Income Inequality and Economic Growth in Pakistan

In time series data, which indicates that increasing income inequality is likely to spur higher levels of GDP, certain examples become apparent. For instance, Shahbaz (2010) employed a time series data on Pakistan for the period 1971-2005, using the ARDL bound test approach, to determine the relationship between income inequality and economic growth in Pakistan. The results show that income inequality is positively and significantly related in both long-run and short-run with economic growth in Pakistan.

Gelan and Price (2003) also carried out research in sub-Saharan Africa, using the Kuznets theory to estimate the relationship between growth (skilled and unskilled labor) and income inequality.

The empirical results show that Sub-Saharan African economies are dualistic, based on the segment of the Kuznets' curve where income inequality is positively related to economic development. However, Banerjee and Duflo (2003) concluded that in the political economy, the inverted U-shaped curve is real and exists. Mora (2004) conducted a study on the relationship between economic growth and income inequality for the European region.

The empirical results indicate the presence of a fractional Kuznets convergence process, which means that economic growth tends to decrease income disparities, instead of the reverse effect used by regional funds. Bengoa Calvo and Sánchez Robles (2005) investigated the theoretical and empirical relationship between economic growth and income inequality in Latin American countries for the period 1975 – 1995. Their results show a quadratic relation for the said variables. Furthermore, they concentrated on investment in infrastructure, especially in less developed economies. This is absolutely needed to obtain the social capacity for the pushing of the economic growth rate. Interestingly, Bengoa Calvo and Sánchez Robles (2005) have examined the relationship between growth and income inequality for Latin American Countries.

Their results revealed that the effect of income inequality on economic growth may be different at different stages of economic development. However, Nahum (2005) checked the impact of inequality on growth for Swedish countries. He seems to find a positive impact on the economic growth of income inequality. Heyse (2006) considers the growth and income inequality for less developing economies. It is assumed that developing countries with high income inequality are not related to less economic growth as compared to those developing countries where income distribution is more equal. A 0.3 percent increase in economic growth is associated with a 1 percent increase in income inequality.

Malinen (2008) examined the long-run relationship between income distribution and economic growth for Latin American Countries. The results show that income inequality is inversely related to economic development in most of the countries, but is also positively significant for some countries. The findings may be due to heterogeneity and are based on the short and medium term for the variables in question.

Bahmani Oskooee and Gelan (2007) found that economic growth is positively related to income inequality in the short-run of time but negatively related in the long-run, supporting the inverted U-shaped hypothesis. Some researchers examine the relationship between economic growth and income inequality at a country level. For instance, Rangel et al. (2002) examined the impact on economic growth of income inequality in some Brazilian cities for the period 1991-2001.

The empirical results show that the inverted U-shaped curve is the model that signifies the connection between income inequality and economic growth. Panizza (2002) examines the relationship between income inequality and economic growth for 48 states for the period 1940 – 1980, using the Fixed Effect (FE) and Generalized Movements Method (GMM). The empirical results show that a rise in per capita income equalizes income distribution in the USA, but the link between income inequality and growth is not robust.

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