Income Distribution and Economic Growth: The Case of Brazil
Matins-Bekat, Camila, Kulkarni, Kishore G., The Journal of Developing Areas
In a perfect world, it will be great if the growth can be distributed equally and all poverty is removed simultaneously. Unfortunately, as Simon Kuznets has pointed out, economic growth is rarely distributed equally, in fact, according to him, economic growth initially leads to higher income inequality of income, as some sectors grow faster and some do not grow at all. In this paper, we apply the Kuznets hypothesis to the Brazilian case. Our test shows that in case of Brazil, the Gini coefficient has in fact behaved as Kuznets predicted.
JEL Classifications: O54, O40
Keywords: Income distribution and economics growth, country studies: Brazil
As inequality applied to income and economic inequality, is a very complex issue. Economists, sociologists, and political scientists are only a few of the researchers concerned with economic inequality. Is all inequality equal in its effects? Alternatively, do certain types of inequality spur growth while others damage it? Concrete answers to questions regarding the relationship between inequality and economic growth have not been found (see Introduction: Seligson and Passé-Smith, 2003). More specifically, development economists have been trying to understand the reasons why economic inequality is higher in countries that grow fast. Is economic growth the culprit?
These and other related questions have been the focus to study for several prominent economists. Simon Kuznets developed the most famous hypothesis of the relationship between inequality and economic growth. He argued that as a country develops, income inequality initially increases, and only after some time, it declines. In the first section of this paper, we will briefly discuss the social, political, and economic impact of income inequality. The second section is a review of the literature for and against Kuznets. hypothesis. In section three, we will apply Kuznets. hypothesis to the case of Brazil using time-series data. Suggestions for ameliorating income inequality in Brazil are discussed in the conclusion.
IMPACTS OF INCOME INEQUALITY
Gottschalk and Justino (2006) highlight several important studies regarding the social impact of income inequality and present the argument that high inequality may deteriorate stocks of human capital when associated with high illiteracy and poor health. Ribero and Nunez showed that there is a negative correlation between disability and stature and the ability to earn an income. In other words, an individual.s ability to earn money decreases as their nutritional status deteriorates (Gottschalk and Justino, 2006).
The evidence suggests that another social impact of income inequality is the positive relationship between high inequality and forms social and political conflict (Lichbach, 1989 in Gottschalk and Justino, 2006). If the poorest 20% of a society control less than one percent of the national income, their hardships are exasperated. Lack of access to education, healthcare, social security and jobs only fuel the sentiment that the government is not doing its share to alleviate their suffering. Once the tolerance threshold for inequality is reached, society is faced with what Hirschman and Rothschild (1973) called the Tunnel Effect (Ray 1998). The implications of Hirschman.s tunnel effect hypothesis on economic growth policy are significant. If the tunnel effect is present in a weak society, then an economic policy focused on aggregate growth would not be a prudent choice. Instead, the society should choose a policy that would address growth and distribution simultaneously (1998).
Illiterate and poor, the individuals at the lowest ranks of society are often excluded from the political arena either because they cannot afford to vote or due to voter corruption. The latter takes the form of candidates offering small amounts of money to the poor in return for their ? …