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Kuznets Curve
Simon Smith Kuznets (April 30, 1901 – July 8, 1985) was a Russian American economist at the Wharton School of the University of Pennsylvania. He was awarded the 1971 Nobel Memorial Prize in Economic Sciences "for his empirically founded interpretation of economic growth which has led to new and deepened insights into the economic and social structure and process of development".
His study of inequality over time, lead him to form the “ Kuznets Curve Hypothesis ”, published in the year 1941. Kuznets opined that in the early stages of economic growth, the distribution of income will tend to worsen, but in later stages it will improve. This observation is visiblized by the 'Inverted-U' Kuznet's Curve.
The main reason why inequality might worsen during the early stages of economic growth
before eventually improving is always relate to the nature of structural change:
This curve can be explained as follows:
Stage 1 : Increase in inequalities This can be attributed to the process of growth being concentrated in a modern industrial sector. The scope for improving standard of living is more than by continuing to live in the rural setup. This increases migration levels as it seems lucrative to move to a city. The income levels in rural areas are almost similar and thus intra-inequality in rural societies is low.
The wider range of income levels in the industrialised city further opens up the inequality levels.
Stage 2: The inequality levels fall. As the country becomes richer, its government would make a greater effort towards social spending. Now, the government provides transfers, welfares, retirement pension, health-care in an effort to redistribute income throughout.
Rise in mass education movement may open up opportunity for all and reduce the gap in income inequality.
Fiscal redistribution by the government , through the taxation policy, would lead to a reduction in inequality.
Critique through Empirical Evidences
For cases:
Taiwan, South Korea, China, Costa Rica and Sri Lanka exhibit this inverted U shape tendency as the higher income levels in these countries have been accompanied by falling inequality.
Against cases:
Some argue that the Kuznets Curve Hypothesis can be a misleading generalisation.
- There is a dominating influence of Latin American countries in this hypothesis. This
tendency could be highly circumstantial, as these countries have historically high levels of inequality and with growth, these inequalities are now reducing.
- Data of specific countries such as Pakistan, Hong Kong, Singapore, India over their developing years, have shown a U-shaped curve instead on an inverted-U.
- Study of data from Bangladesh, Kenya, Indonesia show that PCIs are not highly correlated with any of the measures of income inequality ratios.
- With the advent of the services industry a third stage of inequality is now being noticed in many economies.
The USA has witnessed a resurgence in inequality after a reduction.
The first was after the late 1930s with the top 1% of the population holding nearly 45% share of wealth.
Through policy changes (after WW-II) inequalities reduced.
