During 1980s empirical growth models developed depending entirely on the techniques of new econometric development along with increasing computer power. However, those models required more sources of economic data. In this context, economist Robert Barro provided an essential paper, named, ‘Economic Growth in a Cross-Section of Countries’. The paper was published in Quarterly Journal of Economics in the year 1991 (Barro 1996). According to the author, there are various key factors that can help an economy to determine comparative rates of growth. Through applying various attempts, those chief factors can be isolated. Those attempts involved extending concept of growth considering some variables, such as labour supply and capital accumulation. In addition to this, the author also considers other fundamental factors with the help of which the economy can determine investment rates as well as changes within the labour market (Ravallion 2018). The other essential side of these growth models are to find out new growth theories, which will be more convincing compare to other neo-classical growth model developed by Solow. This growth model can be divided into four aspects, which are, trade, institutions, inequality and ecological issues (World Economic Forum 2018). However, this essay considers inequality to discuss further with the help of two case studies.
There are various empirical evidences, which intend to decide that whether inequality helps an economy to grow or not. However, economists remain unable to provide an accurate outcome regarding this issue. During the early decade of nineties, researchers observed a negative correlation between wealth inequality and economic growth. In this context, investment rates earned significant importance. Therefore, various previous research works observed that, ceteris paribus, some countries experienced income inequality by large extend during 1960 and consequently experienced lower growth rates regarding per capita income during the period 1960 to 1985 (Marginson 2018). To measure income inequality, researchers use the Gini coefficient. It is a statistical measurement through which gauge of economic inequality can be measured. This inequality comes through the form of income distribution of wealth distribution within the population.
Different economists adopt different models of data analysis. It is observed that calculations of panel data models hay provide better outcome compare to that of cross-sectional analysis. Inequality and growth can be discussed on Korea and the Philippines during 1960s. In this beginning of this period, South Korea as well as the Philippines experienced similar economic condition based on economic aspects, such as, population, GDP per capita, primary as well as secondary school enrolment and urbanisation (Havranek et al. 2015). The Philippines experienced higher GDP in manufacturing sector though in the context of international trade, both countries exported same proportions of manufacturing products and primary commodities. Therefore, the growth pattern of both countries was almost similar. However, Korea grown miraculously in the next quarter on an average of 6 percent per year while the Philippines experienced a slower growth rate by 2 percent. With the help of statistical data one can understand that the Philippines experienced unequal distribution of income and consequently the Lorenz curve of this country lies below the same of Korea throughout the period. In 1965, the Gini Coefficient of Korea was 34.34% while that of the Philippines was 51.32%. Moreover, the value of this coefficient of Korea in the year 1988 was 33.64% while that for Philippines was 45.73%. Therefore, the Gini coefficient remained 17 percent higher while the value of standard deviation s was 1.8 based on the world distribution of Gini (Coady and Dizioli 2018). Most interest part of this distribution is that the income share ratio on the bottom 20% and the top 20% was around double of the Philippines. This discrimination can be observed on the wealth inequalities. Considering the farm land, the Gini coefficient for Korea was 38.7 % while that for the Philippines was 53.4 % in the year 1961 and 1960, respectively. From these two figures it can be said that Korea had comparatively less inequality in wealth compare to the Philippines during the specified period.
The impact of inequality and economic growth can be described in the context of Nigeria. The term ‘inequality’ defines the difference of living standard of population across the country. In is this context, it can be observed that developing countries mostly experience unequal societies by large extend. Such inequalities can be observed in the form of wealth, gender, health as well as income. However, the mostly seen inequality over the world is income. This inequality represents as the disparity between income of rich people and poor people within a society. This phenomenon can be seen in most of the developing countries and consequently this has become a serious issue among policy makers of those countries. This is also true for Nigeria. This issue rose mainly during the period 1985 and 2004 when the Gini coefficient of this country increased from 0.43 % to 0.49 % (Dabla-Norris et al. 2015). As a result, the country ranked as one of the most unequal countries across the world. One of the chief reasons behind this inequality is increasing corruption within the country as well as absence of fair distribution related to human as well as economic resources. Economic growth does not consider only the increase in per capita income of a country. Rather, this economic phenomenon also indicates an improvement in standard of living and welfare of citizens in a country. Considering Nigeria, a disconnection can be observed between economic development and growth as it does not provide any guarantee for the economic development (Temple 1999). This happens due to an uneven distribution of income between poor and rich within the country.
Nigeria is one the largest countries in Africa where the number of population is around 173 million. This largest country contains 43 % of total population of Africa. In addition to this, the country is the biggest exporter of this continent and possesses the largest reserve of natural gas. Moreover, Nigeria enriches with natural resources and human resources. The Human Development Report (2015) represents that the value of Human Development Index of Nigeria in 2005 was 0.467. According to this, it can be said that Nigeria was in the category of low human development. The rank of this country was 152 out of 188. According to the report of African Development Bank (2014), Nigerian economy has observed a slower rate of growth since the last phase of 2015. This happens due to various internal as well as external shocks, such as decrease in oil prices, illiteracy and corruption and terrorism. As a result, economic growth of Nigeria declines from 6.2 % to 3 % while the inflation level increases from 7.8 % to 9 % within 2014-2015 (Ogbeide and Agu 2015). In this situation, the central bank has implemented both monetary and fiscal policies to decrease borrowing costs for the Nigerian government and the private sector for stimulating the economy. As a result, Nigeria experienced inequality in income and consequently economic growth declines significantly.
After these two case studies, the essay can further discuss the importance of inequality for the growth process over the last twenty years. According to some economists, inequality is considered as the biggest threat all over the world and consequently it needs to be reduced. In recent years, almost every country acknowledges that the increasing inequality has created a pressure in respective economy. Therefore, the relationship between the income distribution and aggregate output is an essential topic in macroeconomics. Therefore, policy makers pay quite attention on the role of income inequality (Bakare 2012). As a result, the World Bank Group has considered this as one of the global object to eradicate extreme poverty. This in turn can boost the incomes of some developing countries, which belong to the bottom 40%. Furthermore, the International Monetary Fund has highlighted that the role of income distribution acts as a cause and effect of economic growth. Therefore, based on some researchers, it can be said that income inequality has led economic growth of many countries towards a negative direction over the last 20 years (Lee and Suh 2017). In most of developing countries of Asia, like India and Sri Lanka, inequality creates significant barriers regarding the economic growth of this country. As a result, the government of these countries have taken various policies and programs to eradicate these inequalities.
When income between rich and poor people increases, inequality within the country rises. However, the per capita income cannot identify this difference. Therefore, it cannot be possible to understand that whether the country is actually experiencing growth or not. Therefore, policy makers need to take under consideration other measurements like HDI to know that whether the country experiences economic growth in actual sense or not (Fidler, Soerjomataram and Bray 2016). Growth of a country identifies with the help of standard of living and accessibility of basic requirements.
Conclusion:
In conclusion it can be said that, empirical growth models have helped economists to know that whether a particular county experiences economic growth or not. Old or new theoretical models cannot provide enough idea regarding the actual growth pattern of a country. In this situation, for elements of this growth model helps an economy to understand the entire scenario. With the help of South Korea, the Philippines and Nigeria, this essay intends to say that inequality and economic growth has negative relationship.
References:
Bakare, A.S., 2012. Measuring the income inequality in Nigeria: the Lorenz Curve and Gini co-efficient approach. American Journal of Economics, 2(1), pp.47-52.
Barro, R.J., 1996. Determinants of economic growth: a cross-country empirical study (No. w5698). National Bureau of Economic Research.
Coady, D. and Dizioli, A., 2018. Income inequality and education revisited: persistence, endogeneity and heterogeneity. Applied Economics, 50(25), pp.2747-2761.
Dabla-Norris, M.E., Kochhar, M.K., Suphaphiphat, M.N., Ricka, M.F. and Tsounta, E., 2015. Causes and consequences of income inequality: a global perspective. International Monetary Fund.
Fidler, M.M., Soerjomataram, I. and Bray, F., 2016. A global view on cancer incidence and national levels of the human development index. International journal of cancer, 139(11), pp.2436-2446.
Havranek, T., Horvath, R., Irsova, Z. and Rusnak, M., 2015. Cross-country heterogeneity in intertemporal substitution. Journal of International Economics, 96(1), pp.100-118.
Lee, C. and Suh, M., 2017. State Building and Religion: Explaining the Diverged Path of Religious Change in Taiwan and South Korea, 1950–1980. American Journal of Sociology, 123(2), pp.465-509.
Marginson, S., 2018. Higher education, economic inequality and social mobility: Implications for emerging East Asia. International Journal of Educational Development, 63, pp.4-11.
Ogbeide, E.N.O. and Agu, D.O., 2015. Poverty and Income Inequality in Nigeria: Any Causality?. Asian Economic and Financial Review, 5(3), p.439.
Ravallion, M., 2018. Inequality and globalization: A review essay. Journal of Economic Literature, 56(2), pp.620-42.
Temple, J., 1999. The new growth evidence. Journal of economic Literature, 37(1), pp.112-156.
World Economic Forum 2018. How does income inequality affect economic growth?. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2015/07/how-does-income-inequality-affect-economic-growth/ [Accessed 21 Dec. 2018].
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