Publications  Income Distribution

 

INTRODUCTION

The relationship between growth and equity has been a disputed issue at least since Simon Kuznets [11] described it as U-shaped. Kuznets's hypothesis that as per capita income rises income distribution would first become less equal and then more equal has been supported by a large array of empirical studies (e.g.: Bacha [4], Ahluwalia [3] , Chenery et al. [7] , Adelman and Morris [2] , Cline [8] , Paukert [23]. As a result, there are only a few propositions in economics which have wider acceptance.

The Kuznets hypothesis, which applies to the secular process of development over several decades, has sometimes been cited as evidence that there is conflict between growth and equity. Alternative reasons were subsequently advanced for the conflict between these objectives. It was argued that there is also a trade-off between a high rate of growth and an equitable distribution of income, because the policies desirable for a high rate of growth involve strong incentives and rewards to the scarce factors in the hands of the rich. Finally, the related argument was some­times made that reliance on private enterprise was favorable for growth, but unfavorable for equity. In combination, these three arguments led to a belief in a rather dismal trade-off for the poor in poor countries: rapid growth achieved in a private-enterprise economy resulted in a rapid decline in the income share of the poor; as they slide down the Kuznets Curve,1 their slide was speeded by policies favorable to the rich. Indeed, the decline in the share of the poor was so great, Adelman and Morris [ 2] claimed that their absolute income would fall in the early stages of development. The political consequences were sometimes noted as well: worsening income distribution in an environment of rapid development required an authoritarian regime to maintain the pace of development until the reversal of the Kuznets Curve came to the rescue of the poor and of political stability and democ­racy.2  An alternative to rapid, inequitable growth under an authoritarian regime was massive government intervention in the economy to achieve greater equity, usually at the cost of growth.

 Enough observations about income distribution have accumulated by now to permit further empirical testing of these arguments, using a combination of methodologies. These tests suggest that

(i)       indeed, income distribution may tend to become less equal as per capita income rises and then become more equal, but this "Kuznets effect" is very weak and explains little of the variation in income distribution; and

(ii)      results obtained by other authors were replicated for some factors (education; the share of primary exports) but not for others. Most notably, neither the rate of growth nor the extent of government intervention in the economy appears to influence income distribution. Finally, socio-political dualism appears to be a new, and important, factor in income distribution.

 

 

 

 

 

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