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Income Disparities, Economic Growth, And Development As A Threshold

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  • Sherif Khalifa

    ()
    (Department of Economics, California State University)

  • Sherine El Hag

    (Department of Economics, California State University)

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    Abstract

    Galor and Moav (2004) argue that in the early stages of development, physical capital accumulation is the primary source of economic growth. Thus, inequality enhances growth by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, physical capital is replaced by human capital as the engine of growth. Accordingly, equality alleviates the adverse effects of credit constraints on human capital accumulation and prompts the growth process. This paper attempts to test empirically the finding that the impact of income inequality on economic growth depends on the development stage. A threshold estimation technique, developed by Hansen (1999), is utilized for a panel of 70 countries for the period between 1970 and 1999. The estimation suggests that there is a statistically significant threshold income per capita, below which the coefficient on the relationship between inequality and growth is significantly negative and above which the estimate is positive, but not statistically significant.

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    Bibliographic Info

    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 35 (2010)
    Issue (Month): 2 (June)
    Pages: 23-36

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    Handle: RePEc:jed:journl:v:35:y:2010:i:2:p:23-36

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    Keywords: Income Inequality; Economic Growth;

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    1. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," GE, Growth, Math methods 0410005, EconWPA.
    2. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
    3. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    4. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
    5. Perotti, Roberto, 1992. "Income Distribution, Politics, and Growth," American Economic Review, American Economic Association, vol. 82(2), pages 311-16, May.
    6. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
    7. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    8. Jess Benhabib & Mark M. Spiegel, 1997. "Growth and investment across countries," Working Papers in Applied Economic Theory 97-03, Federal Reserve Bank of San Francisco.
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