Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 1 /16 Inequality in growth models

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 2 /16 Inequality in growth models - Kuznets, Vandhoudt, Chen/Ravaillon, Barro, Bourguignon/Morrisson, 2002, Becker/Philipson/Soares, Milanovic, 2007 The literature

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 3 /16 Inequality in growth models The Outline I. Definition II. Basic approach: Kuznets, 1955 III. Research: - Vandhoudt, Barro, Chen and Ravaillon, Bourguignon and Morrisson, 2002, Milanovic, 2007 IV. Conclusions

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 4 /16 Inequality in growth models I. Definition => What do we mean by „inequality“? Synonyms: asperity, bias, contrast, difference, discrimination, disparity, disproportion, dissimilarity, dissimilitude, diversity, imparity, incommensurateness, injustice, irregularity, one-sidedness, partisanship, preferentiality, roughness, unequivalence, unevenness, unfairness, unjustness, variation Antonyms: balance, equality, evenness, similarity Synonyms Difference between something Difference in something

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 5 /16 Inequality in growth models I. Definition => How can we measure „inequality“? 1. We need to find a proxy 2. We can measure the distribution - Gini coefficient - Hoover index - Theil index - Herfindahl index - Rosenbluth index - …

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 6 /16 Inequality in growth models II. Basic approach Kuznets, 1955 Question: Does inequality in the distribution of income increase or decrease in the course of a country‘s economic growth? 1.chooses one particular country 2. defines: - units: for which incomes are recorded: family-expenditures - ordinal groups: a<b<c: income - income: in GDP per capita, annual, before direct taxes 3.measures the distribution of income among these units over time: from the 19th century to the 1950ies

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 7 /16 Inequality in growth models II. Basic approach Kuznets, 1955 Findings Developed countries: over time from 1870s to 1950 Undeveloped countries: in 1950 US: - the share of the lowest 2 quintiles rise from 13,5% (1929) to 18% (1950) - the share of the top quintile declines from 55% (1929) to 44% (1950) - and that of the top 5% from 31 to 20% UK:- the share of the lower 85% remains fairly constant ( ) between 41 and 43%, but then rises to 46% (1929) and 55% (1947) - the share of the top 5% of the units declines from 46% (1880) to 43% (1910), to 33% (1929), to 31% (1938), and to 24% (1947) Prussia: - the share of the lower 60% remains about the same ( ) - the share of the top quintile rises from 48 to 50% ( ) - the share of the top 5% rises from 26 to 30 % ( ) India: - the share of the lower 3 quintiles is 28% - the share of the top quintile is 55% Ceylon:- the share of the lower 3 quintiles is 30% - the share of the top quintile is 50% Puerto Rico: - the share of the lower 3 quintiles is 24% - the share of the top quintile is 56%

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 8 /16 Inequality in growth models II. Basic approach Kuznets, => „Kuznets curve“: one country, 3 phrases 5. Explanation: industrialisation and urbanisation „The paper is perhaps 5 per cent empirical information and 95 per cent speculation […]” 6. Importance: distinction between developed and undeveloped countries

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 9 /16 THIS IS A WARNING Theories + empirical findings = ambiguous !

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 10 /16 Question: Is the Kuznet‘s hypothesis still right? Methodology: Kuznet‘s hypothesis empirially will be examined by neoclassical growth model Macroecnomics knowledge by Mankiw, Romer, Weil (1992). 23 OECD countries and 30 LDCs. Data: Gini-coefficient, Deininger & Squire‘s, Penn World Table, Barro‘s and Lee‘s „GEETOT“ variable.The reseaching period: Result: Yes. The Kuznet’s hypothesis is still right. But: the way of measuring (GDP per capita) should be advanced by economic growth fundamentals. We should find additional metrics for the level of development. In other words: GDP per capital is not sufficient proxy for the level of development. His proposal: add growth fundamentals such as investment share in physical and human capital or knowledge or policy. Reason: Economic fundamentals create the differences on level and trend rate in inequality among countries. He shows that changes in inequality are explained as responses to shocks in policy and the changes in capital stocks. Inequality in growth models III. Research What were Vandhoudt‘s empirical findings (1998)?

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 11 /16 Inequality in growth models III. Research Question: Is the Kuznets curve true? Methodology: To investigate four features in growth models: Credit market imperfections, saving rate, political economy and social climate. Data: Gini coefficients observed around 1960, 1970, 1980 and 1990, level of per capital GDP. Gini coefficient is used to show inequality in distribution. The higher the coefficient, the more unequal the distribution is. Results: Yes, there is clear empirical regularity But: The Kuznets curve does not explain all variations in inequality across countries. Reason why Barro thinks that the Kuznets curve is not completely true: + Evidence shows little relation between income inequality and rates of growth and investment. + For growth, higher inequality tends to slow growth in poor countries and encourages growth in richer ones. What was Barro‘s conclusion (2000)?

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 12 /16 Inequality in growth models III. Research Question: Did poverty increase in the developing countries from 1987–1998? Methodology: household: household consumption expenditure per capita poverty: ▪ absolute consumption poverty: international poverty line set at $1 ($2) per day ▪ relative consumption poverty: international poverty line + consumer of more than 1$, but less than 1/3 of mean consumption Data: household survey: national surveys of 88 countries price data: Purchasing Power Parity (PPP) estimates by the World Bank Results:  No. In 1987: 28% of pop. of developing world below $1 per day, in 1998: 23%  But: decrease in 3 regions: East Asia, Middle East-North Africa, Latin America increase in 3 regions: Eastern Europe and Central Asia, South Asia, Sub- Saharian Africa  And: the decrease of the average poverty rate is not sufficient to reduce the aggregate number of poors. Excluding China, number of poors has risen steadily. What were Chen and Ravaillon‘s estimates (2001)?

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 13 /16 Inequality in growth models III. Research What was Bourguignon and Morrisson‘s findings (2002)? Question: How did the distribution of “well-being” among world citizens develop during the last two centuries? Methodology & data: updating existing works and extending it back => first broad historical view 2 dimensions of “well-being” - Income distribution within countries -Life expectancy (longevity)  Rather an comparison of world inequality among individuals than countries Results: - Early 19th century: Gini coefficient: 0.50 => already high income inequality -With the spreading of the industrial revolution: inequality soared (continuous rise) coefficient: Between the wars: inequality decelerated -After 1950: inequality slowed -Beginning in the 1980’s: catching up by China -Little difference between 1950 and today, but not due to stabilisation, but to shifting of concentration of world poverty  BUT: inequality worsened dramatically over the past two centuries: Gini coefficient increased 30% between 1820 and 1992  Not due to increase in inequality within countries, but to an increase of inequality across countries or regions of the world

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 14 /16 Question: How is the circumstances and social class important in global income distribution? Methodology: Assessment of the global income inequality though two characteristics: 1.country where a person was born and 2.social class within that country bases on different mean country incomes and supposing: no migration. Data: World Income Distribution database including representative household surveys form most of the countries in the world. The benchmark year is Results: One’s position in global income distribution can be known by one’s location (60%) and social class (30%) around 1/3 and 2/3 of which is due to the former one. The predictive power of country mean income is strong, not only in the aggregate, but for each social class. There is also the trade-off between wealth of the country and its income distribution from a person’ social class. Inequality in growth models III. Research What are Milanovic‘s social classes (2007)?

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 15 /16 THE EVOLUTION OF INEQUALITY OVER TIME First, Kuznets (1955) analysed countries separately => Kuznets curve Then, cross-country analyses were realised with different proxies for “quality of life”: e.g.: distribution of income: Chen and Ravaillon (2001) for developing countries Bourguignon and Morrisson (2002) for the whole world Milanovic (2007) for the whole world distribution of longevity: Becker, Philipson and Soares (2003) for the whole world Bourguignon and Morrisson (2002) for the whole world Inequality in growth models IV. Conclusions CONCLUSION Kuznets has been confirmed average poverty rate decreases number of poor rises shifting of concentration of world poverty increase of inequality across countries or regions of the world the opportunity for global equality is rather minimal

Inequality in growth models - Development Economics Thi Minh Hanh Kieu, Ngoc Vu Thi Minh, Corina Croissant 16 /16 Thanks for the attention