Income Inequality and Development: Empirical Analysis of a Cross Section of Countries

Abstract

Since the 1990s, there has been controversy regarding Kuznets' inverted-U hypothesis and the economic theory of trickle down. There are a variety of arguments as to whether the inverted-U hypothesis holds or not and whether inequality can be a driving force of economic growth. This paper examines the above arguments theoretically and empirically, and clarifies how income inequality relates to economic development, considering the key social factors such as health and education. While it is recently observed that Kuznets' inverted-U hypothesis cannot be empirically supported from the simple relationship between income and inequality measures, the paper concludes that the inverted-U shape holds partially, and that the hypothesis points out one of the important phenomena of income inequality related to economic development. Regarding trickle down economic theory, the author remains skeptical. By referring to the unfavorable effect of inequality on health and education and the negative influence of tax increase on economic growth, the author concludes that inequality is harmful to economic development.