2.6.1. Inequality and Economic Growth

Kuznets Curve

The relationship between growth and inequality has long been an important question for economists, and a number of influential theories have emerged over the years. But for most people, the issue boils down to this: is rising inequality good or bad for growth? Those who believe it’s good, or at least necessary,

argue that it provides incentives to entrepreneurs and a source of overall investment for the economy. Those who believe it’s bad argue that it can prevent poorer people from investing in their education and encourage the rich to grab a bigger slice of the economic pie without making the pie any bigger.

Kuznets curve provides a way to study the relationship between inequality and economic growth. It says that as

the economy grows, inequality increases in the beginning and then it decreases with further growth in economy.

As per Kuznets hypothesis, as economic growth comes from the creation of better products, it usually boosts the income of workers and investors who participate in the first wave of innovation. The industrialisation of an agrarian economy is a common example. This inequality, however, tends to be temporary as workers and investors who were initially left behind soon catch up by helping offer either the same or better products. This improves their incomes.