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Can there be a Wave-Like Association between Economic Growth and Inequality? Theory and Lessons for East Asia from the Middle East

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  • Partha Gangopadhyay
  • Biswa N. Bhattacharyay

Abstract

High income growth in many countries in East Asia and the Middle East has been accompanied by increasing income inequality and widening gaps between rich and poor, and urban and rural. It is therefore it is important to examine the interrelationships between inequality and economic growth. This paper develops a simple model to establish that the change in income growth rate is a non-linear function of the income growth if policy makers try to influence economic growth. As a result, inequality and growth bear a non-linear relationship: for low values of inequality, economic growth rate is an inverted U-shaped \function of inequality. This function becomes U-shaped for values of inequality beyond a critical value of inequality. As a result, the relationship between growth and inequality can take the form of a wave. This simple theoretical model is a sufficient case to explain why previous empirical studies might have failed to reach a consensus between economic growth and inequality. The paper estimates the model empirically by using a set of panel data for ten Middle Eastern countries. The empirical analysis finds statistical support for a possible wave like relationship between growth and inequality, which can bear ominous messages for using equitable growth in fighting poverty. Rapid growing developing economies need to adopt appropriate policies for achieving an optimal mix of inequality and growth. Promoting inclusive growth together with good governance is crucial to ensure more equity and social stability.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3953.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3953

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Keywords: growth; inequality; poverty; East Asia and the Middle East;

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  1. Mattias Lundberg & Lyn Squire, 2003. "The simultaneous evolution of growth and inequality," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(487), pages 326-344, 04.
  2. Francois Bourguignon & Luiz A. Pereira da Silva, 2003. "The Impact of Economic Policies on Poverty and Income Distribution : Evaluation Techniques and Tools," World Bank Publications, The World Bank, number 15090, August.
  3. Anand, Sudhir & Kanbur, S. M. R., 1993. "Inequality and development A critique," Journal of Development Economics, Elsevier, Elsevier, vol. 41(1), pages 19-43, June.
  4. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, Elsevier, vol. 57(2), pages 259-287.
  5. Echenique, Federico & Edlin, Aaron, 2004. "Mixed equilibria are unstable in games of strategic complements," Journal of Economic Theory, Elsevier, Elsevier, vol. 118(1), pages 61-79, September.
  6. Clarke, George R. G., 1995. "More evidence on income distribution and growth," Journal of Development Economics, Elsevier, Elsevier, vol. 47(2), pages 403-427, August.
  7. Savvides, Andreas & Stengos, Thanasis, 2000. "Income inequality and economic development: evidence from the threshold regression model," Economics Letters, Elsevier, Elsevier, vol. 69(2), pages 207-212, November.
  8. Chen, Been-Lon, 2003. "An inverted-U relationship between inequality and long-run growth," Economics Letters, Elsevier, Elsevier, vol. 78(2), pages 205-212, February.
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