Income Inequality and Economic Growth

There is a very complex relationship between income inequality and per capita income. Without disregarding the merits of Simon Kuznets’ inverted U hypothesis, there are few development economists today who believe that inequality inevitably rises and then falls as growth increases. In many cases, higher GDP growth rates are associated with lower levels of income inequality as measured by the Gini index, but in many cases, this is not the rule, and the outcome may be different for countries belonging to different income groups. Looking at the time series, we find that Gini and GDP can increase together in certain countries, but this is not a general pattern. Obviously, other important factors are not constant. The aim of this chapter is to identify these variables, which we believe to be primarily efficiency, institutional, and economic policy factors. Our research also highlights the different characteristics of economic growth, thus distinguishing two specific types of growth. On the one hand, we explore (i) market-friendly economic growth, where the benefits of growth trickle down to the poorer classes and can be sustained over the long run. On the other hand, there exists (ii) harmful growth, where growth exacerbates income inequality, particularly if it benefits certain segments of society disproportionately. This can be equivalent to rent-seeking and will, in any case, not be permanent.