Inequality And Economic Growth. Vicious Or Virtuous Circles?

The relationship between income inequality and economic growth has been widely studied, leading to a controversial debate. Regarding the effect of economic growth on inequality, Kuznets’ inverted-U hypothesis (1955) suggests that inequality first rises with growth and then falls after a turning point. This model has been extended by Anand and Kanbur (1993), and its empirical applications have provided a wide variety of results, depending on the statistical information, the indicators and the estimation techniques. With regard to the effects of inequality on growth, on a theoretical basis the relationship could be of any sign and thus the initial works by Lewis (1954) and Kaldor (1956) defend the existence of positive effects while Alesina & Rodrick (1994), Persson & Tabellini (1994), and Deininger & Squire (1998) assume a negative relationship.The diversity of theoretical assumptions and empirical evidence has stimulated the debate without achieving a consensus about the existence of vicious or virtuous circles. In this context the present paper aims to provide new evidence about the growth-inequality relationship, paying attention to the income level in a double sense. First, we introduce a classification of countries according to their income levels, and second we distinguish between inequality relating to low and high incomes.