The influence of income inequality on economic growth in less developed and developed countries

Qaiser Munir, (2007) The influence of income inequality on economic growth in less developed and developed countries. PhD thesis, Universiti Malaysia Sabah.

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Abstract

Income inequality has long been the economic, social, political, and moral concern for countries. The issue of attaining a fair income distribution of the fruits of economic growth and development has even grown in mportance through time. Despite an extensive literature on inequality and growth, there remains considerable disagreement on the effect of inequality on growth. This study attempts to empirically re-evaluate the relationship between income inequality and economic growth with dynamic panel data approach for panel of 56 countries from 1960-2000. Unlike the previous approaches, this study employ a novel approach, Generalized Method of Moments (GMM) on dynamic panel data, namely differenced-GMM estimator developed by Arellano and Bond (1991) and recently extended by Blundell and Bond (1998). Advantages of using the GMM estimators to handle the possible country-specific fixed effects such as geographical and time invariant institutional characteristics. Furthermore, these estimators appropriately deal with omitted variable bias due to time invariant country specific effect and tackle the issue of endogeneity and measurement error in the regressors. This study shows that the influenced of income inequality on growth rate of real per capita GDP is significantly negative. This result is rather robust to the use of different specifications and estimation methods that yielded conflicting results in different studies, despite having used the same data sources. This negative impact of inequality on growth much weaker and positive, and statistical insignificant, for developed countries; however, it remains and negative and robust for less developed countries. The present study also finds equality of income is positively correlated to growth. Political economic literatures postulate two major channels linking inequality to lower growth. This study re-examined these approaches and find that income inequality stimulates social and political tension in societies and in turn socio-political uncertainties depress economic growth. This findings support the first approach namely, socio-political instability. Finally, in the frame work of endogenous fiscal policy, a second approach, this study's results are not supportive for "median voter hypothesis". Estimated result of this approach strongly suggests the positive impact of taxation on growth rather than negative as theory predict. The "median voter" theory of political behavior implies that if median voter is poor than mean voter (the income distribution is positively skewed and thus more unequal), then the median voter will prefer a progressive taxation on investment designed to redistribute income through higher transfer payment, which may lead to slower per capita GDP economic growth. Thus, this dissertation results do not support the idea that more equal societies grow faster because they generate fewer demands for redistribution and therefore fewer distortion.

Item Type:Thesis (PhD)
Uncontrolled Keywords:Income Inequality, Economic Growth, Dynamic Panel Data, Generalized Method of Moments (GMM), Socio-Political Instability, Endogenous Fiscal Policy.
Subjects:H Social Sciences > HB Economic Theory
Divisions:SCHOOL > School of Business and Economics
ID Code:1826
Deposited By:IR Admin
Deposited On:22 Feb 2011 18:48
Last Modified:22 Feb 2011 18:48

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