Income inequality and economic growth have long been a debate among many
economists. The main purpose of the economic policies is to increase the level
of economic well-being of all individuals and classes who shape the society. As
the economy grows, the most important way of analyzing the change in the
economic welfare of the individual and the social classes is income
distribution and poverty statistics. Along increase of growth rate and current
per capita give a general idea of the change in the level of economic
well-being, income distribution and poverty are essential indicators that
should be taken into account in order to clarify the distribution of wealth
growth between social classes and individuals in the growth process.
Background to the Study
Although income inequality and economic growth are the topical issues of
society at all times, industrial capitalism was paid special attention, which
emerged after the industrial revolution (Çelik, 2004). After the industrial
revolution, while the profits of the bourgeois class on the one hand have risen
to the extreme, the rise and even fall of wages has resulted in a clearly
visible problem of income inequality.This has led to industrial unrest, great
unrest, and fierce ideological conflicts (Aksu, 1993). Until the understanding
of the social state that prevailed after the World War II, the theory of
economics was dealing with long-term economic problems such as capital
accumulation and growth, and it was assumed that the problem of income
inequality and poverty would be solved spontaneously with growth over time.
However, especially in developing countries, rapid economic the growing
deterioration of income distribution and the increase of poverty caused income
inequality to be seen as an important economic and social problem. Along with
the widespread understanding of the social state, social policies aimed at
exploiting the benefits of poor and low-income citizens, who constitute the
lowest level of society, have benefited from at least the benefits of growth.
The understanding of the social state aims at ensuring development on the one
hand, and on the other hand, benefiting all citizens from the blessings of
development in a fair way (?enses, 1991).
Purpose of the Study
The main aim of the current study is to explain effects of economic
growth on income inequality under the light of countries’ level of development and
to determine the affect of different stages of economic development on income
The study determines the
relationship between economic
growth and income inequality. Specifically, the relationship between
economic growth and income inequality has been explored by economists and
policymakers. The distinguishing feature of this study from other studies is
the analysis of the studies by many authors to highlight the problem related to
economic growth and income inequality in the societies in terms of global from
past to today.
Our research questions include some important definitions of income,
income distribution and income inequality, basic concepts of income
distribution, factors that determining income inequalities, theoretical
framework of economic growth. Also according to “The Organisation for Economic Co-operation
and Development”, questions of “What is
a long-term rise of income inequality?” “How is inequality linked to growth?” “Why
does inequality reduce growth?” “How can policy respond?”, we try to answer
these questions in the basis of other studies conducted by researchers about
income inequality and economic growth.
As an input , We can start by trying to explain which aspects of the
economy are related to these concepts in the beginning. These magnitudes that constitute
the content of the course and the calculations belong to the Macro Economy
which deals with the general balance and magnitude of the economy. Therefore,
it is useful to give some information about macroeconomic evolution first.
Nativity of Macro Economy was
occured by consequences of The World
Economic Crises in 1929. J.M. Keynes
explained them in the work of
Employment,Interest and the General Theory of Money and of course there
was some Macro Economic works before Keynes. For instance ; Quantity
theory and Wealth of Nations of Adam Smith ‘s books. However they
are not independent disciplines by each other. Thus , consequences of these disciplines are about Macro Economic magnitude and calculations.
Income as a proxy for economic welfare. If one adopts an individualistic,
welfarist approach to social economics then it is reasonable to be concerned
with individual well-being or utility.
Income as command over resources. If a person is losing power, perhaps
disposable income may be an adequate concept. But if economic inequality related to status then
evaluation of well-being could be more effective.
Income distribution can be defined as the distribution of national
product or income, which is produced within a certain period of time, among
individuals, groups or production items (Aktan & Vural, 2002). The main
types of income distribution are:
a. Functional Distribution of
Functional distribution; is a concept that is used to analyze the distribution
of income, especially among laborers and other generation factor owners. Each
of the factor owners involved in the production process, from the goods and
services produced; they receive a share in the name of wages, rent, interest
and profit. Payments made against these shares constitute the revenues of the
owners of the production factor.
b. Personal Income Distribution
Personal income distribution is the concept of income distribution which
shows the distribution of national income among the individuals or households
constituting the society.
In the distribution of personal income, it is not a matter of wages,
profits, rents or interest that the share of the individual or the houses in
the national income. What is important in personal income distribution is not
how the individual gets income, how much income he earns. (Öçal, 1990)
c. Regional Income Distribution
Regional income distribution is the definition of income distribution
used to determine the distribution of an country’s national income between
regions determined according to different criteria. In the regional
distribution calculations, the country is usually analyzed by geographical
regions, by the quality of the settlement units (rural or urban) or by zones
according to the level of development.Almost, in any country, national income is
never distributed among the regions equally.
d. Sectoral Income Distribution
The concept of sectoral income distribution means that the branches of
economic activity; industry, agriculture and services are used for the purpose
of establishing the national income. With sectoral distribution calculations,
it is analyzed which sectors have favored or changed the changes in the
distribution of income over time. (Karluk, 2005)
Income inequality is the distribution of household or personal income inequally
across the various participants in an economy.
The Factors of Inequality
The factors of income inequality could divid into economic development,
demographic factors, political factors, cultural and environmental factors, and
macroeconomic factors. To briefly explanation is economic development includes
that a country’s wealth, economic growth, technological development and the
development of economic structure. Demographic factors include that
urbanisation, age, and composition of households, and also education level,
education inequality, and education expenditure. Political factors are shares
of the government and the private sector, democratisation, liberalisation,
etc.Cultural and environmental factors include that concentration, cultural
variation, shadow economy, corruption and also the abundance of natural
resources which are playing a crucial role on income inequality. The last one
is macroeconomic factors which include inflation, unemployment, financial
development, export, import and foreign investments.
Framework of Economic Growth
Growth is the first step in development. If growth does not follow the
transformations towards economic and social progress, development will not take
place.The most important progress of development is the distribution of income
equally to individuals or households.
The most widely known economic growth models for the underdeveloped
countries in the economic literature are the models of Harrod-Domar, Singer,
Robinson, Lewis, Leibenstein, Rostow and Kaldor. In the classic growth models include models
of Smith, Ricardo, Malthus, Mill, McCulloch and Senior. In addition, Marx’s
growth model as an alternative growth model, Schumpeter’s emphasis on economic
development, and Hicks’s emphasis on conjuncture theory have an important place
in growth theories.In addition to all these, Hirschman’s views on more
up-to-date unbalanced development must be carefully considered.
It is one of the important debates in the economic literature that
economic growth processes have created deterioration in income distribution, or
in which stages deterioration and recovery are observed. For example, Nurkse
(1963) points out that in underdeveloped countries the capital accumulation is
insufficient and that the market is limited. According to him, it would be
appropriate for the accumulation of limited capital to be transformed into a
balanced investment in the complementary sectors where the demand is
sufficient. According to Fleming (1955), the success of balanced development
but only if the positive external economies are strong enough to negate
Income Inequality Metrics
Many studies have been conducted
related to income inequality and economic growth. There are many works
about income inequality and growth economic. In this situation , to measure
this inequality , there are some measurement methods. So , firstly , the most
commonly used in empirical studies. To measure inequality , usually , In the
literature, the GINI coefficient is used as the standard measurement. GINI
coefficient is a period between zero (0) and one (1) numbers. The full equality
of income distribution ( if necessary ) is equal to zero (0). According to Wade
(2001) that there is no significant change
in income distribution ,the problem is that the GINI Coefficient has been used .
Because , while the GINI coefficient
gives excessive weight to changes in the middle of the distribution, it gives
very little weight to the changes at the ends. However , According to Dowrick
and Akmal, studies that use the purchasing power parity have some form of
non-neutral calculation. That is, such calculations tend to show more than the
incomes of developing countries (Dowrick and Akmal,2001).
We have some research questions and in this section , we try to present
answers of these research questions. Our first question is “What is a long-term
rise of income inequality?” and according to OECD , As a measure of this
disparity, the richest 10% of the population now earns 9.6 times more than the
poor 10%; this rate has reached to its present value by increasing from 9,1 in
1980s to 7.1: 1990s in 8.1: 2000 years. The second question is “How is
inequality linked to growth?” and according to OECD , inequality decrease the
economic growth. The third question is “Why does inequality reduce growth?” and
according to OECD, because differences purchasing power reduces the economic
growth and inequality make a trigger on purchasing power of people balances.
The last question is “How can policy respond?” and as a respond , of course
there should be some pressure on politicians . There are some ways to exist
pressures on them but the some of best ways are mass protests and syndicate .
After then the politicians can have radical changes on economy to prevent
inequality and negative consequences of inequality.
Throughout the history of daily life, people
have lived in class differences. It has been social and economic at the same
time. As a result these classes differences reveal the income inequality in
public. We can see great examples of that in history . For instance French Revolution
. In the beginning it can be seem as a political revolution but the fact was huge
income inequality on between regime , bourgeois and folk. As a mention income
inequality can create huge problems for people and it reduces economic growth .
on the other hand in this research , the avoiding is clear for that.