha used the regression test to test the Kuznets hypothesis. His study was based on 76 countries the used the variables like income share Gini coefficient and the GDP capita. He argues that the difference in income distribution is due to the government policy involved in promoting equal income distribution. It is difficult to separate how much of this growth versus equality is involved in the trade off due to this policy.
Randolph and Lott used the cross country regression to test inverted U test. The independent variables were the income share and the Gini coefficient. And the dependable variable was the GDP per capita. He concluded that he does not advocate for the growth concentrated policies because they do include the welfare of the low income class.
The Analysis
Considering the literature review done earlier about inequality and growth many of the economics tries to look at this on a more practical stand off. Some of the research as discussed above shows that the inequality is negatively related to growth. On the other hand more of the analysts were found to favor that income equality is positively associated with growth. Those who agree with the Kuznet hypothesis are found in Ahluwai, Randolph and Jha. It is only Fishlow who has opposed and proposed that there is a weakness in this hypothesis.
A lot of questions are asked in regard to these differences that arise among many authors on this issue. The puzzle about these differences concerning the growth and inequality relationship may be presented in different economic structures. A number of authors have been trying to prove that whether an inequality is high or low it may affect the interaction with growth. The reason for this situation is: there are two ways of non-linear relationship between growth and equality in that they both affect each other. The other reason is that there is a host of initial conditions as well as interrelated policies which have an impact on growth as well as equality. These impacts are not always on the same direction. It has been proved very difficult to separate these impacts so as to identify the policy that can be used so as to ensure positive contribution towards growth and equality. The third reason is that it is easy to quantify growth rate either as the aggregate GDP or per capita income but equality does not have a direct quantification.
Kuznets hypothesis used in consideration of the relationship between growth and equality uses different techniques of measurement. Gini coefficient is the one that has been used as a measure of equality by many analysts, but it should be noted that other measures might bring different results.
Policy Implication and Conclusion
In this study they are various description of the relationship between inequality and growth. In the literature review it is evidence that they are some studies that support the “inverted U” hypothesis. Other results from some of these studies have shown a negative relationship and positive relationship between the two development policies.
It has been shown that there is no inherent trade-off between growth and income distribution, implying that the simultaneous chase of growth and inequality is not an infeasible task. An important complication in assessing the relationship between growth and equality is that, unlike economic growth, the concept of inequality is not easily agreeable to quantification.
There is no clear relationship between growth and inequality. This is because of the opposite interactions that exist between them within the framework of the policies, initial conditions and institution which diverge widely from one country to another.
This paper makes some suggestions on the future policy directions that should be implemented by various countries. It was noted that the human resource contributes in ensuring that there is equality, it is therefore vital for the government to improve the accessibility of education to ensure that people at the bottom level of income gain education. The goal of education for all should be encouraged.
There is a need for a more sophisticated system in areas like collective bargain, training, social insurance, employment security and wage determination as the economy becomes complex. In addition it is necessary for the government to put up adequate standards in social services.
Finally agriculture development is very important in many areas. It has been observed that it promote growth and equality in many countries. It requires policies that will promote agricultural activities like input output pricing, offering credit to the farmers and improving the rural infrastructure among others.
The above suggestions if put in place will be able to increase the level of growth since the agriculture contribute to GDP. The income of the country since agriculture products can be exported. Agriculture sectors also provide a form of employment to the citizen of the area.
Considering improvement in the education level in the country it can be noted that this will lead to qualified human capital that can be used to increase the level of production hence increase the growth of the economy. On top of that, if education is emphasized and the people receive the basic education the gap between the poor and the rich will be reduced.
Work cited
- Ahluwania, M.S. “Inequality, Poverty and Development.“ Journal of Development Economics, Vol.3, No.4 (1976):pp.307-342.
- Alesina, A. Rodrik. Distributive Politic and Economic Growth, Quarterly Journal of Economics, 109, 3 (1994): pp.465-490.
- Alesina, A, Perotti R., “Income Distribution, Political Instability, and Investment”, European Economic Review, 40, (1996): pp.1203-1228.
- Birdshall, N., D. Ross and R. Sabot, “Inequality and Growth Reconsidered: Lesson from East Asia”, The World Bank Economic Review, Vol.9, No.3, (1995) pp.477-508.
- Campano, F. and D. Salvatore. “Income Inequality and Economic Development”. Working Paper, No.4, Department of International Economics and Social Affairs, United Nations, New York, 1987.
- Fishlow, A., “Inequality, Poverty, and Growth: Where do We Stand?” in M. Bruno and B. Pleskovic, Eds, Annual World Bank Conference on Development Economics, 1995.
- Forbes, Kristin J, “A Reassessment of The Relationship between Inequality and Growth”, The American Economic Review, Vol.90, No.4. (2000): pp.869-887.
- Jha, S.K., “The Kuznets Curve: A Reassessment“, World Development, Vol.24, No.4, 1996, pp.773-780.
- Persson, T. and G. Tabellini, “Is Inequality Harmful for Growth?” The American Economic Review, Vol.84, No.3, (1994): pp.600-621.
- Randolph, S.M and W.F Lott,”Can the Kuznets Effect be relied on to Induce Equalizing Growth?” World Development, vol.21, No.5, (1993):, pp.829-840.
- Ray, Debraj, Development Economics New Jersey Princenton University Press, 1998
- Send, B., A Changes in Poverty in A Cross Section of Countries, New Delhi :Univ. Press Limited, 1996.