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Theory and Evidence from Developed and Developing Countries
Jay T. Chittooran
May 5, 2009
Abstract: This paper focuses on the relationship between economic growth and the
distribution of the income. However, previous attempts to answer this question have ignored, for the most part, government social spending, aimed at redistributing wealth. Using data from 40 countries over 80 country-years, this paper analyzes economic growth in terms of GDP, GDP Change, and GDP per capita, income inequality in terms of the Gini index, and government social spending in terms social contributions in both the currency and as a percentage of GDP, to determine this relationship. Based on the multivariate regression output, this study has shown that as a country grows economically, the Gini index increases. Concurrently, social spending begins to increases, albeit slowly. However, at a point, the Gini index plummets as the amount of social contributions drastically increases. Based on this, the hypothesis is correct in poor countries, but is incorrect in wealthy countries.
Key Words: income inequality, economic growth, Gini index, government entitlements, development, distribution of benefits, social spending, GDP per capita
John C. Whitehead School of Diplomacy and International Relations, Seton Hall University, email email@example.com, telephone: 314/795/5524.
Electronic copy available at: http://ssrn.com/abstract=1505649
Table of Contents
1 2 3 4 Introduction ............................................................................................................ 1 Issue/Literature Survey .......................................................................................... 3 Claim/Testable Hypotheses .................................................................................... 8 Analysis and Findings .......................................................................................... 10 4.1 Analysis/Model ............................................................................................... 10 4.2 Findings .......................................................................................................... 11 5 Policy Implications ............................................................................................... 23 6 Concluding Comments ......................................................................................... 25 Appendices ................................................................................................................... 27 Appendix 1: Data Description .................................................................................... 27 Appendix 2: Methodology ......................................................................................... 27 References .................................................................................................................... 30
Electronic copy available at: http://ssrn.com/abstract=1505649
Do the Benefits of Economic Growth Favor the Rich? Theory and Evidence from Developed and Developing Countries
Do the benefits of economic growth favor the rich? Essentially, this research question seeks to examine the relationship between economic growth and income inequality. Studying this, my research topic and this area, is of vital importance. Currently, there are about 3 billion people living in poverty, which is nearly 50 percent of the world‟s total population.1 Of these, 2.6 billion people live on under $2 (adjusted for PPP) per day; this number represents about 40 percent of the world‟s total population. 2 Even worse, roughly 1 billion people live on a mere $1 per day or less, which is the standard for absolute poverty.3 A majority of those living in absolute poverty live in Africa and Southeast Asia. Simultaneously, the richest 5 percent of the world receive more than 30 percent of the world‟s total income. Indeed, we live in a society of diametric opposites. It is estimated that the worldwide Gini index, which measures income inequality on a scale of 1 being equal to 100 being completely unequal, is at approximately 65. 4 Branko Milanovic, an economist at the World Bank, best characterizes the significance of this: “The top 5 percent of individuals in the world receive about 1/3 of total world income. The bottom 5 percent receive 0.2 percent of total world income. This means that the ratio between the average income received by the richest 5 percent and the poorest 5 percent of people in the world is
Human Development Report 2007/2008. Rep. 2007. United Nations Development Programme. 15 Sept. 2008 <http://hdr.undp.org/en/media/hdr_20072008_en_complete.pdf>. 1-384. 25 2 Human Development Report 2007/2008 25 3 Human Development Report 2007/2008 25 4 Milanovic, Branko. Global Income Inequality: What it is and Why it Matters? Working paper no. 26. Aug. 2006. United Nations Department of Economic and Social Affairs. 2 May 2009 <http://www.un.org/esa/desa/papers/2006/wp26_2006.pdf>. 1-17. 9
thus.165 to 1. this 5 Milanovic 9 2 . problems that face all countries across the globe. which includes entitlements and pensions. will be the dependent variable. which will be measured using gross domestic product data. or other perceived Third World Countries. Those in the depths of poverty should be helped by their respective states to lift them from a state of endemic poverty. poverty. while those in poverty are living on nothing. By understanding the situation of those in poverty. Government investment. As members of the global community. This is no surprise. this particular research study aims to properly determine. Only recently has the relationship between economic growth. Southeast Asia. using many statistical tools. while income inequality. For this research project. will be the independent variable. this paper will attempt to control for these plausible alternatives. the wealthy control the preponderance of money. However. The richest people earn in about 48 hours as much as the poorest people earn in a year. including a multivariate regression. Additionally. and inequality been studied properly. we must acknowledge that the lack of fair opportunities for all is simply inexcusable and something should be done to ameliorate the situation. which will be measured using the Gini indices. research and analysis in this field. Because of this ostensible dearth of study. economic growth. this paper will incorporate data under the „government aid‟ nomenclature. we can better work to solve these problems that plague not only certain countries in Africa. but rather.”5 These aforementioned numbers are simply shocking. if those in poverty are receiving fair benefits when compared with those in the upper income quintiles in a given country. is redistributive in nature and can alter the rates of income inequality.
"Income Inequality is Not Harmful for Growth: Theory and Evidence. I will test my research question by running a multivariate regression to determine if a relationship exists between economic growth and favoritism of the rich. 3 . The literature review will begin the survey with articles that study the economic growth/income inequality relationship. 2 Issue/Literature Survey There are many answers to the research question in the extant literature. pensions. and Heng-fu Zou. all of which seek to redistribute wealth and alter the real income inequality rates. I will include data from many countries from many different time periods. Li and Zou use 46 developing and developed countries over the 1947-1994 period as their dataset. and if one exists. what kind of relationship is it." Review of Development Economics 2 (1998): 318-34. By doing this. Li and 6 Li. suggests that income inequality and economic growth are positively correlated. and articles that investigate the relationship between government spending and income inequality.6 This article uses the CES utility function and a standard growth production function to evaluate the intersection of income inequality and economic growth. The literature review is divided into two distinct categories: articles that analyze the relationship between economic growth and income inequality. This adjustment will fall under the government aid category. Based on their analysis. “Income Inequality is not Harmful for Growth: Theory and Evidence” by Hongyi Li and Heng-fu Zou. as the title indicates. 318-320. The first article.paper will control for any entitlements. and other investments from the government. the results will hold greater explanatory power and be more applicable. Hongyi.
London: Routledge. Harrod and Domar rationalized this relationship actually occurred because the rich control a higher percentage of the wealth and can invest their money in the market. associated with economic growth. In this empirical study. International Trade and Economic Growth. A. Ghatak. the main problem with this research is that the authors framed their answers by using a comparatively small dataset that they admittedly „cleansed. Dollar and Kraay use a sample of 92 countries over the course of 285 country years (Dollar and Kraay 2002). Dollar and Kraay promote an antithetical notion. and services. Growth is Good for the Poor. yield opposite results. Sharpe. 1-43. average incomes across each income quintile did not show variance when compared to each other in times of economic boom or bust. data irregularities.”7 While these authors proffer a strong claim. Further. D.E. (2002).”8 The Harrod-Domar growth model also postulated a similar position.9 “Growth is Good for the Poor” by David Dollar and Aart Kraay have promoted ideas that have been widely accepted and praised. and Joshua J. and very often even significantly. 7 8 Li and Zou 322 Li and Zou 328 9 Van Den Berg. Introduction to Development Economics. New York: M. which when accounted for. Hendrik. Subrata. 458. 54-56. it is clear that the incomes of those in the poorest quintile did not vary significantly when compared to the average income. while the previous article acknowledged that the benefits of economic growth often are not passed to everyone. However. 305. 10 Dollar. & Kraay.” 11 Based on this study.10 Dollar and Kraay reveal that “average incomes of the poorest fifth of a country on average rise or fall at the same rate as average incomes. 1-2 11 Dollar and Kraay 27 4 . The World Bank. 2006. while the poor can only use their money for buying necessary goods. 84-85.Zou determine that “economic inequality is positively. 2003. goods. Lewer.
specifically in Eastern Europe and Africa. while others indicate that redistributive government practices are not related to income inequality. Knowing what countries Barro selected would strengthen his overall case as we can determine if there was a selection bias." Journal of Economic Growth 5 (2000): 5-32.”12 Barro avers that $2000 GDP per capita is the apex of the curve. Some authors claim that social spending causes deeper income inequality.plague this article. because Barro used a rather long period in which many countries. this is the point at which growth transitions from slowed to encouraged. this possibly could have affected the results. including “Inequality and Growth in a Panel of Countries. This following section of the literature review examines the relationship between government social spending and income inequality. Other articles. Using a general panel of 100 countries from 1960-1995. This article goes so far as to say that the evidence provided does not even support the idea that the trickle-down sequence is either appropriate or effective. the regression results reflected a Kuznets (an inverse U) curve. "Inequality and Growth in a Panel of Countries. Additionally. 29 13 Barro 31-32 5 . 12 Barro. Robert. were not yet countries. claim that the relationship between inequality and growth can vary greatly. that is.” by Robert Barro. which essentially verifies his claim that “inequality retards growth in poor countries but encourages growth in richer places. the results of Barro‟s study could have been altered by many countries that were not included in this study. thus.13 Barro also fails to mention what countries he chose for the study. Studies on the effect of income distribution on economic growth that have included government social spending data have yielded interesting results.
" American Economic Review 84 (1994): 600-21. 1-26. Tiongson. Luiz. In the IMF Working Paper entitled “Income Inequality and Redistributive Government Spending” by Luiz de Mello and Erwin Tiongson. that is. when government aid systems are in place and engaged. Similarly. economic growth is significantly limited. or social expenditure aimed at the redistribution of wealth.In both “Distributive Politics and Economic Growth” and “The Political Economy of Growth: A Critical Survey of the Recent Literature” by Alberto Alesina and Dani Rodrik. income inequality will worsen. Alberto. Perrson and Tabellini in their article “Is Inequality Harmful for Growth? Theory and Evidence. Washington DC: International Monetary Fund. and Erwin R. the authors believe the opposite to be true.16 In “Unequal Societies: Income Distribution and the Social Contract” by Roland Benabou.15 Essentially. thus.” aver that a negative relationship exists between income inequality and growth when government aid. 364-365 15 Persson. "The Political Economy of Growth: A Critical Survey of the Recent Literature. is frequently utilized. despite a growing economy. and Guido Tabellini. Torsten. 17-21 6 . Based on statistical analysis. 16 de Mello. Benabou rationalizes this because public support is 14 Alesina. the authors indicate that redistributive spending that is financed by taxation has the potential to reduce the incentive for capital accumulation and investment. the author concluded that income inequality is determined to be less related to redistribute government spending. Income Inequality and Redistributive Government Spending. high rates of income inequality will continue unabated. the authors determine that countries with higher rates of income inequality spend less on redistribution (or government aid programs). Working Paper WP/03/14. "Is Inequality Harmful for Growth? Theory and Evidence. 2003.14 By curtailing this enhancement of wealth. government spending and income inequality are not significantly related at all." World Bank Economic Review 8 (1994): 351-71. and Dani Rodrik.
Davoodi. worsening income inequality in Hong Kong. because most developed countries have effective tax systems. Zhang. 119 18 Chu. and L. 2000.closely tied to redistribution." American Economic Review 90 (2000): 96-129. "Unequal Socities: Income Distribution and the Social Contract.19 In their closing. Washington DC: International Monetary Fund. "Economic Growth and Income Inequality in Hong Kong: Trends and Explanations. worsening income inequality. 19 Chu. and Sanjeev Gupta examine what the relationship between income distribution and social spending policies is from a different angle. Working Paper WP/00/62." China: An International Journal 3 (2005): 74-103.20 17 Benabou. the authors explain how Hong Kong has managed high growth rates despite consistently large income inequality rates.18 However. Income Distribution and Tax and Government Social Spending Policies in Developing Countries. but actually. the authors prove that. “Income Distribution and Tax and Government Social Spending Policies in Developing Countries” by Ke-young Chu. the authors indicate that additional methods of improving income inequality need to be examined. income inequality in developing countries is lower than developed countries. as simply having high economic growth rates cannot combat distribution issues by itself. Simon. Hamid Davoodi.17 However. Zhang. it is a requirement. and Sanjeev Gupta. 35-37. 1-48. this point is suspect as participation in government social spending programs is not a public choice. it seemed that the redistributive role of government social policies was. In “Economic Growth and Income Inequality in Hong Kong: Trends and Explanations” by Simon Zhao and L. in part. 101 7 . social spending seemed to be not helping improve income inequality. this idea is the crux of the following work. Interestingly. From their analysis. Rather. Based on their analysis. before taxes. Ke-young. and Gupta 36-37 20 Zhao. the authors focus on the income distribution solely in developing countries. Roland. Hamid Davoodi. income inequality rates in developed countries generally are on pace with these rates in developing countries.
receive larger returns. government aid is simply redistributive practices aimed at „leveling‟ the playing field. it does not hold great significance now. in which I include pensions. entitlements. Because of this. However. that is. common sense tells us this is incorrect. are able to invest more. these redistributive measures will impact income inequality 8 .Now that a conclusive albeit brief literature review has been provided. Additionally. Government aid. Obviously. While the Perrson and Tabellini paper is strong and includes all the relevant variables. and/or used cleansed data. Li and Zou indicate that growth favors the rich because the rich have more money. and any other form of government intervention. can directly impact the distribution of income. In its most basic form. the paper will delve into the issue at hand. and thus. While the above work has directly impacted the discourse in this field. many of the articles examined in the social spending literature survey failed to adjust for the value of economic growth. all of the above authors apparently discounted the role and impact of the government domestic aid. These factors impacted their findings. 3 Claim/Testable Hypotheses The previous attempts to determine the relationship between economic growth and income inequality when government aid (social spending) is controlled have yielded insufficient answers. it is very dated. determining whether a relationship exists between economic growth and income inequality when government social spending is adjusted for. cross-country data. tax breaks. Dollar and Kraay claimed that the benefits of economic growth do not favor any income group. Barro classifies the relationship between economic growth and inequality as non-monotonic.
the more favoritism (inequality) will occur. This legitimizes the rationale behind my work and the creation of my hypothesis. societal issues and structures. in this case would be: Adjusting for government social spending. irrespective of socioeconomic status. In more simple language. the favoritism of the rich in most countries has grown. need to be utilized in studies on income inequality. For this paper. my hypothesis is: Adjusting for government social spending. Indeed. The null. I expect that this study will verify the claim that benefits of economic growth are not passed on equally to all members of society. By including the level of government aid for each country. then the benefits of economic growth will not favor anyone. While foundational economic theory contends that as an economy grows. the literature review revealed scholarship (i. this paper will show what kind of relationship exists. if a country grows economically. While this hypothesis seems palpable. the results should proffer clear and easily dissectible results. the higher the economic growth rate. to some degree. In this study. I believe this macro-level 9 . but will use a larger data set that incorporates more countries from a series of years. the word „rich‟ will be defined by the upper twenty percent of the population. if a country grows economically. then it is more likely that the benefits will favor the rich. if at all. While this hypothesis seems to be in violation of the basic economic theory.rates and thus. and will be able to issue predictions for these countries for the future. each member receives the benefits. Additionally. the paper will verify this statement with evidence from a wide range of countries all with different development paths. With this in mind. with economic growth. and historical memories. Perrson and Tabellini) in which their results contradicted economic foundations. This paper will be using a model similar to the one utilized in Li and Zou.e.
Benefits that are received by the lower income brackets are often times inconsequential and minute. and data that was used. when government aid is adjusted for. cases. However. should receive a higher share of the rewards. 10 . Once this has been done. what kind of relationship is it. often times.1 Analysis/Model I will test my research question by running a cross panel multivariate regression to determine if a relationship exists between economic growth and favoritism of the rich. in which government aid data will be included and an additional regression will be run to determine the validity of my claim. A major criticism of this position is that the rich. contribute more extensively to the economy of a country than a poor person would and as such. so small that the increase does not even cover cost of living adjustments. This regression will serve as Model I and the foundation for further analysis. essentially. before doing this. this section will present the findings of the regression run. which includes defining the variables.14. 4 Analysis and Findings This section will present the quantitative model utilized for determining the relationship between economic growth and income inequality.approach does not properly analyze the depth of this problem. the results are a tipping off point for Model II. the paper will conduct a regression comparing economic growth and income inequality. and if one exists. 3.
22 3. As mentioned in text. and social conditions. not correct. the definition. Antarctica). why this is significant in measuring the research question. 11 . and the location where the data can be found is included. if this was not the case. While this relationship is not strong and thus telling. fully operationalized.24. in the Appendix. This group represents most of the continents (excluding Australia and This group of countries also has many unique and disparate political. or another unforeseeable alternative. the results from the study of the relationship between economic growth and income inequality depict that there is some correlation between the independent variables (GDP. I ensured that all the data was available and useable. poor. I have taken many steps to control for bias and to ensure my results are widely applicable.2 Findings23 In Model I. In order to conduct research on my question. and middleincome. GDPpercapita) and the dependent variable (Gini index). Each variable is fully operationalized. economic. For each country. Listed first are the independent variables. after the Appendix. GDPChange. it is significant enough to note the existence of 21 22 A full list of these countries can be found in the Appendix. the country was removed from the study. that is. countries included in this analysis are rich. These many factors together make the case selection in this study highly important for an objective assessment. I employ variables that will help answer whether the above hypothesis is fully correct. all variables utilized in this study are listed.My analysis will consist of data from forty (40) randomly selected countries21 in two (2) different periods (1994-6 and 2004-6). only in hard copy. followed by the dependent variable. For example. A list of all variables that will be utilized in attempting to answer this research question are catalogued in the Appendix. partially correct. 23 All data used in this study will be included.
351. it certainly does indicate that some kind of relationship does exist. this model explains 35 percent of the variance in the Gini index. measures the strength of association of all the independents variables in explaining the variance in the dependent. With regards to each particular connection. MODEL I As it is clearly portrayed above. R Square. The relationship between Gini and GDP. there is a negative relationship between Gini and both GDPpercapita and GDPChange. on the other hand. is positive. This value.a relationship. 12 . Below are the results from the regression. in this case. While this number is not particularly revealing. the R Square is fairly strong (for a cross-sectional analysis) at .
185. which registers at .035. is a very low .560. This is indicative of a very poor finding with no real statistical value. Any score above an absolute value of 2 is necessary for a significant t-stat. Even less impressive is the p-value. The beta coefficient for GDPpercapita was -. The t-stat. meaning. for every unit move in the dependent variable.049. Thus.719. the score is . is GDPpercapita. GDPchange moves approximately a third of the distance in the opposite way. The beta coefficient for the Gini/GDP relationship is . While this shows a stronger relationship when compared with the first independent variable. the second independent variable. For GDPchange. The final independent variable and perhaps most interesting in terms of explanatory power for this study. for every one unit move in Gini. the value of R Square in cross sectional regressions will be substantially lower when compared to timeseries analysis because of the wide variance in the data.In the Coefficients table. at -2. this is a negative relationship. for every unit move in the dependent variable. the beta coefficient is -. the standardized beta coefficients are telling and yield unique and interesting conclusions. The p-value for this coefficient is also representative of a strong relationship. based on the previous scholarship in this field. the independent moves in the opposite direction half of a 13 . This high value means that there is a 72% margin of error. This very low value indicates that this data cannot be trusted.298. Much like GDPChange. The first independent variable is GDP.362. is strong. that a change in GDP will result in a change in the Gini index. the independent moves in the opposite direction. this is not particularly surprising as it would make sense. The t-stat. meaning. It is important to note that generally speaking. a measure that determines correlation between variables. This is a negative relationship.
14 . Kuznets.000 GDP per capita and a Gini index of 45) income inequality begins to decline very steeply. The ascent in the Gini is intuitive because industrialization is known for having winners and losers. Equity and Growth in Developing Countries: Old and New Perspectives on the Policy Issues.000. 1996. "Economic Growth and Income Inequality.pdf>. the level of income inequality increases. 11-12. Working Paper 1563. Ravallion.unit. The t-stat is a very strong -4. registering . the results are fascinating (See Graph I). This is interesting and 24 Bruno. as an economy grows.nus. Simon. 24 However. 1-30.. Washington DC: The World Bank. Lyn.sg/course/ecshua/eca5374/Economics%20growth%20and%20income%20inequality _Kuznets_AER55. Martin. However. at the apex of the curve (approximately $24." The American Economic Review 45 (1955): 1-28. 4 May 2009 <http://courses. Perhaps even more impressive is that the p-value is perfect.edu.116. Michael. and Squire. Generally speaking. Graph 1: Scatter Plot with Trend Line for Gini and GDPpercapita When graphed. the graph indicates that the Gini index will continue to decline as long as the economy is growing.
Model I has examined and explained the relationship between economic growth and income inequality. Now that the relationship between income inequality and economic growth. However. but will account for government aid. the results are telling. has a high Gini index. without adjusting for social spending. MODEL II 15 . especially considering the United States. the study on the relationship between economic growth and income inequality when government social spending is controlled for.unexpected. has been presented. but does not comment on specificities of the relationship. These results are very important for this research paper as it yields the makings of research answers. one of the wealthiest countries in this dataset. this regression analysis output only signifies that a fairly significant relationship exists. The model and regression analysis will be presented and recapitulated below. Model II will investigate this relationship once again. In Model II.
there is great strength in the association of these variables. Obviously. Alternatively. this also confirms the claim that government social spending does impact the relationship between economic growth and income inequality. and t scores are more important. the R Square.791. for every unit move in Gini. it is . As the R Square increased when compared to Model I. has improved dramatically. the beta coefficient was . This means that these variables together explain approximately 80 percent of the variance in Gini.193. Determining if this statistical analysis is notable will be verified by these statistical measures. GDP. Thus.In the Model Summary. GDP moves in the same direction approximately half of one 16 . However. there is x unit move in the independent. The coefficients of each independent variable will be investigated now as a means of providing greater depth and detail on the influence of government aid. significance. for every one unit move in the dependent (Gini). while the R Square is important. this depicts that the null hypothesis is correct only 20 percent of the time. when compared to Model I. Standardized beta coefficients indicate the relationship between each independent variable and the dependent variable. For the first independent variable. That is. the coefficients.
034. In both cases. a value well within the acceptable norms and is elucidatory of sound results. With both GDP and GDPChange in this model. when compared with Model I. the values for GDP are far stronger than the values in Model I. Because the results were so skewed and were impacting the other beta results. GDPChange has improved. This negative relationship is interesting. a better relationship for all the variables was established. The p-value for this coefficient is very low. negates any benefits of this variable.271. coming in at .372. the GDP rates also decreases (or inequality improves and growth rates improve).007. It is apparent that this variable. improved over Model I.120. the economic growth aspect was still fairly represented. the score is -. especially for this paper.223 for GDPchange. The fourth independent variable is SocialContributionsLCU. this variable was removed from Model II. a value well above the highest acceptable value for margin of error. When removed. The third independent variable is GDPpercapita. or instead Gini decreases and social contributions increase (similar to the relationship between Gini and GDPChange). a number representative of a solid relationship. the second independent variable. The beta coefficient was -. albeit in a very minor fashion. 17 . is now -2. a score well above the allowable norms for statistical significance. GDPpercapita was corrupting the entire study. The t-stat. The p-value for GDP is .885. It verifies the claim that as Gini increases. The t-stat is 1. The beta coefficient is fairly strong and is also negative. social contributions decreases. as Gini increases (more inequality). and for all intents and purposes.unit. The relationship is very interesting. The p-value is .
In Graph 2. the relationship becomes much more significant. Countries like Ukraine. The beta coefficient is -. because of the great disparity is GDP levels and levels of social contributions across the panel of countries included in this study.813. holds weight in improving ameliorating income inequality. contribute a fraction of their GDP to social issues. Simply increasing social contributions from 0 to 5 percent can result in an 8 point decrease in the Gini index. indicating that this relationship is 100% statistically significant. Interestingly. the p-value perfects itself. it is noteworthy to mention that increasing social contributions has a diminishing return in terms of lowering the Gini index. even less of an impact is made on contributions of more than 15 percent of the GDP. adjusting for this broad variance makes this relationship much more easily comparable. Contributing more than 10 percent seems to have less of an impact of lowering Gini rates. Naturally. it is clear that the Gini index decreases as the level of social contribution increases. and the t stat increases noticeably. It is apparent that a point exists (approximately 21 percent social contributions and 25 on the Gini index) at which. their Gini indices would decrease tremendously. The beta coefficient becomes more substantial. utilized as a percent of GDP as opposed to the aggregate amount in the local currency). The t stat is a strong -9. This variable has the strongest relationship with the Gini variable. which increased its social contribution by about 3 percent. even if small. when the amount of social contributions is normalized for a cross-country analysis (that is. if these countries increased their social contributions. The impact of social contributions. and El Salvador. Many countries included in this study.883. 18 . including Chile. The p-value is perfect. reduced their Gini index by about 8 points in 10 years. However.The fifth independent variable is SocialContributions%GDP.
irrespective of the amount of social contribution. as a country grows economically. its social contributions increases. the Gini index will not traverse. We cannot infer causality. This is fairly obvious. Below. Graph 2 highlights the relationship between the Gini index and government social spending. but the slope of the line is particularly noteworthy. Thus. the wealthier a country. the more it will contribute to social spending. Graph 3 (below) depicts the relationship between economic growth and social contributions. but the 19 . Simply stated. Graph 2: Gini/Social Contribution Line Graph with Trend Line Having presented this relationship. Towards the higher GDPpercapita rates. the fit line is much steeper when compared with the lower GDPpercapita rates.
at 20 . This method. the strength of an economy (or lack thereof) is related to the amount of social contributions. will allow the reader to fully understand this relationship. albeit slowly. social spending also increases. GDPpercapita. Concurrently. despite its obvious complexities. However. The purpose of this is to show the relationship between these three variables simultaneously. and Social Contributions as a percent of the GDP. The graph depicts the following: as a country grows economically. the Gini index increases. Graph 3: Economic Growth and Social Contributions Scatter Plot The below graph (Graph 4) presents the Gini index.results are telling. more effective than others.
First. this seems to be intuitive. as a country‟s economy grows. As an impoverished. it seems that social spending has great bearing on gross domestic product rates. Social Spending There are two significant lessons that were can infer from this model.a certain point. Economic Growth. they will be able to afford more money to allocate towards social issues. It makes sense that the link between GDP and Gini was strengthened when the social spending variable was added. Previous scholars have effectively argued the idea that increased economic growth often times occurs concurrently with an increase in social spending. Graph 4: Income Inequality. the Gini index begins to decrease. naturally. but 21 . while the social contributions increase in a more precipitous fashion. Also.
The graph below demonstrates this point clearly. In more wealthy countries. my hypothesis was both right and wrong. Though this seems counterintuitive. Second. the Gini index will decline by approximately 20 Gini points. then it is more likely that the benefits will favor the rich) seemingly yields two different research answers.burgeoning country must develop a political structure and functioning economy. As social contributions as a percent of the GDP increase. an increased ratio of social contributions leads to more income equality. the Gini index decreases. the benefits of growth will favor the rich. if a country grows economically. Unsurprisingly. the hypothesis (Adjusting for government social spending. That is. the graph indicates that if social contributions are increased by a 10 percent of the GDP. countries like Sweden and France. For example. Interestingly. the transitioning of a country from a rural agrarian economic to an urban industrialized country results in 22 . On the other end of the spectrum. the fit line (red dashed line) steeply decreases as social contributions increase. both of these contribute heavily to societal ills and have very low Gini indices (mid-twenties for both) In summation. This study has shown that as a country grows economically. the United States and Mexico contribute in a very minor fashion to social goods. As you can see. the benefits do not favor the wealthy and are as egalitarian as our society is capable of achieving. a wealthy and developed country must limit the affect of social ills. the Gini index (income inequality) increases. Thus. the relationship between the Gini index and the Social Contributions as a percent of the GDP is very interesting. depending on the approach at which it is analyzed. their Gini indices are generally high. In poorer countries.
an upward trending line represents the relationship. This paper has produced a result similar to the previous research answers. it seems that the jury is out on this study. concomitantly. 23 . at a certain point. ostensibly when a country is transitioning from the industrialization process. this is no real surprise. 45 Policy Implications There are many policy implications that can be deduced based on this analysis. yields an upward trend of the Gini rates. Previous scholarship has indicated that economic growth does not have an exact and systematic impact on income inequality. Either way.winners and losers. there is a decrease in the Gini index. That is. However. However. Government contributions to social spending are often times not the first priority because of other. the Gini index plummets as the amount of social contributions increases.25 However. including military and economic issues. more pressing issues. Interestingly. Again. and Squire 14. Ravallion. the enlargement of the economy allows more money to be spent in different places. especially in relation to the burgeoning field of economic growth and social spending. including social programs. when government social spending is included. Kuznets 11-12. different studies have generated different results. measured by increases in the GDP per capita. An increase in the strength of the economy. the results seem to follow a Kuznets-curve relationship. Further work needs to be done in this field. social spending also increases very slowly. The relationship between economic growth and income inequality presents a nonmonotonic Kuznets curve (inverse U) relationship. Further. I believe that this decrease in the impact of the Gini index is not because of the societal adjustment to 25 Bruno.
simply including more money as social contributions will not Kuznets 12 24 . Thus. generally speaking. as previously mentioned. it seems that poor countries that can provide more social contributions will ultimately be able to reduce the level of income inequality in their country. we see the strong (negative) correlation between amount of social contributions as a percent of the GDP and the Gini index. Even more interesting is that while the benefits of this practice are obviously more robust for poorer countries. many of which are in my dataset. In Graph 2. These redistributive social contributions are able to counteract high Gini indices brought on by shift to an urbanized and manufacturing economy. Lastly. 26 That is. among others. Based on this graphical breakdown.26 but rather. it is apparent that contributing more to social goods will stifle any increase in the Gini index. and South Africa. employing this practice (increasing social contributions) can significantly reduce the Gini index and/or maintain it at a certain level and prevent it from increasing in rich countries as well. Dominican Republic. which ultimately curbed the Gini index. irrespective of any economic growth or previous economic standing. the decreasing Gini index and its diminishing effect is a direct result of the increased investment of social contributions (Graph 4). regardless of the amount of social contributions. the Gini index can decline as social contributions increase. Based on the analysis. it is important to note that there is a point at which. This list of countries includes France. but increased social contributions. these social contributions will cause dramatic reductions in the Gini index. Further. This is obviously true as it was evidenced by numerous countries.industrialization and urbanization as postulated in previous literature on this subject. that grew economically. the Gini index will not continue to decline.
the inclusion of government 25 . This lethargic increase in social spending is purely derivative of an economy that needs to spend money in other areas. As a country grows economically. both variables move approximately the same distance. This section has briefly described the policy implications of this work. to say the least. ostensibly when a country is transitioning away from the industrialization process. the level of income inequality increases. Having some income inequality is normal and to be expected. 56 Concluding Comments This paper has presented the relationship between economic growth and income inequality when government social spending is adjusted for. especially recently. on the relationship between economic growth and income inequality. However. is practically impossible. social contributions slowly begin to increase.continually lower the Gini index and eventually make a country perfectly egalitarian (achieving a Gini index value of 0). These „take away points‟ yield many significant answers that are relevant to many countries across the world. that is. The results were very interesting. This. we can improve dramatically in the hopes for a brighter future. namely defense and infrastructure. By applying these lessons to our global community. the Gini index begins to noticeably decrease while the government social contributions increase precipitously. This is very significant and interesting as this seems to transpire equally. but in the opposite direction. However. simply stated. at a certain point. ensuring that government social contributions are relatively high (at approximately 10 percent of the GDP) will ensure low Gini indices occur in a country. While this is occurring. While studies have been very common.
this paper was simply not able to find. in two specific ways. would provide work that would be very prescriptively rich and offer great explanatory power. This paper has provided the groundwork for further study in this area. 26 . Second. quantify. studies that include more countries over longer periods need to be completed. while onerous. First.(redistributive) social spending as a control variable has been all-but-forgotten in economics literature. ranging from pensions to tax cuts. but more work needs to be done. because government social spending occurs in many different forms. Doing this. and include every single government social spending program into this paper.
27 . VARIABLES Independent Variables -GDP (in both models) GDP. I will use the World Economic Outlook Database published by the International Monetary Fund (International Monetary Fund 2008). This variable will calculate the overall change in GDP. which is explained in great depth earlier. my first variable. is the change of the gross domestic product of a country. This value in units of the local currency. divided by the total population. and the difference of the terms of trade. from the first measured year to the last measured year (in this case. the gross domestic product is a dollar value determination on how robust and healthy an economy actually is. This is the total gross domestic product. This will provide a determination of not only whether a country‟s economy grew or not. 1984-6 to 2004-6). this variable is the amount of contributions to social security and certain pension programs. This will indicate the average value for each person in an economy. government spending.Appendices Appendix 1: Data Description METHOD: Model I: Multivariate regression comparing economic growth and income inequality. Only used in the second model. This number yields the GDP per person. is the gross domestic product of a nation. Essentially. For this variable. For this variable. I will be calculating this growth. this is the total value of all private consumption. or lack thereof. but to what extent the country‟s economy changed during this period. The gross domestic product of a nation is the whole market value of all goods and services produced in a given country in a given year. investment. I will use data from the World Development Indicators database from the World Bank. my second variable. I will use the World Economic Outlook Database published by the International Monetary Fund (International Monetary Fund 2008). however. or GDP per capita. -GDPChange (in both models) GDPChange. -SocialContributionsLCU (only in Model II) SocialContributionsLCU is my fourth variable. -GDPpercapita (in both models) GDPpercapita is my third variable. On a very basic level. For this variable. of the GDP on my own (International Monetary Fund 2008). I will use data from the World Economic Outlook Database published by the International Monetary Fund for each country‟s GDP. Model II: Multivariate regression comparing economic growth and social spending with income inequality.
Canada. my fifth variable. Latvia. Burundi. with 0 representing a fully egalitarian society while 100 is a completely unequal society. Poland. Croatia. I will use the PovcalNet Database and the Global Development Indicators dataset. Chile. Peru. Armenia. Ivory Coast. Philippines. El Salvador. information from the Central Intelligence Agency (World Bank 2008. Madagascar. World Bank 2008. Dependent Variable -Gini (in both models) Gini. Venezuela. SocialContributions%GDP is the amount of social contributions as a percent of the country‟s gross domestic product. Tunisia. Ireland. By using this method. Spain. data from United Nations University-World Institute for Development Economics Research as part of the World Income Inequality Database. data from the Human Development Reports. I will use data from the World Development Indicators database from the World Bank. DATA: N: Forty (40) randomly selected countries (Austria. Sweden. Mexico. Costa Rica. United States. Lithuania. which are published by the United Nations Development Programme. “Human Development Report 2007/2008”. France. Using a scale 0-100. Hungary. Slovenia. Colombia. Jamaica. Kenya. Malaysia. Finland. For this variable. the data is normalized can yield more telling results. both from the World Bank. and data from the CIA World Factbook. my fifth variable. South Africa. this measure evaluates the level of income inequality in a country.-SocialContributions%GDP (only in Model II) Similar to the fourth variable. Dominican Republic. is the Gini Index. Guatemala. 2007. United Nations University-World Institute for Development Economics Research 2008). Estonia. Russia. For this variable. Kazakhstan. Central Intelligence Agency 2008. and Zambia) T: Two (2) different periods (1994-6 and 2004-6) 28 . Korea. Ukraine. Bulgaria.
Multivariate Regression Equation: Y = a + b1*X1 + b2*X2 + b3 * X3 + b4 * X4 + b5 * X5 29 . a multivariate regression was run between the Gini index and economic growth variables and social spending variables.Appendix 2: Methodology Using SPSS version 16.
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