Main Article Content
Abstract
Purpose ― The paper queries the impacts of income inequality on economic growth in selected advanced and emerging market economies by adopting nonlinearity and endogeneity.
Methods ― This research analysis is based on a balanced panel from 1996 to 2018 and employs the dynamic panel threshold analysis after baseline estimations with the fixed-effect, system Generalized Method of Moments, and difference Generalized Method of Moments.
Findings ― This study finds a nonlinearity between income inequality and economic growth. Income inequality has a significant threshold effect on the growth of both panels. Besides, the threshold effect of emerging market countries is higher than the level for advanced countries. This means emerging market economies are negatively affected above the estimated threshold value according to the advanced economies.
Implication ― This paper supports that inequality may harm much more economic growth above a specific level. On the other hand, these distorting effects are related to the other economic issues of countries, such as government spending, inflation, export of goods and services, gross fixed capital formation, and foreign direct investment.
Originality ― This paper contributes to the literature by focusing on the nonlinear effects of income inequality and different aspects of economic growth above or below the estimated threshold value, thereby providing cross-country comparability and endogeneity.
Keywords
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References
- Aktas, E. E. (2019). The relationship between income inequality and economic growth: An empirical investigation. Hacettepe University.
- Alesina, A., & Perotti, R. (1994). The political economy of growth: A critical survey of the recent literature. The World Bank Economic Review, 8(3), 351–371. https://doi.org/10.1093/wber/8.3.351
- Alesina, Alberto, & Rodrik, D. (1994). Distributive politics and economic growth. Quarterly Journal of Economics, 109(2), 465–490. https://doi.org/10.2307/2118470
- Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
- Banerjee, A., & Duflo, E. (2003). Inequality and growth: What can the data say? Journal of Economic Growth, 8(3), 267–299. https://doi.org/10.3386/w7793
- Birdsall, N., Pinckney, T. C., & Sabot, R. (1996). Why low inequality spurs growth: Savings and investment by the poor (No. 327; Inter-American Development Bank Working Paper).
- Birdsall, Nancy, Ross, D., & Sabot, R. (1995). Inequality and growth reconsidered: Lessons from East Asia. World Bank Economic Review, 9(3), 477–508.
- Caner, M., & Hansen, B. E. (2004). Instrumental variable estimation of a threshold model. Econometric Theory, 20(5), 813–843. https://doi.org/10.1017/S0266466604205011
- Chletsos, M., & Fatouros, N. (2016). Does income inequality matter for economic growth: An empirical investigation (No. 75477; Munich Personal RePEc Archive Working Paper).
- Cho, D., Kim, B. M., & Rhee, D. E. (2014). Inequality and growth: Nonlinear evidence from heterogeneous panel data (No. 14–01; Korea Institute for International Economic Policy Working Paper). https://doi.org/10.2139/ssrn.2533846
- Cingano, F. (2014). Trends in income inequality and its impact on economic growth (No. 163; OECD Social Employment and Migration Working Papers). https://doi.org/10.1787/5JXRJNCWXV6J-EN
- Delbianco, F., Dabús, C., & Caraballo, M. A. (2014). Income inequality and economic growth: New evidence from Latin America. Cuadernos de Economía, 33(63), 381–398. https://doi.org/10.15446/cuad.econ.v33n63.45338
- Doytch, N., & Uctum, M. (2011). Does the worldwide shift of FDI from manufacturing to services accelerate economic growth? A GMM estimation study. Journal of International Money and Finance, 30(3), 410–427. https://doi.org/10.1016/j.jimonfin.2011.01.001
- Fawaz, F., Rahnama, M., & Valcarcel, V. J. (2014). A refinement of the relationship between economic growth and income inequality. Applied Economics, 46(27), 3351–3361. https://doi.org/10.1080/00036846.2014.929624
- Forbes, K. J. (2000). A reassessment of the relationship between inequality and growth. American Economic Review, 90(4), 869–887. https://doi.org/10.1257/aer.90.4.869
- Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345–368. https://doi.org/10.1016/S0304-4076(99)00025-1
- Hansen, B. E. (2000). Sample splitting and threshold estimation. Econometrica, 68(3), 575–603. https://doi.org/10.1111/1468-0262.00124
- Khalifa, S., & El Hag, S. (2010). Income disparities, economic growth and development as a threshold. Journal of Economic Development, 35(2), 23–36. https://doi.org/10.35866/caujed.2010.35.2.002
- Knowles, S. (2005). Inequality and economic growth: The empirical relationship reconsidered in the light of comparable data. The Journal of Development Studies, 41(1), 135–159. https://doi.org/10.1080/0022038042000276590
- Kolev, G., & Niehues, J. (2016). The inequality-growth relationship an empirical reassessment (7/2016; German Economic Institute Working Paper).
- Kremer, S., Bick, A., & Nautz, D. (2013). Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics, 44(2), 861–878. https://doi.org/10.1007/s00181-012-0553-9
- Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1–28. https://doi.org/10.2307/2118443
- Lahouij, H. (2017). The effects of income inequality on economic growth evidence from MENA countries (5433/4; 2017 Awards for Excellence in Student Research and Creative Activity Documents).
- Li, H., & Zou, H. (1998). Income inequality is not harmful for growth: Theory and evidence. Review of Development Economics, 2(3), 318–334. https://doi.org/10.1111/1467-9361.00045
- Michálek, A., & Výbošťok, J. (2019). Economic Growth , Inequality and Poverty in the EU. Social Indicators Research, 141. https://doi.org/10.1007/s11205-018-1858-7
- Milanovic, B. (2016). Global inequality: A new approach for the age of globalization (1st ed.). Harvard University Press.
- Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.
- Saint-Paul, G., & Verdier, T. (1993). Education, democracy and growth. Journal of Development Economics, 42(2), 399–407. https://doi.org/10.1016/0304-3878(93)90027-K
- Solt, F. (2020). Measuring income inequality across countries and over time: The standardized world income inequality database. Social Science Quarterly, 101(3), 1183–1199.
- Todaro, M. P., & Smith, S. C. (2012). Economic development (11th ed.). Pearson Education Limited.
- Wahiba, N. F., & Wariemmi, M. E. (2014). The relationship between economic growth and income inequality. International Journal of Economics and Financial Issues, 4(1), 135–143.
- Yang, Y., & Greaney, T. M. (2017). Economic growth and income inequality in the Asia-Pacific region: A comparative study of China, Japan, South Korea, and the United States. Journal of Asian Economics, 48, 6–22. https://doi.org/10.1016/j.asieco.2016.10.008
References
Aktas, E. E. (2019). The relationship between income inequality and economic growth: An empirical investigation. Hacettepe University.
Alesina, A., & Perotti, R. (1994). The political economy of growth: A critical survey of the recent literature. The World Bank Economic Review, 8(3), 351–371. https://doi.org/10.1093/wber/8.3.351
Alesina, Alberto, & Rodrik, D. (1994). Distributive politics and economic growth. Quarterly Journal of Economics, 109(2), 465–490. https://doi.org/10.2307/2118470
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Banerjee, A., & Duflo, E. (2003). Inequality and growth: What can the data say? Journal of Economic Growth, 8(3), 267–299. https://doi.org/10.3386/w7793
Birdsall, N., Pinckney, T. C., & Sabot, R. (1996). Why low inequality spurs growth: Savings and investment by the poor (No. 327; Inter-American Development Bank Working Paper).
Birdsall, Nancy, Ross, D., & Sabot, R. (1995). Inequality and growth reconsidered: Lessons from East Asia. World Bank Economic Review, 9(3), 477–508.
Caner, M., & Hansen, B. E. (2004). Instrumental variable estimation of a threshold model. Econometric Theory, 20(5), 813–843. https://doi.org/10.1017/S0266466604205011
Chletsos, M., & Fatouros, N. (2016). Does income inequality matter for economic growth: An empirical investigation (No. 75477; Munich Personal RePEc Archive Working Paper).
Cho, D., Kim, B. M., & Rhee, D. E. (2014). Inequality and growth: Nonlinear evidence from heterogeneous panel data (No. 14–01; Korea Institute for International Economic Policy Working Paper). https://doi.org/10.2139/ssrn.2533846
Cingano, F. (2014). Trends in income inequality and its impact on economic growth (No. 163; OECD Social Employment and Migration Working Papers). https://doi.org/10.1787/5JXRJNCWXV6J-EN
Delbianco, F., Dabús, C., & Caraballo, M. A. (2014). Income inequality and economic growth: New evidence from Latin America. Cuadernos de Economía, 33(63), 381–398. https://doi.org/10.15446/cuad.econ.v33n63.45338
Doytch, N., & Uctum, M. (2011). Does the worldwide shift of FDI from manufacturing to services accelerate economic growth? A GMM estimation study. Journal of International Money and Finance, 30(3), 410–427. https://doi.org/10.1016/j.jimonfin.2011.01.001
Fawaz, F., Rahnama, M., & Valcarcel, V. J. (2014). A refinement of the relationship between economic growth and income inequality. Applied Economics, 46(27), 3351–3361. https://doi.org/10.1080/00036846.2014.929624
Forbes, K. J. (2000). A reassessment of the relationship between inequality and growth. American Economic Review, 90(4), 869–887. https://doi.org/10.1257/aer.90.4.869
Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345–368. https://doi.org/10.1016/S0304-4076(99)00025-1
Hansen, B. E. (2000). Sample splitting and threshold estimation. Econometrica, 68(3), 575–603. https://doi.org/10.1111/1468-0262.00124
Khalifa, S., & El Hag, S. (2010). Income disparities, economic growth and development as a threshold. Journal of Economic Development, 35(2), 23–36. https://doi.org/10.35866/caujed.2010.35.2.002
Knowles, S. (2005). Inequality and economic growth: The empirical relationship reconsidered in the light of comparable data. The Journal of Development Studies, 41(1), 135–159. https://doi.org/10.1080/0022038042000276590
Kolev, G., & Niehues, J. (2016). The inequality-growth relationship an empirical reassessment (7/2016; German Economic Institute Working Paper).
Kremer, S., Bick, A., & Nautz, D. (2013). Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics, 44(2), 861–878. https://doi.org/10.1007/s00181-012-0553-9
Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1–28. https://doi.org/10.2307/2118443
Lahouij, H. (2017). The effects of income inequality on economic growth evidence from MENA countries (5433/4; 2017 Awards for Excellence in Student Research and Creative Activity Documents).
Li, H., & Zou, H. (1998). Income inequality is not harmful for growth: Theory and evidence. Review of Development Economics, 2(3), 318–334. https://doi.org/10.1111/1467-9361.00045
Michálek, A., & Výbošťok, J. (2019). Economic Growth , Inequality and Poverty in the EU. Social Indicators Research, 141. https://doi.org/10.1007/s11205-018-1858-7
Milanovic, B. (2016). Global inequality: A new approach for the age of globalization (1st ed.). Harvard University Press.
Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.
Saint-Paul, G., & Verdier, T. (1993). Education, democracy and growth. Journal of Development Economics, 42(2), 399–407. https://doi.org/10.1016/0304-3878(93)90027-K
Solt, F. (2020). Measuring income inequality across countries and over time: The standardized world income inequality database. Social Science Quarterly, 101(3), 1183–1199.
Todaro, M. P., & Smith, S. C. (2012). Economic development (11th ed.). Pearson Education Limited.
Wahiba, N. F., & Wariemmi, M. E. (2014). The relationship between economic growth and income inequality. International Journal of Economics and Financial Issues, 4(1), 135–143.
Yang, Y., & Greaney, T. M. (2017). Economic growth and income inequality in the Asia-Pacific region: A comparative study of China, Japan, South Korea, and the United States. Journal of Asian Economics, 48, 6–22. https://doi.org/10.1016/j.asieco.2016.10.008