Income distribution and development
Introduction
A crucial topic of development economics is whether exacerbation of income
distribution is an unavoidable characteristic of a country’s economic growth. In
Kuznets’ pioneering 1955 study, he attempted to test an inverted-U hypothesis, that is
to say, worsening of income distribution at the start of modernization and an
improvement of distribution after a turning point (p.18). Using data only from the US,
UK and Germany, Kuznets repeatedly notes that the limited data set only represents aparticular time and, therefore, could not be generalized (1955, pp.27-28). Yet, many
economists later tried to test Kuznets’s U-curve. Most of the studies are based oncross sectional analyses due to the reason that consistent data are scarce in many
developing countries and that time series analysis is infeasible (Ahluwalia et al, 1979;
Anand&Kanbur, 1993). Such an argument is often justified by claiming that
distribution will improve in later phases of development. Thus, it is important toexamine both parts of the argument: whether significant inequality is an unavoidable
characteristic of growth and whether improvements in distribution will actually takeplace in later stages.
The essay will first discuss Kuznets (1955)’s assumptions and his arguments,
followed by counterarguments. Problems regarding the empirical tests of Kuzents’model are discussed in the end.
Gini-coefficient and Lorenz curve
Before delving into the main discussion, it is worth introducing the Gini coefficient:
the common measurement of inequality derived from Lorenz curve. UNDP data use
this measurement. Lorenz-curve depicts how income is distributed within apopulation. When the curves do not intersect, the further the curve is from the 45

1degree line, the wider the inequality. Referring to figure 1, the Gini-coefficient is theshaded area over the area of triangle OAB. The higher the value of the Ginicoefficient, the more unequal the distribution is. When two curves intersect andpossess equal Gini-coefficient values, the relative proportions received by each
income groups should be examined for deeper analyses on social structure(Todaro&Smith, 2002, pp.202-3).
Kuznets’ argument
Kuznets (1955)’s primary attempt was to discover how modernisation andindustrialisation affect the pattern of income distribution in advanced countries. He
showed that there is an increase in the earlier phases of development and a decline in
the later phases (p.18). The discussion is based on the modernisation theory of Arthur
Lewis with the dual economy premise of inter-sectoral migration from a traditional
sector to a modern sector. Kuznets makes two key assumptions. First, on average, theurban population receives a higher per capita income than those in rural areas; andsecond, inequality is wider in urban areas than in rural ones (1955, pp.7-8). Therefore,
in principle, inequality should rise through modernisation. Also, Kuznets assumes theHarrod-Domar model, which supports his argument that the accumulation of capital
under the modern sector enables faster growth (1955, p.9). Yet, he argues that after
the economy reaches a certain point, other factors ameliorate the distribution ofincome. He explains that the contributing factor to equality was mainly politicalforces (pp.8-9). People who doubted the optimism of the trickle-down effect and those
who did not sufficiently benefit from the growth urged for more egalitarian policies(Kuznets, 1955, p.9). In addition, other less apparent forces such as technologicalchange also alleviated the degree of inequality (1955, pp. 9-11).
Role of political institutions

2However, as stated above, Kuznets (1955) only uses the data of three westerndeveloped countries. Several critiques arise when applying the same explanations tocontemporary developing countries, as Kuznets himself acknowledged (1955, p.25).
One of the essential points in Kuznets’s argument, overlooked by Ahluwalia et al(1979) and Anand&Kanbur (1993) is the function of political institutions (Kuznets,
1955, p.25). Factors leading to the turning point are heavier taxation on the rich, lower
interest and rent rates and the wider opportunity for education, which provides social
mobility to the lower classes (Kuznets, 1955, p.9). These policies were implemented
as a result of strong political forces. Yet, in many developing countries, bases forbuilding a progressive taxation system may be absent (Kuznets, 1955, p.24); thevoices of the people may be silenced (Bigsten, 1987, p.162); and lack of educational
opportunities undermine the potential for upward mobility. Therefore, “dynamism” of
economy and politics would be absent and turnover or modifications of the status quo
will not occur (Kuznets, 1955, p.11). When these offsetting factors to improve the
distributions are absent, the changes will not happen, and inequality continues towiden in the presence of economic growth.
Abundant labour and global economy
Another critique is that the current labour market and production lines are on a
global scale compared to the time of industrialisation in western countries. Regarding
the transfer of cheap constant wage labour from the traditional to modern sector orfrom rural to urban, the logic remains constant. Producers always seek low wage
labour. If the initial areas’ commodity prices start to inflate along economic growthand if subsequently labourers start to demand higher wages, multinationals can movetheir factories abroad, where the prices of labour are cheaper, or employ rural
migrants (Bramall, 2000, p.38). The politics extend beyond the domestic market and3are now significantly global as the top of the production line reside outside the LDCs,
in advanced countries. It is difficult for workers to achieve meaningful change undersuch circumstances. Companies and labours in the poor region inevitably accept the
low income to maintain international competitiveness given their comparativeadvantage of cheap labour. For instance, the demand for increase in wages in thesouth-eastern part of China forced companies to move their production lines further
west in China and even to South Asia, i.e. India and Bangladesh. The companies’
decisions then forced labourers in the south-east to concede the low wages. Finally, in
2010, after a numerous workers’ suicides and wildcat strikes, a 20% wage increase in
the cities of Beijing, Shenzhen and Guangzhou was achieved this year throughminimum wage legislation (Giles&Jacob, 2011). The trickle-down effect will notnaturally occur, and is unlikely especially when abundant labour and production lines
exist on a global scale. Bigsten argues that for the trickle-down effect to occur in any
substantial way, it would take generations, which raises the question of morality(1987, p.157).
Relationship between inequality and growth
The question is: To what extent does inequality promote economic growth?
Certainly, if the rich have more potential to save larger amounts of money, given the
Harrod-Domar model, the more money the rich possess, the higher the growth of an
economy, as implied in Kuznets(1955), Ahluwalia et al (1979) and Anand&Kanbur(1993). However, this explanation is only valid when the rich has the will to develop
its domestic economy. Failures of import substitution industrial policies, where therich spent money on imported luxuries and high-value added goods present thelimited will of the rich (Baer, 1972, p. 108). Also, the Harrod-Domar model’s
preconditions do not necessarily exist in developing countries (Todaro&Smith, 2010,4

pp.114-5). Therefore, the higher saving of the rich does not necessarily generatedomestic growth in developing countries.
Moreover, there are cases where inequality has hindered secular growth. For
instance, the Middle East and North African uprisings today represent such, where
inequality partly contributed to political turmoil rather than sustainable development.
The 2011 World Development Report notes that these countries are thrown into
conflict despite positive rates of growth in preceding years (Beattie, 2011, p.7). To
verify, according to the World databank’s indices of annual per capita GDP growth
rates, Egypt, Jordan and Tunisia in 2008 recorded 5.2%, 5.1% and 3.6%, respectively.
The UNDP Gini indices of above countries in 2000-2010 were, 32.1, 40.8 and 37.7.
Compared to some advanced countries where Gini Indices are around 20, they are
relatively high, although not as high as Latin American countries where the Gini
Indices range from 45 to 60.
It is also equally wrong to argue that a more egalitarian distribution would generate
faster growth. Sri Lanka achieved a relatively equal distribution of income in 1990s,
but its rate of growth was low since the majority lived in poverty (Todaro&Smith,
2002, p.217).
Cases inconsistent with inverted-U curve
There are cases where rapid growth was accompanied by relatively equal
distribution of income. Conspicuously, many studies on East Asia challenge themainstream view of the negative relationship between growth and equality (Bramall,
2000, p.30).
Their egalitarian rapid growth is largely owed to the preceded redistributions ofland ownership. They were achieved under a particular historical context rather thanautonomous domestic policies. Aseniero argues that, for South Korea and Taiwan,

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land reform was a result of Japanese colonisation. Japan, acting in its own interests,
broke down the rigid class relations between landlord classes and government
authorities, and making use of brutal force when resisted (1994, p.302). Bigsten
argues that policies which pursue redistribution of assets embrace the possibility ofdestroying the status quo of the political structure (1987, p.155-6). Kuznets also
argues that resistance and conflicts are inevitable (1955, p.25) as many of the conflicts
in modern Africa have their roots in disputes over land ownership created duringcolonisation eras (Ryan, 2011, p.10) It is often difficult to impose land reform in
LDCs, since landowning classes often possess significant political power (Bigsten,
1987, p.155-6).
Secondly, East Asian countries pursued labour-intensive productions which
absorbed the abundant domestic labour, resulting in a robust middle class. This is
crucial for an egalitarian pattern of development so that the growth is not solely
dependent on the rich and that incomes could be directly earned by the low andmiddle income groups (Bigsten, 1987, p.158) Yet, what made their development
different from that of other developing countries was that they pursued a dynamic
pattern of growth, that is to say, they shifted the type of labour-intensive production
from low-value added works to more sophisticated ones and simultaneously enhanced
the quality of labour through education (Bigsten, 1987, p.160). This enabledcompanies to remain in their country to use the domestic labour, even as wages
increased.
Thirdly, technological advancement might have supported egalitarian distribution.
This is because, in theory, if an economy creates inflation through development but
the absolute wage is constant, then relative income declines. In this situation,
labourers need to work longer hours to compensate for their loss of purchasing power.

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Yet, if a higher productivity is achieved, then factories can produce more products inthe same amount of work time. And in principle, even with inflation, workers canearn enough to maintain their purchasing power with the same hours of work or evenless than before. As Giles&Jacob writes, though in reality, factory owners demand
longer hours of work without raising wages until there is an increase in minimum
wage legislation (2011). Yet, without technical innovation, the workers’ situation
could have been worse, leaving them trapped with low wages.
In sum, there has been rapid growth in East Asia without the exacerbation ofincome distribution. Redistribution of landownership, labour-intensive productions
and technological advancement along with enhanced level of education enabled therelatively egalitarian pattern of growth. This is not consistent with Kuznets’
hypothesis.
Methodological issues
Lastly, critiques toward the analytical method used for this area of study are
discussed. First of all, it is problematic to substitute time-series analyses with crosssectional analysis, even with the excuse that data is too scarce for the former. It would
be wise not to do any analysis than making the problem more abstruse, as Saith
astutely points out (1983, p.382). The problem with Ahluwalia’s (1976) analysis,
which is a landmark study, is that his conclusion is dependent on the data he uses. His
result depends on the samples of middle-income Latin American countries wherewide inequality exists. If those samples were excluded, the significance of the model
disappears (Saith, 1987, p.367; Todaro&Smith, 2002, p.217-8). By modifying otherparts of data such as excluding socialist countries, as was tested by Saith, this changes
the results significantly (1987, pp.374-7), raising doubts toward Ahluwalia’s
argument of calling the inverted-U curve the “stylised facts” (Ahluwalia, 1976, p.308).

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Far from being a general ‘consequence’ of the relationship between inequality andgrowth, it seems to be a mere ‘coincidence’ of data. The correlations are apparent, butcausality remains elusive. It would have been better if Ahluwalia had explicitly notedthe volatility of his analysis, like Kuznets (1955) had done. His proposal needs to be
examined with caution since it has the potential to falsely encourage international
politicians and multinationals to disregard the problem of inequality.
Another point about the methodological issue is that the measurement of ‘growth’is biased toward the rich. It is because the measure of GDP growth is incomeweighted, so the growth of the higher income group skews aggregate growth.
Todaro&Smith and UNDP propose alternative measurements of growth, which reflect
the change of the living level of the poor. Weights are shifted towards the poorer(Todaro&Smith, 2002, pp.255-8). This should bring different results to the analysis of
growth and inequality.
Conclusion
This essay argued that exacerbation of the distribution of income in earlier
phases of development is not inevitable and that improvement of income distribution
in later phases is not in itself autopoietic. It considered Kuznets hypothesis and argued
that his study is about developed countries where political forces functioned fortrickle-down effects. Application to contemporary LDCs will not work as the politicalinstitutions may be absent and today’s global economic structure is rigid. Equal
distribution of income also will not bring rapid growth when abject poverty widely
persists. In addition, East Asia’s relatively egalitarian rapid growth was offered as acounterargument to the inverted-U path. Relatively equal land ownership derived
from their history, labour-intensive production, technological advancement, education
policies and developmental state strategies enabled such growth. In the end,

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methodological issues were discussed by questioning the validity of cross-sectional
analysis. In summary, the secular relationship between development and inequality
depends on the complex combination of geo-political, historical and socioeconomic
factors of each country and is not a fixed law.

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