The kuznets process inequality- development

Journal

of Development

Economics

40 (1993) 25552.

North-Holland

The Kuznets process inequality-development
Sudhir Anand St. Catherine’s S.M.R.
College, 0x$&-d, UK

and the relationship*

Kanbur

The World Bank, Washington DC, USA Received December 1985, linal version received January 1992

In his classic paper on economic growth and income inequality, Kuznets discussedthe process of population shift from traditional to modern activities as the basis for a theory of distributional change during the course of development. In this paper, we present a formalization of the Kuznets process, conduct a general analysis of distributional change under this process, and derive the functional forms of, and conditions for a turning point in, the inequalitydevelopmentrelationship for six commonly used indices of inequality. The functional form appropriate to each index is then estimated using cross-section data on 60 developing and developed countries. Finally, some extensions to the initial formalization of the Kuznets process are considered.

1. Introduction In a classic paper, Kuznets (1955) introduced the idea of a link between inequality and development. Basedon evidence from time-series data on England, Germany and the United States, he hypothesized the now famous ‘inverse-U’ relationship between inequality and development. The mechanisms underlying this relationship were also discussed by Kuznets. He took a somewhat eclectic view, stressing economic, political and social factors as explanations of the statistical regularities he had observed. But theforemost of these factors, one which provided the focus of Kuznets’s analysis and has
Correspondence to: Sudhir Anand, St. Catherine’s College, Oxford OX1 3UJ, UK. *We are grateful to the Economic and Social Research Council of the UK for financial assistance under grant no. B 0023 0001, and to Afsaneh Farzin and George Zanias for research assistance. This is a revised version of our paper‘Intersectoral Shifts Theory and the InequalityDevelopment Relationship’, tirst presented at the EADI Symposium on Income Distribution at the University of Paderborn, West Germany in April 1981. It has also been presented at seminars at the Universities of Oxford, Cambridge, London (University College and LSE), Princeton and Essex, and was published as University of Essex, Department of Economics,Discussion Paper no. 249, August 1984. 03043878/93/$06.00 0 1993-Elsevier Science Publishers B.V. All rights reserved

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S. Anand and S.M.R. Kanbur, The Kuznets process

become important in the recent literature, is the shift of population from traditional to modern activities. This process of population shift, together with a formalization of what he regarded as the ‘stylized facts’ ofeconomic development, allowed Kuznets to derive predictions of the behaviour of inequality during the course of development: ‘An invariable accompaniment of growth in developed countries is the shift away from agriculture, a process usually referred to as industrialization and urbanization. The income distribution of the total population, in the simplest model, may therefore be viewed as a combination ofthe income distributions of the rural and of the urban populations. What little we know of the structures of these two component income distributions reveals that: (a) the average per capita income of the rural population is usually lower than that of the urban; (b) inequality in the percentage shares within the distribution for the rural population is somewhat narrower than in that for the urbanpopulation. . . . Operating with this simple model, what conclusions do we reach? First, all other conditions being equal, the increasing weight of urban population means an increasing share for the more unequal of the two component distributions. Second, the relative difference in per capita income between the rural and urban populations does not necessarily drift downward in the process of...