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Income Inequality and Economic Growth: A Re-Examination of Theory and Evidence

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey; Department of Economics, University of Pretoria, Pretoria, South Africa; Montpellier Business School, Montpellier, France.)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Wei Ma

    (International Business School Suzhou, Xi'an Jiaotong-Liverpool University, Suzhou, China)

  • Philton Makena

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract

We re-examine the theoretical and empirical relationship between income inequality and economic growth in an endogenous growth model with a at tax on income, distributive conflicts among agents and median voter dynamics. We show that when government spends tax revenue on the provision of public goods in the form of both production and consumption services, the theoretical relationship between inequality and economic growth is neither strictly positive nor strictly negative but that it is ambiguous. An empirical evaluation of the theoretical findings is done by applying a semi-parametric model on a sample of 55 low-income, lower-middle-income, upper-middle-income and high-income countries for the period 1980 to 2010. Results show that the relationship between income inequality and growth takes the form of an inverted-U shape in that income inequality initially has a positive impact on growth up to an average Gini coefficient threshold of 35.92 beyond which it negatively impacts on growth.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Wei Ma & Philton Makena, 2018. "Income Inequality and Economic Growth: A Re-Examination of Theory and Evidence," Working Papers 201844, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201844
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    Cited by:

    1. Shahid Iqbal & Abdul Qayyum Khan & Muhammad Yar Khan & Lamya Al-Aali, 2021. "The Dynamics of Financial Development, Government Quality, and Economic Growth in Different Groups of Economies," Sustainability, MDPI, vol. 13(14), pages 1-14, July.
    2. Odhiambo, Nicholas M., 2022. "Information technology, income inequality and economic growth in sub-Saharan African countries," Telecommunications Policy, Elsevier, vol. 46(6).
    3. Obaid Ullah & Zia Ur Rahman & Aijun Guo & Ali Zeb, 2024. "Disaggregated Public Spending, Income Inequality and its Effect on Economic Growth: Empirical Evidence from Developing Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(4), pages 20823-20850, December.
    4. Ibrahim Mohamed Ali Ali, 2023. "Income inequality, economic growth, and structural changes in Egypt: new insights from quantile cointegration approach," Economic Change and Restructuring, Springer, vol. 56(1), pages 379-407, February.
    5. Fan Chen & Can Zhang & Wenna Wang & Hong Wei, 2023. "Internet use and higher farmer participation in domestic waste sorting: micro-survey data from 2126 farming households in rural China," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.
    6. Yacouba Kassouri & Aweng Peter Garang Majok & Faik Bilgili & Andrew Adewale Alola, 2025. "Abating income inequality with financial and institutional quality instruments in Sub-Saharan Africa region," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 177(3), pages 1161-1191, April.
    7. Alex O. Acheampong & Tomiwa Sunday Adebayo & Janet Dzator & Isaac Koomson, 2023. "Income inequality and economic growth in BRICS: insights from non-parametric techniques," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 21(3), pages 619-640, September.
    8. repec:afa:wpaper:aesri-2022-14 is not listed on IDEAS
    9. repec:afa:wpaper:aesriwp14 is not listed on IDEAS
    10. Bruno Ćorić & Rangan Gupta, 2023. "Economic disasters and inequality: a note," Economic Change and Restructuring, Springer, vol. 56(5), pages 3527-3543, October.

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