Exploring the Two-Way Relationship between Income Inequality and Growth

Transcription

1 Journal of Advanced Managemen Scence Vol. 2, No. 1, March 214 Explorng he wo-way Relaonshp beween Income Inequaly and Growh Cheah Yng Lm and Sok Kun Sek School of Mahemacal Scences, Unvers Sans Malaysa, Penang, Malaysa Emal: educaon, prce level of nvesmen and rade openness have no sgnfcance mpac on nequaly. hese facors have mpacs on growh bu he mpacs vary across counres. Absrac We conduc emprcal analyses on he wo-way relaonshp beween nequaly and growh n hree groups of levels,.e. lower mddle, upper mddle and hgh counres. he daa s colleced for 31 counres, rangng from 199 o 211. Besdes, four varables are esed as deermnans of growh and nequaly. Applyng a panel daa approach, our resuls deec only one-way relaonshp,.e. growh nfluences nequaly. here s no sgnfcance effec from nequaly on growh across hree groups of counres. Our resuls also reveal ha enrollmens of prmary educaon, prce level of nvesmen and rade openness have no sgnfcance mpac on nequaly. hese facors have mpacs on growh bu he mpacs vary across counres. II. A. he Measuremen of Income Inequaly Lorenz curve and Gn coeffcen are wo ways of measuremens commonly used o measure nequaly. As n [1] Lorenz curve shows he relaonshp beween percenage of populaon and he percenage of oal he populaon receved. he horzonal axs represens he percenage of populaon. he vercal axs shows he percenage of oal ha receved by he percenage of populaon consdered. Boh of he varables on he horzonal axs and vercal axs mus be ordered from he lowes o he hghes. Index erms economc growh, nequaly, Gn ndex, panel daa, nvered-u Kuznes curve I. INRODUCION he sudes concernng he relaonshp beween nequaly and economc growh had been conduced over he las half cenury. Economc growh s he ncrease n he amoun of producon of goods and servces n an economy over a ceran perod of me. Economc growh can be measured hrough he real gross domesc produc (real GDP) or real per capa gross domesc produc (real per capa GDP). Income nequaly s measured by Gn ndex. he hgher he value of Gn ndex means he hgher n nequaly or he larger of he gap beween he rch and he poor. Boh varables are beleved o be relaed snce hgher nequaly s ofen found n lower developed counres. Mos sudes focused n a one-way regresson,.e. eher o sudy he mpac of growh on nequaly or he mpac of nequaly on growh. In hs paper, we seek o nvesgae he relaonshp usng wo-way approach. he sudy s focused on hree groups of levels,.e. lower mddle, upper mddle and hgh groups. Apar from hs, we also seek o reveal he facors ha deermne he relaonshp of nequaly and growh. Applyng a panel daa approach, our resuls only deec one-way relaonshp,.e. growh nfluences nequaly. We fal o deec sgnfcance mpac from nequaly on growh across 3 groups of counres. Enrollmens of prmary Fgure 1. Lorenz curve. As shown n Fg. 1, he dashed lne represens a perfecly equal dsrbuon n an economy and mples ha every person n he populaon has he same. By conras, he horzonal axes and he vercal axes, whch are he lnes of perfec nequaly, represen a perfecly unequal dsrbuon n an economy. In hs case, only one person has all he and all ohers have none. he nequaly of he dsrbuon s shown by he dsance of he Lorenz curve from he lne of perfec equaly. he nequaly becomes hgher f he Lorenz curve bends furher away from he lne of perfec equaly (45 degree lne) as n [2]. Gn coeffcen s a measuremen of nequaly based on Lorenz curve, whch ranges beween and 1. Gn coeffcen wh represens perfec equaly Manuscrp receved Augus 1, 213; revsed December 12, 213 do: /joams LIERAURE REVIEW 33

2 Journal of Advanced Managemen Scence Vol. 2, No. 1, March 214 and 1 represens perfec nequaly. he larger he Gn coeffcen over means he hgher he nequaly. B. Invered Kuznes Curve Kuznes depcs he relaonshp beween he nequaly and growh n an nvered U-shaped curve as shown n Fg. 2. Accordng o Kuznes, developmen nvolves he shf of populaon from he agrculural secor (low wage-rural secor) o ndusral secor (hghwage urban secor). In he early sages of developmen, movemens from agrculure o ndusral secor would ncrease he of he populaon, bu he for hose who say n agrculure secor would no ncrease as fas as hose n ndusral secor and hs would ncrease he nequaly of he populaon. Whle a he laer sages, he aggregae of he populaon would sll ncrease, bu he nequaly decrease as he labor force n ndusral secor ncrease and decrease n agrculure secor. Income Inequaly Fgure 2. Kuznes nvered U curve. Source: Mekenbayeva and Karakuş (211). C. Emprcal Fndngs Income per Capa Prevous sudes repored dfferen relaonshp beween nequaly and growh whch devaes from he nvered Kuznes U curve. Some auhors fnd a negave relaonshp beween nequaly and economc growh, whle some oban a posve relaonshp beween he boh varables. For example, [3] conduced he panel daa analyss n 45 counres for he perod of Hs resul showed ha nequaly has a posve effec on economc growh n he shor and medum erms. On he oher hand, [4] focused hs sudes n 2 developng counres for he perod of and hs resul also suppored for he posve relaonshp beween growh and nequaly. However, [5] found negave relaonshp beween he wo varables n hs sudy n 3117 Uned Saes counes for he perod of Oher han ha, some sudes consder ha boh negave and posve relaonshps are possble depend on he level of developmen of he counres nvolved. For nsance, [1] found posve relaonshp beween nequaly and economc growh n developed counres whle negave relaonshp n developng counres n her sudy n 5 developed counres and 4 developng counres for he perod of Comparng he resuls ha focused on developed versus developng counres, mos of he researchers fnd a negave effec of nequaly on economc growh n developng counres or poorer counres and a posve relaonshp beween he boh varables n developed or rcher counres. hese researchers nclude [1], [6] and [7] Mnory papers show an nvered-u shaped relaonshp beween nequaly and economc growh. hese papers nclude [8] and [9]. Besdes ha, [1] shows an ordnary U-curve relaonshp beween boh varables. here are a number of deermnans ha had been found o affec he relaonshp beween nequaly and economc growh. For nsance, [11] found ha more physcal and human capal, openness o rade and hgher governmen spendng would reduce nequaly and enhance economc growh. On he oher hand, [7] found ha cred marke mperfecon, polcal economy, socal unres and savng raes are among he deermnans ha affec he relaons beween nequaly and growh whle [12] hnk ha measuremen error s an mporan facor ha affecs he relaonshp beween nequaly and growh besdes polcal economy and wealh effec. Besdes ha, [13] has evdence o show ha regonal producve srucure specfcally agrculural secor would change he relaon of he boh varables from negave o posve for he boom of he earnngs dsrbuon whle [14] found ha he nfluence of nequaly on growh s affeced by urbanzaon and socal coheson. III. DAA Before conducng he analyses, we caegorze he counres no hree groups accordng o he World Bank s classfcaon of counres by group usng 211 daa on gross naonal (GNI) per capa. In hs sudy, he group of low s no consdered due o he daa avalably problem. here are 8 counres, 11 counres and 12 counres for he group of lower mddle, upper mddle and hgh respecvely. he counres ha nclude n hs analyss are shown n able I. he daa used n hs analyss are from year 199 o 211. Daa on growh rae of GDP per capa, percenage of gross enrollmen n prmary educaon and ferly rae are aken from he World Bank. Daa on prce level of nvesmen and rade openness are aken from Penn World ables. he Gn daa are aken from wo sources, World Bank and European Unon Sascs on Income and Lvng Condons (EU-SILC). he followng able shows he un of measuremen of each daa used. ABLE I. Income group Lower mddle Upper mddle Hgh CLASSIFICAION OF COUNRIES BASED ON INCOME GROUP Counres Armena, Bolva, El Salvador, Georga, Honduras, Moldova, Paraguay, Ukrane. Argenna, Brazl, Colomba, Cosa Rca, Domncan Republc, Kazakhsan, Peru, Romana, Russan Federaon, Uruguay, Bulgara. Poland, Belgum, Denmark, Esona, Greece, Span, France, Luxembourg, Ausra, Fnland, Sweden, Uned Kngdom. 34

3 Journal of Advanced Managemen Scence Vol. 2, No. 1, March 214 No. ABLE II. UNI OF MEASUREMEN OF DAA Daa 1. Growh rae of GDP per capa (Growh) % Un of measuremen 2. Gross enrollmen n prmary educaon (Edu) % 3. Ferly rae (Fer) % 4. Prce level of nvesmen (PLI) % 5. rade openness (Open) % 6. Income nequaly (Gn) Index IV. MEHODOLOGY Smulaneous equaons model s used n hs sudy as here are wo equaons nvolved,.e. Gn (nequaly of ) and growh. hese equaons are: Growh Edu PLI Open, 1 2, 3, 4, Fer 5, 6, + Growh Gn 1, 1, Gn Edu PLI, 7 8, 9, Open Fer Growh 1, 11, 12, Gn 2, 1, where Growh, and Gn are he endogenous varables, Edu,, PLI,, Open, and, (1) (2) Fer are he exogenous varables, Gn, 1 and Growh, 1 are he lagged endogenous varables and, s he unobserved error erm. We esmae he equaon (1) and (2) smulaneously usng generalzed mehod of momens (GMM). A. Generalzed Mehod of Momens (GMM) Ordnary Leas Squares (OLS) s based or msleadng when endogeney problem arses. Endogeney problem occurs when he assumpon of cov( x,,, ) s volaed. When hs problem arses, one should apply GMM as he nsrumen varables n GMM help o conrol he relaon beween x, and, so ha cov( x, ) as n [15].,, Suppose here are n equaons o be esmaed, he equaons can be wren n marx noaon as: y x (3),,, where 1,..., n s he equaon number, and 1,..., s he number of observaons. y, s n 1 vecor of dependen varables, x, s a n k marx of ndependen varables,, s unobserved error erm and s a k 1 vecor of unknowns parameer. Now, assume here s a n 1 dmensonal ( n k) funcon f (, y, x, z ) where z s a ( n 1 ) vecor of nsrumen varables. he man dea of GMM s o selec a se of parameer esmaes ha mach he heorecal relaon as close as possble or he esmaed parameers are closely equal o he acual parameers. If s he acual value of, we seek o acheve he followng momen condon: = E f y x z E f (, y, x, z ) (,,, ) (4) where s a ( n 1) vecor of unknown parameers. he heorecal momen s replaced by he sample momen of observaons: 1 f (, y, x, z ) f (, y, x, z ) = (5) 1 If he number of momens s equal o he number of unknown parameers ( n k), he GMM esmaor ˆ can be obaned by solvng f ( ˆ, y, x, z ). When he equaons are over-denfed, whch means here are more momen han unknown parameers ( n k), here wll be no unque soluon. he problem s solved by mnmzng he weghed dsance beween he heorecal and acual values by consderng k lnear combnaon of he n momen condon: Q(, y, x, z ) (6) mn f (, y, x, z ) W (, y, x, z ) f (, y, x, z ) where W s akng as he n n posve defne weghng marx. A necessary condon o oban an effcen esmae of s o se W as he nverse of he covarance marx of he sample momens. If he opmal weghng marx s W lm. E m, y, x, z m, y, x, z he followng mnmzaon problem for GMM esmaes wll be obaned: Q(, y, x, z ) 1 mn f (, y, x, z ) W f (, y, x, z ) We expec he law of large numbers holds f saonary and m, y, x, z s connuous, p where m(, y, x, z ) Em, y, x, z In he case where m, y, x, z. (7) z s s no serally correlaed, he opmal weghng marx W can be consanly esmaed by: 35

4 Journal of Advanced Managemen Scence Vol. 2, No. 1, March 214 ˆ 1 p W f (, y, x, z ) f (, y, x, z ) W (8) 1 where ˆ s he conssen esmae of as n [16]. B. J Sasc (J-es) J-es s used o es he valdy of over-denfyng resrcons. he es s appled o check he orhogonaly condons and correc model specfcaon under overdenfcaon case such ha cov(, z ). In order o ge he denfed GMM esmaor, he number of nsrumen varables should a leas equal or greaer han he number of parameers ( n k). he J-sasc mulpled by he sze of observaons ( ) s an asympocally freedom. 2 n k dsrbuon wh ( n k) degrees of a 1 2 nk H ˆ,, ˆ ˆ,,. f, y x z W f, y x z he man dea of J-es s o check f he sample momens of f ( ˆ, y, x, z ) are expeced o be zero f he populaon momens E f y x z (9) (,,, ). he valdy of over-denfyng resrcons s sasfed when one canno rejec he null hypohess of vald overdenfcaon, whch means he nsrumen varables are good as n [16]. Parameers V. RESUL ABLE III. SUMMARY OF RESUL OF ESIMAION Growh equaon Consan Edu PLI Open Fer Gn Growh (-1) Lower mddle *** *** ** * Upper mddle ** *** Hgh ** * -.714***.85* R-square Gn equaon Consan Edu PLI Open Fer Growh Gn (-1) *** * *** **.9535*** R-square J-sa Noes: *** denoes he 1% sgnfcan level. ** denoes he 5% sgnfcan level. * denoes he 1% sgnfcan level. he resuls of esmaon are summarzed n able III. he frs column s he resul for lower mddle group and he second and hrd columns are resuls for upper mddle and hgh groups respecvely. he resuls of growh equaon show ha nequaly or Gn does no have sgnfcance mpac on growh movemen for all groups. However, growh s mosly deermned by s prevous growh as he ncrease of 1% n Growh (-1) leads o sgnfcance ncrease of.33% and.4% n curren growh n lower mddle and upper mddle groups respecvely. Prevous growh does no have sgnfcance mpac on curren growh n hgh group. he resuls of Gn equaon show ha nequaly s hghly mpaced by prevous nequaly. 1% ncrease n prevous nequaly or Gn (-1) wll lead o.93%, 1.2% and.95% ncrease n curren nequaly n lower mddle, upper mddle and hgh groups respecvely. Growh only shows sgnfcance mpac on deermnng nequaly n hgh group bu no he oher groups. 1% ncrease n growh leads o.38% declne n Gn or mprovemen n nequaly n hgh group. Besdes, we also nvesgae f he four varables of Edu, PLI, Open and Fer have sgnfcance mpac on growh and nequaly. Our resuls reveal ha hese four varables do no have sgnfcance mpac on deermnng he nequaly n all groups bu may have dfferen effecs on growh across groups. I s surprsed ha oal enrollmen rae as % on populaon (Edu) has negave mpac on growh n lower mddle group. Perhaps prmary educaon s no able o produce sklls/ knowledge for labour o mprove producon and growh. On he oher hand, rade openness leads o negave mpac on growh for lower mddle group bu mposes posve mpac on growh n hgh group. hs phenomenon s due o producers n lower group have lower compeve power and hey open radng may deerorae her busness. PLI s measured as purchasng power pary over nvesmen dvded by he exchange rae mulpled by 1. PLI has negave mpac on growh n all groups. hs may be explaned by hgher purchasng power leads o hgher consumpon, hence hgher mpor relave o expor and hs leads o lower or growh. he J-sa shows ha all esmaons fulfll he over denfcaon requremen. he R-square shows ha he nequaly equaon can be explaned by (above 87%) by he endogenous varables. However, he R- square values are relavely low for growh equaon. here may be oher mporan facors ha no nclude n hs equaon bu have sgnfcance mpac on growh. VI. CONCLUSION hs sudy nvesgaes he wo-way relaonshp beween nequaly and economc growh usng a panel of 31 counres over he perod 199 o 211. he counres are classfed no hree groups whch are lower mddle, upper mddle and hgh group accordng o counres classfcaon from World Bank. GMM esmaon approach s appled o 36

5 Journal of Advanced Managemen Scence Vol. 2, No. 1, March 214 provde conssen esmaes when here s an endogeney problem. Besdes ha, hs sudy nvesgaes four oher varables o esmae her possble mpacs on nequaly and economc growh,.e. enrollmen of prmary educaon, ferly rae, prce level of nvesmen and rade openness. Includng hese varables n esmaon could nfluence he relaonshp beween nequaly and growh. he resuls of esmaon ndcae ha here s a oneway relaonshp beween nequaly and growh,.e. nequaly has no sgnfcan mpac on growh n all groups bu growh has posve sgnfcan mpac on nequaly n hgh group. he movemens of nequaly and growh do no mpaced by groups as groups do no lead o sgnfcan dfferences n her movemens. Enrollmens of prmary educaon, prce level of nvesmen and rade openness have no sgnfcan mpac on nequaly. On he oher hand, enrollmens of prmary educaon, prce level of nvesmen and rade openness have sgnfcan mpac on growh bu he mpacs vary across groups. REFERENCES [1] K. Mekenbayeva and S. B. Karakuş, Income nequaly and economc growh: Enhancng or reardng mpac? n Proc. 14h Inernaonal Suden Conference, Izmr, urkey, May [2] R. B. Ekelund and R. D. ollson, Economcs Prvae Markes and Publc Choce, Uned Saes: Addson-Wesley, [3] K. J. Forbes, A reassessmen of he relaonshp beween nequaly and growh, he Amercan Economc Revew, vol. 9, pp , 2. [4] A. Heyse, Income dsrbuon and economc growh n developng counres: An emprcal analyss, Indan Journal of Economcs and Busness, pp , 26. [5] J. Roh, How does nequaly affec he growh of U.S. counes? Honors Projecs, Paper 32, 21. [6] A. Caselló-Clmen, Inequaly and growh n advanced economes: An emprcal nvesgaon, n Proc. 4h ECFIN Annual Research Conference, Brussels, Belgum, Ocober [7] R. J. Barro, Inequaly and growh n a panel of counres, Journal of Economc Growh, vol. 5, pp. 5-32, 2. [8] A. V. Banerjee and E. Duflo, Inequaly and growh: Wha can he daa say? Journal of Economc Growh, vol. 8, pp , 23. [9] B. Al, Kuznes hypohess revsed n a developng economy, Inernaonal Research Journal of Fnance and Economcs, vol. 72, no. 5, pp. 2-61, 211. [1] G. Angeles-Casro, he relaonshp beween economc growh and nequaly: Evdence from he age of marke lberalsm, PhD hess, Unversy of Ken, 26. [11] A. abassum and M.. Majeed, Economc growh and nequaly relaonshp: Role of cred marke mperfecon, he Paksan Developmen Revew, vol. 47, pp , 28. [12] Banerjee, V. Abhj, and E. Duflo, Inequaly and growh: Wha can he daa say? Journal of Economc Growh, vol. 8, pp , 23. [13] M. C. N. Smões, J. A. S. Andrade, and A. P. S. Duare, A regonal perspecve on nequaly and growh n Porugal usng panel conegraon analyss, n Proc. 14h INFER Annual Conference, Llle, France, 212, [14] B. Fallah and M. Parrdge, he elusve nequaly-economc growh relaonshp: Are here dfferences beween ces and he counrysde? he Annals of Regonal Scence, vol. 41, pp , 26. [15] S. Vochocsky, Does he profle of nequaly maer for economc growh? Dsngushng beween he effecs of nequaly n dfferen pars of he dsrbuon, Journal of Economc Growh, vol. 1, pp , 25. [16] S. K. Sek, Economerc srucures, he naure of shocks and he role of exchange rae n he moneary polcy formaon n he emergng counres of Eas-Asa, German: VDM Verlag Dr. Müller, 29. Cheah Yng Lm s a maser suden n he program of sascs, Unvers Sans Malaysa. he resuls summarzed n hs paper are par of her maser dsseraon. Sok Kun Sek was born n he cy of Malacca, Malaysa. She compleed her prmary, secondary and hgh school n Malacca. She obaned her Bachelor Degree n Economcs from he Naonal Unversy of Malaysa (Selangor, Malaysa), and Maser n Economcs n he same unversy, Afer ha she furhered her docoral sudy n Quanave Economcs a Chrsan-Albrechs- Unversy of Kel, (Kel, Germany), Currenly she s a Senor Lecurer a School of Mahemacal Scences, Unvers Sans Malaysa (Penang, Malaysa). Her man neres s economercs/ me seres and moneary polcy and exchange rae. Dr. Sek has joned IEEE snce 21. Besdes a member of IEEE snce 21, Dr. Sek s also a lfe member of Malaysan Mahemacal Socey (PERSAMA) snce 21. She became a member of Inernaonal Economcs Developmen Research Cener (IEDRC) snce year 211. In addon, she also joned he Economerc Socey snce