Kuznets Curve - Criticisms

Criticisms

Critics of the Kuznets Curve theory argue that its U-shape comes not from progression in the development of individual countries, but rather from historical differences between countries. For instance, many of the middle income countries used in Kuznets' data set were in Latin America, a region with historically high levels of inequality. When controlling for this variable, the U-shape of the curve tends to disappear (e.g. Deininger and Squire, 1998). Regarding the empirical evidence, based on large panels of countries or time series approaches, Fields (2001) considers the Kuznets hypothesis refuted.

In accounting for historical changes, David Lempert's work in the early 1980s introduced a time dimension and a political dimension to the curve, showing how population and politics interact with economic inequality over time, leading either to long-term stability or to collapse. This neo-Malthusian model incorporating Kuznets' work, yields a helix model of the relationships over time rather than just a curve.

The East Asian Miracle has been used to criticize the validity of the Kuznets curve theory. The rapid economic growth of eight East Asian countries – Japan, South Korea, Hong Kong, Taiwan, Singapore (Four Asian Tigers), Indonesia, Thailand, and Malaysia – between 1965 and 1990, was called the East Asian Miracle (EAM). State-led manufacturing and export grew quickly and powerfully. Yet simultaneously, life expectancy was found to increase and population levels living in absolute poverty decreased. This development process was contrary to the Kuznets curve theory. Many studies have been done to identify how the EAM was able to ensure that the benefits of rapid economic growth were distributed broadly among the population, because Kuznets’ theory stated that rapid capital accumulation would lead to an initial increase in inequality. Joseph Stiglitz argues the East Asian experience of an intensive and successful economic development process along with an immediate decrease in population inequality can be explained by the immediate re-investment of initial benefits into land reform (increasing rural productivity, income, and savings), universal education (providing greater equality and what Stiglitz calls an “intellectual infrastructure” for productivity ), and industrial policies that distributed income more equally through high and increasing wages and limited the price increases of commodities. These factors increased the average citizen’s ability to consume and invest within the economy, further contributing to economic growth. Stiglitz highlights that the high rates of growth provided the resources to promote equality, which acted as a positive-feedback loop to support the high rates of growth. The EAM defies the Kuznets curve, which insists growth produces inequality, and that inequality is a necessity for overall growth.

Furthermore, Cambridge University Lecturer Gabriel Palma recently found that there is no evidence at all for a ‘Kuznets curve’ in inequality. He notes in his paper Homogeneous middles vs. heterogeneous tails, and the end of the ‘Inverted-U’: the share of the rich is what it's all about :

"he statistical evidence for the ‘upwards’ side of the “Inverted-U” between inequality and income per capita seems to have vanished, as many low and low-middle income countries now have a distribution of income similar to that of most middle-income countries (other than those of Latin America and Southern Africa) That is, half of Sub-Saharan Africa and many countries in Asian, including India, China and Vietnam, now have an income distribution similar to that found in North Africa, the Caribbean and the second-tier NICs. And this level is also similar to that of half of the first-tier NICs, the Mediterranean EU and the Anglophone OECD (excluding the US). As a result, about 80% of the world population now live in countries with a Gini around 40."

Palma goes on further to note that among middle-income countries only those in Latin America and Southern Africa live in an inequality league of their own. Instead of a Kuznet curve, he breaks income inequality in to deciles which contain 10% of the population relating to income inequality. Palma then shows that there are two distributional trends taking place in inequality within a country. Palma notes: "One is ‘centrifugal’, and takes place at the two tails of the distribution—leading to an increased diversity across country in the shares appropriated by the top 10 percent and bottom forty percent. The other is ‘centripetal’, and takes place in the middle—leading to a remarkable uniformity across countries in the share of income going to the half of the population located between deciles 5 to 9."

Therefore, it is the share of the richest 10% of the population that affects the share of the poorest 40% of the population with the middle to upper-middle staying the same across all countries.