Academic journal article Pakistan Economic and Social Review

Issue of Income Inequality under the Perceptive of Macroeconomic Instability: An Empirical Analysis of Pakistan

Academic journal article Pakistan Economic and Social Review

Issue of Income Inequality under the Perceptive of Macroeconomic Instability: An Empirical Analysis of Pakistan

Article excerpt

Byline: AMJAD ALI

Abstract

This study has investigated the impact of macroeconomic instability on income inequality in Pakistan over the period of 1980 to 2015. A comprehensive macroeconomic instability index has been constructed by incorporating inflation rate, unemployment rate, trade deficit and budget deficit. Stationarity of data is checked with the help of the Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and Dickey-Fuller Generalized Least Squares (DF-GLS) unit root tests.

Autoregressive Distributed Lag (ARDL) model has been used for examining the co-integration among the variables of the model and Vector Error-Correction model has been used for short run dynamics of the model. The empirical results of the study confirm the existence of co-integration between macroeconomic instability and income inequality in Pakistan. The results of the study show that macroeconomic instability has a deep-rooted impact on income inequality in the case of Pakistan. Hence, for achieving the desired level of income distribution, Pakistan should make its macroeconomic environment stable.

Keywords: Macroeconomic instability, Income inequality, Pakistan, Co-integration

I. INTRODUCTION

Better quality of life is the aim of all types of sciences. Following this objective, economists treat economics as a science. Smith (1784) mentions that no society can be happy and flourished if the greater part of its population is miserable and poor. Hartwell (1972) claims that the spirit of economics to study poverty. But a historical overview of economic thoughts shows that the nature of economic activities changed over the time. Bigsten (1983), Atkinson (1997) and Ferran (1997) place income distribution in the center of their thoughts when they claim that political economy should determine the laws and rules of income distribution. Thus, the fairer income distribution is the prime objective of economics, but this prime objective lost elsewhere as economic thoughts move forward. After Smith and Ricardo, the literature before 1950's shows that the objective of fair distribution of income is absent in economic theories and policies (Atkinson, 1997).

Generally, income inequality gives a concise picture of society that show who receives what. Following theoretical and empirical literature, functional distribution and personal distribution or size of income distribution are two main concepts of income distribution. The functional distribution reveals what the share of income is received by individual factor of production. Whereas the size of income distribution reveals that how many households get how much? The final results of the entire economic process are the distribution of income (Bigsten, 1983). From 1970's much concern of the developed world is the quality of life and harmful consequences of economic growth, such as the depletion of natural resources and pollution. But the developing world is still confused between relationship of economic growth and distribution of income. Moreover, developing countries are experiencing high rates of economic growth with increasing income inequality (Todaro, 1994).

How macroeconomic environment impacts income distribution? This is a critical topic of discussion among the economists and policymakers since the days of Kuznets. But after millennium development goals of United Nations reducing income discrepancies and macroeconomic instability are the main objectives of United Nations member countries. Macroeconomic instability is not only a natural policy target of governments, but it can also be viewed as an important factor affecting income distribution. Moreover, there are number of normative and positive questions are associated with the relationship of macroeconomic instability and income distribution. So, uncovering the direction of this relationship gives much understanding to policymakers for targeted policy issues. Demery and Tony (1987) mention that rising inflation, deficit in balance of payment and budget deficit create distributional issues. …

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