Inequality in growth models
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
The literature
- Kuznets, 1955
- Vandhoudt, 1998
- Chen/Ravaillon, 2001
- Barro, 2000
- Bourguignon/Morrisson, 2002, 2005
- Becker/Philipson/Soares, 2003
- Milanovic, 2007
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
The Outline
I. Definition
II. Basic approach: Kuznets, 1955
III. Research:
- Vandhoudt, 1998
- Barro, 2000
- Chen and Ravaillon, 2001
- Bourguignon and Morrisson, 2002, 2005
- Milanovic, 2007
IV. Conclusions
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
I. Definition
=> What do we mean by „inequality“?
Synonyms: asperity, bias, contrast, difference,
discrimination, disparity, disproportion, dissimilarity,
dissimilitude, diversity, imparity, incommensurateness,
injustice, irregularity, one-sidedness, partisanship,
preferentiality, roughness, unequivalence, unevenness,
unfairness, unjustness, variation
Antonyms: balance, equality, evenness, similarity
• Synonyms
• Difference between something
• Difference in something
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
I. Definition
=> How can we measure „inequality“?
1. We need to find a proxy
2. We can measure the distribution
- Gini coefficient
- Hoover index
- Theil index
- Herfindahl index
- Rosenbluth index
-…
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
II. Basic approach
Kuznets, 1955
Question:
1.
2.
3.
Does inequality in the distribution of income increase or
decrease in the course of a country‘s economic growth?
chooses one particular country
defines: - units: for which incomes are recorded: family-expenditures
- ordinal groups: a<b<c: income
- income: in GDP per capita, annual, before direct taxes
measures the distribution of income among these units over time:
from the 19th century to the 1950ies
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
II. Basic approach
Kuznets, 1955
Findings
Developed countries: over time from 1870s to 1950
US:
- the share of the lowest 2 quintiles rise from 13,5% (1929) to 18% (1950)
- the share of the top quintile declines from 55% (1929) to 44% (1950)
- and that of the top 5% from 31 to 20%
UK:
- the share of the lower 85% remains fairly constant (1880-1913) between 41 and 43%,
but then rises to 46% (1929) and 55% (1947)
- the share of the top 5% of the units declines from 46% (1880) to 43% (1910),
to 33% (1929), to 31% (1938), and to 24% (1947)
Prussia:
- the share of the lower 60% remains about the same (1875-1913)
- the share of the top quintile rises from 48 to 50% (1875-1913)
- the share of the top 5% rises from 26 to 30 % (1875-1913)
Undeveloped countries: in 1950
India:
- the share of the lower 3 quintiles is 28%
- the share of the top quintile is 55%
Ceylon:
- the share of the lower 3 quintiles is 30%
- the share of the top quintile is 50%
Puerto Rico: - the share of the lower 3 quintiles is 24%
- the share of the top quintile is 56%
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
II. Basic approach
Kuznets, 1955
4. => „Kuznets curve“: one country, 3 phrases
5. Explanation: industrialisation and urbanisation
„The paper is perhaps 5 per cent empirical information and 95 per
cent speculation […]”
6. Importance: distinction between developed and undeveloped countries
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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THIS IS A WARNING
Theories + empirical findings = ambiguous !
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
III. Research
What were Vandhoudt‘s empirical findings
(1998)?
Question: Is the Kuznet‘s hypothesis still right?
Methodology:
• Kuznet‘s hypothesis empirially will be examined by neoclassical growth model
• Macroecnomics knowledge by Mankiw, Romer, Weil (1992).
• 23 OECD countries and 30 LDCs.
Data:
Gini-coefficient, Deininger & Squire‘s , Penn World Table , Barro‘s and Lee‘s „GEETOT“
variable.The reseaching period: 1975-1985.
Result:
• Yes. The Kuznet’s hypothesis is still right.
• But: the way of measuring (GDP per capita) should be advanced by economic growth
fundamentals. We should find additional metrics for the level of development. In other words:
GDP per capital is not sufficient proxy for the level of development.
• His proposal: add growth fundamentals such as investment share in physical and human
capital or knowledge or policy. Reason: Economic fundamentals create the differences on
level and trend rate in inequality among countries.
• He shows that changes in inequality are explained as responses to shocks in policy and the
changes in capital stocks.
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
III. Research
What was Barro‘s conclusion (2000)?
Question: Is the Kuznets curve true?
Methodology:
To investigate four features in growth models: Credit market imperfections, saving rate,
political economy and social climate.
Data:
Gini coefficients observed around 1960, 1970, 1980 and 1990, level of per capital GDP.
Gini coefficient is used to show inequality in distribution. The higher the coefficient, the
more unequal the distribution is.
Results:
•
Yes, there is clear empirical regularity
•
But: The Kuznets curve does not explain all variations in inequality across countries.
•
Reason why Barro thinks that the Kuznets curve is not completely true:
+ Evidence shows little relation between income inequality and rates of growth
and investment.
+ For growth, higher inequality tends to slow growth in poor countries and
encourages growth in richer ones.
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
III. Research
What were Chen and Ravaillon‘s estimates
(2001)?
Question: Did poverty increase in the developing countries from 1987–1998?
Methodology:
household: household consumption expenditure per capita
poverty: ▪ absolute consumption poverty: international poverty line set at $1 ($2) per day
▪ relative consumption poverty: international poverty line + consumer of more
than 1$, but less than 1/3 of mean consumption
Data:
household survey: national surveys of 88 countries
price data: Purchasing Power Parity (PPP) estimates by the World Bank
Results:
 No. In 1987: 28% of pop. of developing world below $1 per day, in 1998: 23%
 But: decrease in 3 regions: East Asia, Middle East-North Africa, Latin America
increase in 3 regions: Eastern Europe and Central Asia, South Asia, SubSaharian Africa
 And: the decrease of the average poverty rate is not sufficient to reduce the
aggregate number of poors. Excluding China, number of poors has risen steadily.
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
III. Research
What was Bourguignon and Morrisson‘s
findings (2002)?
Question: How did the distribution of “well-being” among world citizens develop during
the last two centuries?
Methodology & data:
updating existing works and extending it back => first broad historical view
2 dimensions of “well-being”
- Income distribution within countries
Life expectancy (longevity)
 Rather an comparison of world inequality among individuals than countries
Results:
Early 19th century: Gini coefficient: 0.50 => already high income inequality
With the spreading of the industrial revolution: inequality soared (continuous rise) coefficient: 0.61
Between the wars: inequality decelerated
After 1950: inequality slowed
Beginning in the 1980’s: catching up by China
Little difference between 1950 and today, but not due to stabilisation, but to shifting of concentration
of world poverty
 BUT: inequality worsened dramatically over the past two centuries: Gini coefficient increased 30%
between 1820 and 1992
 Not due to increase in inequality within countries, but to an increase of inequality across countries or
regions of the world
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
III. Research
What are Milanovic‘s social classes (2007)?
Question: How is the circumstances and social class important in global income
distribution?
Methodology:
Assessment of the global income inequality though two characteristics:
1. country where a person was born and
2. social class within that country
bases on different mean country incomes and supposing: no migration.
Data: World Income Distribution database including representative household surveys
form most of the countries in the world. The benchmark year is 2002.
Results:
•
One’s position in global income distribution can be known by one’s location (60%) and
social class (30%) around 1/3 and 2/3 of which is due to the former one.
• The predictive power of country mean income is strong, not only in the aggregate, but
for each social class.
• There is also the trade-off between wealth of the country and its income distribution
from a person’ social class.
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Inequality in growth models
IV. Conclusions
THE EVOLUTION OF INEQUALITY OVER TIME
First, Kuznets (1955) analysed countries separately => Kuznets curve
Then, cross-country analyses were realised with different proxies for “quality of
life”:
e.g.: distribution of income:
Chen and Ravaillon (2001) for developing countries
Bourguignon and Morrisson (2002) for the whole world
Milanovic (2007) for the whole world
distribution of longevity: Becker, Philipson and Soares (2003) for the whole world
Bourguignon and Morrisson (2002) for the whole world
CONCLUSION
•
•
•
•
•
•
Kuznets has been confirmed
average poverty rate decreases
number of poor rises
shifting of concentration of world poverty
increase of inequality across countries or regions of the
world
the opportunity for global equality is rather minimal
Inequality in growth models - Development Economics - 04.01.2010 - Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant
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Thanks for the attention
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