Kuznets Inverted U Hypothesis

Dr.
Mrinalini
Assistant Professor
(Guest Faculty)
Department of Economics
Magadh Mahila College, M.A Economics(Sem-2)
Patna University, Patna. Paper – CC-6
E-Mail- mrinalinishahi@gmail.com Economics of Growth and Development.(Module-2)
Kuznet’s inverted U-hypothesis

Simon Kuznets put forward the hypothesis that relationship between per
capita national income and the degree of inequality in income distribution
may be of the form of inverted-U. Due to limitations of data he used an
inequality measure of the ratio of income share of the richest 20 per cent of
the population to the bottom 60 per cent of the population known as
Kuznets’ ratio. According to the Kuznets’ Inverted U-hypothesis, as per
capita national income of a country increases, in the initial stages of
growth, inequality in income distribution rises and after reaching the
highest degree in the intermediate level the income inequality falls. This is
shown in Fig. -1 where as a country develops and its per capita income
rises, the degree of income inequality initially rises and after reaching the
maximum level, it falls as GDP per capita increases further.
As time series data
of the transition of the poor underdeveloped countries from
underdeveloped stage to the developed stage was not available, he used
the data of cross section of countries including both developed and
developing countries. In his 1955 study he calculated the Kuznets’ ratios
and found that the developing countries tend to have a higher degree of
inequality whereas the rich developed countries tend to have a lower
degree of inequality.
Later in his 1963 study Kuznets provided further evidence of his inverted
U-hypothesis regarding the relationship between inequality and economic
growth. In this study he included eighteen countries, as in the earlier study,
he included in this sample both the developed and developing countries.
From this later study he concluded that the share of upper income groups
in the rich developed countries was significantly lower than their
counterparts in the developing countries. This means income inequalities
were higher in developing countries compared to those in the developed
countries.
Other economists have also carried out studies to test Kuznets’ inverted U-
hypothesis. Due to the non-availability of income distribution data of an
individual country over time as it grows over time from an
underdeveloped stage, like Kuznets, others have also generally used cross-
section data of countries with a mixture of developed and developing
countries to test Kuznets’ inverted U-hypothesis regarding the relationship
between changes in income inequality and economic growth, one such
cross-section study with data of forty six countries classified into different
income categories according to the per capita GDP in 1965 in US dollars
was made by Paukert using Gini Coefficient as a measure of inequality.
Paukert’s analysis of cross-section of countries also confirmed the inverted
U-hypothesis of Kuznets and his findings are given in Table -2.
As will be seen from Table -2 in less than $100 per capita GDP category
countries, Gini Coefficient is 0.419 and as we go to the next category of
countries with per capita GDP between $ 101 and $200, Gini Coefficient
rises to 0.468 and in still higher categories of per capita GDP between $201
and 300 inequality as measured by Gini Coefficient rises to 0.499.
However, beyond this in still high income categories of countries, the value
of Gini Coefficient goes on falling and in the highest income category of
countries with per capital GDP $2001 and above, Gini Coefficient falls to
0.365. This is in accordance with Kuznets’ inverted U-hypothesis regarding
changes in income inequality as economic growth occurs.
Kuznets inverted U-hypothesis seems to hold well in later years, at least
upto the year 1970. Montek Singh Ahluwalia used income distribution data
of cross-section of countries and made estimates for the countries in near
about the year 1970. Results of his study are given in Table -3.
From the above table inequality can be judged by any three measures,
namely, share of bottom 40% of population in GNP, share of top 40% of
population in GNP and Gini Coefficients in different income categories
countries. It is worth mentioning that in 6th column of Table-3 GNP per
capita indicates the level of development of the economy. Using any of the
three inequality measures it is found that the inequality first rises, then
falls as per capita GNP increases as Kuznets’ inverted U-hypothesis
suggested. Changes in Gini ratio reveals that as average GNP per capita of
countries increased from $101 to $301 Gini Coefficient increases from
0.402 to 0.479 and in countries with per capita GNP of $ 754 Gini
Coefficient falls to 0.461 and then at mean GNP per capita of $ 2849, Gini
Coefficient falls to 0.358.
Similarly, the share of bottom 40% of population in GNP indicates that it
first falls and then rises again showing that inequality first rises and then
falls. In accordance with this the share of highest 40 per cent in GNP first
rises and then it falls. An interesting fact is revealed by the last row of
Table -3 which gives the data of 6 socialist countries around the year 1970.
This reveals that degree of income inequality as per all the three inequality
measures in them was much less compared to market capitalist countries.
This is because in erstwhile socialist countries private ownership of
tangible physical assets was generally abolished and therefore inequalities
of income that arise mainly due to highly skewed distribution of assets and
property did not exist in these socialist countries at that time. Even wage
differentials in these countries were found to be less.
East Asian Countries and Kuznets’ Inverted U- Hypothesis:

It is worth mentioning that development experience in East Asian
countries does not conform to the inverted-U hypothesis of Kuznets. In
East Asian countries such as Japan, South Korea, Taiwan, Thailand,
Indonesia and Malaysia, contrary to Kuznets’ inverted U -hypothesis, in the
initial stages growth was not associated with increase in inequality.
Instead, the increase in national income was widely shared among its
population and millions were lifted out of poverty. For example, in
Malaysia and Thailand the incidence of poverty declined from about 50 per
cent in 1960s to less than 20 per cent by the end of the 20th century.
Though the policies pursued by the various East Asian countries differed a
lot, but the common features of these countries were, high rates of
investment in physical and human capital, rapid growth of agricultural
productivity and declining fertility. All these were conducive to economic
growth with decline inequality in income distribution.
Conclusion:
Kuznets’ inverted U – hypothesis suggests that in the growth process
inequality first rises and then decline. The various factors and arguments
have been advanced in favour of inverted U-hypotheses. However, as
pointed out above, in case of East Asian countries such as Japan, South
Korea, Taiwan, Thailand, Singapore where, contrary to Kuznets’ inverted
U-hypothesis, economic growth has resulted in the reduction in income
inequality. This is because the effect of economic growth on income
distribution has been influenced by economic policies pursued in these
countries. For example, in countries of South Korea, Japan, Taiwan and
other East Asian countries there had been redistribution of land and also
other interventions by government in influencing economic activities that
growth process worked to lower inequality in income distribution. In our
view, there is no single path of growth which first increases inequality and
then decreases it and much depends on the character of growth and
policies followed by the governments of countries in the growth process.
Many factors and policies influence growth and income distribution and
the view that each country must travel through the inverted U- hypothesis
is quite unwarranted.

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Kuznet’s inverted U-hypothesis

East Asian Countries and Kuznets’ Inverted U- Hypothesis:

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