IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_5377.html
   My bibliography  Save this paper

Is there a Nonlinear Relationship between Economic Growth and Inequality? Theory and Lessons from ASEAN, People Republic of China and India

Author

Listed:
  • Partha Gangopadhyay
  • Biswa Nath Bhattacharyay

Abstract

In view of rising inequality in fast growing Asian developing countries, it is important to study the relationship between economic growth and income inequity. We develop a simple model to establish that economic growth and inequality can bear a complex and non-linear relationship if policy makers try to impact on one (say, inequality) by influencing the other (economic growth). Our findings for the Associations of Southeast Asian Nations (ASEAN), People Republic of China and India (ACI) economies are two-fold: first, we observed that for low values of economic growth, inequality and growth bear an inverted U-shaped function. This function becomes U-shaped for values of economic growth lying between two critical values. As a result, the relationship between growth and inequality can take the form of a wave. Secondly, we examine the issue of the existence of threshold effects of foreign direct investment (FDI) in the relationship between growth and inequality by applying the standard methodology of endogenous sample splitting. We confirm that the relationship between growth and inequality in ACI economies is significantly influenced by a single threshold in FDI: for FDIi>ô, economic growth and inequality can have an inverse relationship while for FDIi

Suggested Citation

  • Partha Gangopadhyay & Biswa Nath Bhattacharyay, 2015. "Is there a Nonlinear Relationship between Economic Growth and Inequality? Theory and Lessons from ASEAN, People Republic of China and India," CESifo Working Paper Series 5377, CESifo.
    • Handle: RePEc:ces:ceswps:_5377
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp5377.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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 - Books, The World Bank Group, number 15090, December.
    2. Cooley, Thomas F. & Hansen, Gary D., 1992. "Tax distortions in a neoclassical monetary economy," Journal of Economic Theory, Elsevier, vol. 58(2), pages 290-316, December.
    3. Timothy Besley & Anne Case, 2003. "Political Institutions and Policy Choices: Evidence from the United States," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 7-73, March.
    4. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    5. Hongyi Li & Heng-fu Zou, 2002. "Inflation, Growth, and Income Distribution: A Cross-Country Study," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 85-101, May.
    6. Hongyi Li & Heng‐fu Zou, 1998. "Income Inequality is not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-334, October.
    7. Dollar, David & Kraay, Aart, 2002. "Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
    8. Ravallion, Martin, 1997. "Can high-inequality developing countries escape absolute poverty?," Economics Letters, Elsevier, vol. 56(1), pages 51-57, September.
    9. Davidson, Russell & Flachaire, Emmanuel, 2008. "The wild bootstrap, tamed at last," Journal of Econometrics, Elsevier, vol. 146(1), pages 162-169, September.
    10. 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.
    11. Baele, Lieven & Pungulescu, Crina & Ter Horst, Jenke, 2007. "Model uncertainty, financial market integration and the home bias puzzle," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 606-630, June.
    12. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92, National Bureau of Economic Research, Inc.
    13. Clarke, George R. G., 1995. "More evidence on income distribution and growth," Journal of Development Economics, Elsevier, vol. 47(2), pages 403-427, August.
    14. 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.
    15. Banerjee, Abhijit V & Duflo, Esther, 2003. "Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-299, September.
    16. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    17. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
    18. Case, Anne, 2001. "Election goals and income redistribution: Recent evidence from Albania," European Economic Review, Elsevier, vol. 45(3), pages 405-423, March.
    19. Anand, Sudhir & Kanbur, S. M. R., 1993. "Inequality and development A critique," Journal of Development Economics, Elsevier, vol. 41(1), pages 19-43, June.
    20. Bourguignon, Francois, 1981. "Pareto Superiority of Unegalitarian Equilibria in Stiglitz' Model of Wealth Distribution with Convex Saving Function," Econometrica, Econometric Society, vol. 49(6), pages 1469-1475, November.
    21. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
    22. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    23. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    24. Echenique, Federico & Edlin, Aaron, 2004. "Mixed equilibria are unstable in games of strategic complements," Journal of Economic Theory, Elsevier, vol. 118(1), pages 61-79, September.
    25. Easterly, William, 1999. "Life during Growth," Journal of Economic Growth, Springer, vol. 4(3), pages 239-276, September.
    26. Lopez, Humberto, 2006. "Did growth become less pro-poor in the 1990s ?," Policy Research Working Paper Series 3931, The World Bank.
    27. Li, Hongyi & Zou, Heng-fu, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-334, October.
    28. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    29. Ravallion, Martin & Chen, Shaohua, 2003. "Measuring pro-poor growth," Economics Letters, Elsevier, vol. 78(1), pages 93-99, January.
    30. Savvides, Andreas & Stengos, Thanasis, 2000. "Income inequality and economic development: evidence from the threshold regression model," Economics Letters, Elsevier, vol. 69(2), pages 207-212, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dhananjay Bapat & Biswa Nath Bhattacharyay, 2016. "Determinants of Financial Inclusion of Urban Poor in India: An Empirical Analysis," CESifo Working Paper Series 6096, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Partha Gangopadhyay & Biswa N. Bhattacharyay, 2012. "Can there be a Wave-Like Association between Economic Growth and Inequality? Theory and Lessons for East Asia from the Middle East," CESifo Working Paper Series 3953, CESifo.
    2. Gravier-Rymaszewska, Joanna & Tyrowicz, Joanna & Kochanowicz, Jacek, 2010. "Intra-provincial inequalities and economic growth in China," Economic Systems, Elsevier, vol. 34(3), pages 237-258, September.
    3. Jakub Bartak & Łukasz Jabłoński, 2020. "Inequality and growth: What comes from the different inequality measures?," Bulletin of Economic Research, Wiley Blackwell, vol. 72(2), pages 185-212, April.
    4. Arshad Ali Bhatti & M. Emranul Haque & Denise R. Osborn, 2015. "Threshold Effects of Inequality on the Process of Economic Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 205, Economics, The University of Manchester.
    5. Bourguignon, Francois, 2005. "The Effect of Economic Growth on Social Structures," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 27, pages 1701-1747, Elsevier.
    6. Been-Lon Chen & Jang-Ting Guo, 2005. "Income Inequality and Economic Growth: A Simple Theoretical Synthesis," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 319-329, November.
    7. Lin Shu-Chin & Huang Ho-Chuan & Kim Dong-Hyeon & Yeh Chih-Chuan, 2009. "Nonlinearity between Inequality and Growth," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(2), pages 1-20, May.
    8. Marrero, Gustavo A. & Rodríguez, Juan G., 2013. "Inequality of opportunity and growth," Journal of Development Economics, Elsevier, vol. 104(C), pages 107-122.
    9. Amparo Castelló-Climent, 2010. "Inequality and growth in advanced economies: an empirical investigation," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 8(3), pages 293-321, September.
    10. Michal Brzezinski, 2013. "Income Polarization and Economic Growth," LIS Working papers 587, LIS Cross-National Data Center in Luxembourg.
    11. Shinhye Chang & Rangan Gupta & Stephen M. Miller, 2018. "Causality Between Per Capita Real GDP and Income Inequality in the U.S.: Evidence from a Wavelet Analysis," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 135(1), pages 269-289, January.
    12. Roberto Dell'Anno & Adalgiso Amendola, 2015. "Social Exclusion and Economic Growth: An Empirical Investigation in European Economies," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 61(2), pages 274-301, June.
    13. Daniel Halter & Manuel Oechslin & Josef Zweimüller, 2014. "Inequality and growth: the neglected time dimension," Journal of Economic Growth, Springer, vol. 19(1), pages 81-104, March.
    14. Karim Azizi, 2007. "Inequality and convergence clubs: results from a threshold regression model [Inégalités et clubs de convergence : les résultats d'un modèle à seuil]," Post-Print halshs-00180955, HAL.
    15. Mohamed Ali Chroufa & Nouri Chtourou, 2022. "Inequality and Growth in Tunisia: New Evidence from Threshold Regression," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 163(2), pages 901-924, September.
    16. Martin Ravallion, 2012. "Why Don't We See Poverty Convergence?," American Economic Review, American Economic Association, vol. 102(1), pages 504-523, February.
    17. Charles-Coll, Jorge A., 2010. "The optimal rate of inequality: A framework for the relationship between income inequality and economic growth," MPRA Paper 28921, University Library of Munich, Germany.
    18. Mcknight, Abigail, 2019. "Understanding the relationship between poverty, inequality and growth: a review of existing evidence," LSE Research Online Documents on Economics 103458, London School of Economics and Political Science, LSE Library.
    19. Ravallion, Martin, 2001. "Growth, Inequality and Poverty: Looking Beyond Averages," World Development, Elsevier, vol. 29(11), pages 1803-1815, November.
    20. Dustin Chambers, 2005. "Inequality and Growth: A Semiparametric Investigation," Computing in Economics and Finance 2005 132, Society for Computational Economics.

    More about this item

    Keywords

    growth; inequality; foreign direct investment; poverty ASEAN; People Republic of China and India;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_5377. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.