Financial deepening and income inequality: Is there any financial Kuznets curve in China? The political economy analysis

The interconnectedness of financial deepening and income inequality has been a highly controversial discussion which has not been concluded despite many empirical and theoretical studies up to date. One of the basic building blocks for many research designs is the reliance upon the Kuznets inverted U-shaped curve which postulates that in the first phase of economic growth income inequality increases, peaks and then decreases to a tolerable level in the later phase after a certain income level had been attained. The role of financial deepening in financing economic growth is an indispensable and necessary condition enabling us to easily draw an analogy between financial deepening and income inequality in a financial version of the Kuznets curve. In spite of 30 years of economic and financial reforms in China, which represents a fairly young history of economic growth and development, there are many indicators that Chinese experience significantly deviates from the presupposed inverted U-shaped curve trajectory and its final equalizing effect. This paper relies on financial deepening data measured by monetary aggregate M2/GDP and domestic banking credit/GDP ratios in its claim that they significantly correlate with rising income inequality. The author’s intention consists not in claiming that financial deepening per se causes income inequality, but provides a political economy analysis of the specific institutional and power configuration which leads to their positive relationship. This configuration is determined by the prevailing banking model, the hukou system, financial repression and the decentralized authoritarian system. On the other hand, the absence of inequality-narrowing institutitons further aggravate the problem. All the aforementioned factors are geared at avoiding mechanical and spurious claims that financial deepening increases or decreases income inequality across countries. A historical institutionalism approach to explain China’s path related to the Kuznets curve prediction shows the central validity of open and inclusive institutions in generating inequality-narrowing benefits of financial deepening.     

On the impact of innovation and inequality in economic growth

We present robust results on the empirical relationship among income inequality, innovation, and economic growth for a panel dataset of 74 countries over the period 1996–2014. We estimate pairwise causality tests to show that there is bidirectional causality between GDP per capita and R&D, while R&D causes the Gini index of income inequality, and it causes human capital. Allowing coefficients to be different across cross-sections of countries, we get in any case a pairwise bi-directionality. By dynamic panel data estimations, when regressing R&D on GDP per capita, we obtain a threshold value of 0.16% of R&D such that for values above it there is economic growth. While regressing R&D on the Gini index, we get a threshold of 0.10% of R&D above which, the income distribution begins to improve. Finally, we estimate a growth equation that depends on R&D, income inequality, and physical capital. We obtain two thresholds, one of 38.79 for the Gini (above which the economic growth decreases), and one of 0.06% for R&D such that above it, economic growth is rising.     

The income inequality curve in the last 100 years: What happened to the Inverted-U?

This paper examines the shape of the curve that represents the long-run relationship between income inequality and economic growth, using data from four developed countries (USA, UK, France, and Germany) over the period 1915 – 2014. The analysis is carried using a panel data technique (fixed, random, and interactive effects) that takes into account common shocks. We find that in the long-term, this curve has the shape of an “N-shape” and that the Kuznets curve does not explain this path. We also present many factors that may affect the path of inequality up or down, the most important is political, economic and demographic, specifically technological change, globalization, social transfers, economic policies, trade unions, taxation, education, war, and epidemics.     

All About the Giants: Probing the Influences on World Growth and Income Inequality at the End of the 20th Century

This paper presents estimates of world output growth from 1970to 2000, the distribution of income among countries and personsfor the years 1980, 1990 and 2000, and world income povertyrates for the same years. It also presents the results of aseries of simulation exercises that attempt to isolate the effectof particular country and regional experiences on world outputgrowth and changes in global income inequality and poverty. The authors find that rapid growth in China (despite a downwardadjustment of official growth estimates) had a powerful impacton the growth of world output in both the 1980s and 1990s, butthat negative economic growth in Eastern Europe more than offsetthat effect in the 1990s. With respect to the distribution ofworld income between countries, the impressive growth performancesof the worlds most populous countries, China and India, ensureddecreasing levels of inequality during both the 1980s and 1990s.When the distribution of world income between persons is measured,the equalizing effect of China's rapid growth remains dominantthrough both the 1980s and 1990s, despite the contradictoryimpact of increasing domestic inequality. Only India's influenceremained substantial by comparison. Other identifiable eventsof the period, such as the economic contraction in Eastern Europeand continued economic decline in Africa, had little statisticalimpact. However, when the combined influence of China and India'sabove-average growth rates is removed, or their size effectdampened, the improving global distribution of (inter-countryand inter-personal) income suggested by all statistical measuresbecomes one of sharply worsening inequality. The impact of thesetwo countries is similarly critical with respect to global povertyreduction. (JEL F0, I3, O4)     

Education and Income Inequality: New Evidence From Cross-Country Data

This paper presents empirical evidence on how education is related to income distribution in a panel data set covering a broad range of countries for the period between 1960 and 1990. The findings indicate that educational factors—higher educational attainment and more equal distribution of education —play a significant role in making income distribution more equal. The results also confirm the Kuznets inverted–U curve for the relationship between income level and income inequality. We also find that government social expenditure contributes to more equal distribution of income. However, a significant proportion of cross–country variation in income inequality remains unexplained.     

Brazil and China: Two Routes of Economic Development?

We look at two emerging economies, Brazil and China, and propose an evaluation of their recent development in terms of growth performance and the evolution of income inequality. Our analysis, therefore, is related to the literature on their recent vast growth and also to the much debated Kuznets curve and theory. However, we claim that neither the growth nor the Kuznets approach capture recent relevant phenomena characterizing such countries' dynamics: namely, the presence of at least two distinct growth models. Cointegration analysis and empirical evidence seem to corroborate our interpretation. They also offer some further insights. We surmise that while contributing to press for a further re‐examination of convergence in the light of the issue of income distribution, such findings have interpretative relevance and policy implications for other less developed countries.     

Modeling income inequality and openness in the framework of Kuznets curve: New evidence from China

This article tests the relationship between openness and income inequality in openness Kuznets curve framework. The Auto Regressive Distributed Lag (ARDL) estimator is employed to establish the long run relationship between openness and income inequality. We add to the literature by noting that Kuznets curve fits the relationship between openness and income equality in the case of China. This evidence is new and in line with the Kuznets hypothesis that income inequality rises with the increase of openness and then starts fall after a critical point.     

Entrepreneurship and income inequality: a spatial panel data analysis

The main objective of this paper is to empirically analyze the relationship between entrepreneurship and income inequality. We use a spatial panel data analysis for both 33 high-income countries and 39 middle- and low-income countries over a period of 11 years. Estimation results and rigorous diagnostic analysis suggest that: (i) there is a strong support for the existence of an inverted U-shaped relationship between entrepreneurship and income inequality espoused by the Kuznets Curve hypothesis; (ii) the relationship between entrepreneurship and income inequality is negatively moderated by country’s level of economic development; (iii) regardless of income inequality levels, entrepreneurship has a non-linear relationship with income per capita; (iv) gross domestic expenditure on research and development exhibits significant negative impacts on entrepreneurship; (v) significant mixed effects on the likelihood of entrepreneurial activity are observed with governance, globalization, population growth rate, and competitiveness variables; (vi) there are significant mixed feedback effects on entrepreneurship; and (vii) there are statistically significant, positive as well as negative spatial spillovers to country-level entrepreneurial activity.     

Does S. Kuznets's belief question the Environmental Kuznets Curves?

Abstract.  This paper examines the link between pollution and income. The main purpose is to assess whether the introduction of income inequality in a Environmental Kuznets Curve (EKC) analysis can give new insights into the relationship between pollution and economic growth. The EKC hypothesis proposes that there is an inverted U‐shape relation between environmental degradation and income per capita. We question this common result, in a simple model where the income inequality evolution is exogenous and where the planner could use only one instrument. For a set of parameter values we find, for example, a two‐hump curve. JEL classification: D3, H4, Q2.     

Economic prosperity, biodiversity conservation, and the environmental Kuznets curve

Many conservationists contend that economic growth and biodiversity conservation are incompatible goals. Some economists contest this viewpoint, arguing that wealthier countries have the luxury of investing more heavily in efforts to conserve biodiversity. Under this assumption, we expect a U-shaped relationship between per capita wealth and proportion of species conserved. We test this environmental Kuznets curve (EKC) using estimates of per capita income and deforestation rates (index of biodiversity threat) for 35 tropical countries. A prior analysis [Dietz, S., Adger, W.N., 2003. Economic growth, biodiversity loss and conservation effort. Journal of Environmental Management, 68:23-35] using conventional regression techniques failed to provide any support for the parabolic relationship predicted by the EKC hypothesis. Here, we introduce the use of quantile regression and spatial filtering to reanalyze this data, addressing issues of heteroskedasticity and spatial autocorrelation. We note that preliminary analysis using these methods provides some initial evidence for an EKC. However, a series of panel analyses with country-specific dummy variables eliminated or even reversed much of this support. A closer examination of conservation practices and environmental indicators within the countries, particularly those countries that drove our initial support, suggests that wealth is not a reliable indicator of improved conservation practice. Our findings indicate that an EKC for biodiversity is overly simplistic and further exploration is required to fully understand the mechanisms by which income affects biodiversity.     

Global inequality and international trade

The paper analyses the effect of widespread trade liberalisationon global income inequality. The analysis of the trend in globalinequality during 1981–97, presented in the first partof the paper, shows that the apparent growth of income inequalityamong countries conceals a process of convergence. Some developingcountries achieved significantly faster economic growth thanthe advanced industrialised countries and, though small in number,they actually account for a majority of the population of thedeveloping world. Thus international inequality (i.e., the inequalityof distribution of per capita incomes among the world's population)in fact declined even though the inter-country income inequalityincreased. The analysis in the second part of the paper shows(i) that while improved trade performance did have a stimulatingeffect on growth performance of countries, trade liberalisationhad extremely varied effects on trade performance across countries,and (ii) that the distribution of benefits and costs of tradeliberalisation across countries has been such as to reduce internationalinequality without affecting inter-country inequality.     

Economic,structural and socio‐psychological determinants of protests in Russia during 2011–2012

This empirical analysis is based on the latent variable framework to identify key determinants of protests in Russia during 2011–2012. We derive logistic regressions from the revolution constraints based on economic (the political Kuznets Curve) and socio‐psychological (grievance) theories of protest. Our findings suggest a positive linear relationship between income and income inequality, contradicting the Kuznets curve. Our estimations show that inequality, share of the poor, the relation of the governor's family income to the average family income, distance to Moscow and accumulated human capital increase the risk of protest, whereas transfers and subsidies decrease these risks.     

Genetic distance,economic growth and top income shares: Evidence from OECD countries

The relationship between economic growth and income inequality remains a puzzle in the literature. The main problem has been finding a way to account for the endogeneity of growth. Using century-long data of 14 OECD countries, this study disentangles the growth–inequality relationship. In doing so, our main contribution is employing genetic and geographical distances as instruments for economic growth. The instruments are constructed on the premise that the growth of one country spills over to the others if they are connected through trade and other forms of exchange; however, the genetic and geographical distances between countries represent barriers to such spillovers. Using alternative specifications and measures, we find that growth reduces the inequality measured by top income shares. As capital share increases in the growth process and capital substitutes labour, inequality-reducing strength of growth declines. Another important finding is that the effect of growth on top income shares is more significant among the highest income groups.     

Taking down the wall: Transition and inequality

In this article, we investigate the main determinants of income inequality in the transition countries of Central and Eastern Europe and the Commonwealth of Independent States during the period 1990–2018. To this end, we address a major methodological challenge that lies at the core of the cross‐country literature on income inequality: the potential endogeneity of income per capita, which is largely ignored by most empirical studies. We adopt a two‐pronged empirical strategy by (1) using trading partners’ weighted average real GDP as an instrumental variable and (2) estimating the model via the two‐stage least squares approach for static models and the generalized method of moments estimator for dynamic models. Our empirical findings are consistent with the Kuznets curve that illustrates a nonlinear relationship between income inequality and the level of economic development. We also find that the redistributive impact of fiscal policy is statistically insignificant and taxation and government spending appear to have the opposing effects on income inequality in transition economies over the sample period.     

Poverty decompositions with counterfactual income and inequality dynamics

Traditional poverty accounting decomposes changes in a country's poverty headcount ratio into changes in income and inequality. We argue that this approach is unsatisfactory from the perspective of policy analysis because it compares a country in two points of time without taking the country's initial situation, and hence its potential for poverty reduction, into account. We thus suggest comparing traditional poverty decompositions with a counterfactual situation. This counterfactual indicates what a country starting from its initial situation could be expected to achieve in terms of income, inequality, and, hence, poverty developments. We construct those counterfactuals by modeling income and inequality trends characterized by convergence and a “Kuznets” relationship between inequality and development. Parameters in those relationships are estimated using PovcalNet survey data from 144 countries and we construct our counterfactual poverty predictions for 71 developing countries. While there is overall a tight relationship between actual developments and counterfactuals, we identify several cases, where both deviate from each other and discuss the policy implications. We also check for commonalities in differently performing countries and find that those who fell particularly short of expectations often underwent political transition and state fragility.     

库兹涅茨假说可以解释中国的收入差距变化吗

本文利用中国的数据对经济增长与收入分配的关系进行了经验分析。分析结果没有对库茨涅兹的"倒U型假说"给予足够的支持。中国农村内部、城镇内部和城乡之间的收入差距及其变化特点有其自身的特点,需要从经济发展因素、经济体制转型的因素和政策因素上加以解释。     

Inequality and Growth in a Panel of Countries

Evidence from a broad panel of countries shows little overall relation between income inequality and rates of growth and investment. For growth, higher inequality tends to retard growth in poor countries and encourage growth in richer places. The Kuznets curve—whereby inequality first increases and later decreases during the process of economic development—emerges as a clear empirical regularity. However, this relation does not explain the bulk of variations in inequality across countries or over time.     

结构转变、经济增长与城乡收入差距

经济增长体现为一个结构转变的过程,并通过结构转变影响城乡收入差距。综合分析产业结构、城乡结构转变,以及经济增长对城乡收入差距的作用机理,并基于1978—2011年的相关统计数据进行实证检验。结果显示：中国的经济增长与城乡收入差距存在库兹涅茨倒u型关系;城乡二元经济结构的转变有助于缩小城乡收入差距;城市化对城乡收入差距的影响则出现阶段性特征,城乡收入差距随城市化水平的提高呈现出先扩大后缩小的特征。应注重经济增长、转变经济发展方式、以科学发展观推进城市化发展。     

An Exploration of the Conceptual and Empirical Basis of the Environmental Kuznets Curve

We examine the conceptual and empirical basis of the environmental Kuznets curve. From both perspectives, the relationship lacks firm foundations. In particular, the empirical relationship is shown to be highly sensitive to the choice of pollutant, sample of countries and time period. This strongly suggests that there is an omitted variables problem. We find that two important omitted variables are education and inequality. Also, we show that the observed relationship is sensitive to the measure of income/welfare used. The paper concludes with a discussion of some policy implications of our findings. ( JEL O13, Q21, Q28, Q32)     

Decentralisation and income inequality in Central and Eastern European countries

This paper provides empirical evidence for the association between fiscal decentralisation and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1992–2016. We focus on three research topics: the effect of decentralisation on income inequality; the effects of the structure of subnational government finance on income inequality; and the validity of the Kuznets hypothesis. The main findings from the empirical exercise are as follows: first, we provide firm evidence on the presumed favourable effects of fiscal decentralisation on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralisation on income inequality are dependent on the source of finance of subnational governments, i.e. intergovernmental transfers may have a role in income equalisation; third, we cannot confirm the validity of the Kuznets hypothesis in CEE countries.