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Income Disparities, Economic Growth, And Development As A Threshold

Author

Listed:
  • Sherif Khalifa

    () (Department of Economics, California State University)

  • Sherine El Hag

    (Department of Economics, California State University)

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.

Suggested Citation

  • Sherif Khalifa & Sherine El Hag, 2010. "Income Disparities, Economic Growth, And Development As A Threshold," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 35(2), pages 23-36, June.
  • Handle: RePEc:jed:journl:v:35:y:2010:i:2:p:23-36
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    References listed on IDEAS

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    1. 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.
    2. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1001-1026.
    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. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
    5. 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.
    6. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
    7. Perotti, Roberto, 1992. "Income Distribution, Politics, and Growth," American Economic Review, American Economic Association, vol. 82(2), pages 311-316, May.
    8. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
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    Cited by:

    1. Neves, Pedro Cunha & Afonso, Óscar & Silva, Sandra Tavares, 2016. "A Meta-Analytic Reassessment of the Effects of Inequality on Growth," World Development, Elsevier, vol. 78(C), pages 386-400.

    More about this item

    Keywords

    Income Inequality; Economic Growth;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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