The Nexus between Growth and Income Inequality in Selected South America Countries

Examining the complex interplay between economic growth and income inequality has traditionally been a key area of interest in economic research, albeit in developing contexts, such as South America. This study, therefore attempt to examine this nexus through a panel analysis of Brazil, Colombia, Paraguay, Argentina and Uruguay. These nations have distinct economic challenges and the distribution of income; grasping these dynamics is essential for policymakers seeking balanced economic progress in the region. The study uses a panel dataset on income inequality and economic growth spanning the period 1991–2023. The income inequality was measured by the Gini Coefficient and economic growth was assessed by the real Gross Domestic Product (RGDP). The negative–positive short-run nexus between the log of real gross domestic product (LNRGDP) and the log of the Gini coefficient (LNGINI), as well as the long-run relationship between economic growth and income inequality, supports the Kuznets hypothesis, which posits that as economies develop, income inequality initially increases and subsequently declines, resulting in a downward long-run relationship between inequality and economic growth in more mature economies. The findings suggest that sustained and inclusive economic growth can gradually reduce inequality, but poorly targeted government spending and rapid population growth may limit these gains. The study recommended that the policy makers in South America should ensure that policies improve the efficiency of government expenditure, strengthen redistributive tax, and transfer systems are implemented.