Beruflich Dokumente
Kultur Dokumente
Received 18 December, 2016; Accepted 21 December, 2016; Published 28 February, 2017 The author(s)
2017. Published with open access at www.dynamicresearchjournals.org
Abstract: Growth and inequality relation is a debating issue since Kuznets (1955).In this paper we analyzed a
recent issue between growth and inequality that is growth might help to reduce poverty in a nominal manner but
stronger inequality still prevails when the structural transformation occurs. To analyze this issue we emphasized
on the recent literature of Benabou(1996) which is treated as a significant paper discussing the recent
literatures as well. In our paper we studied the case of Bangladesh by observing her GDP growth, poverty,
inequality and structural change. We estimate a linear regression model of inequality and found that when
structural parameter changes it reduces poverty but the inequality is worsening gradually. Finally, we
recommend policy suggestion given by Benabou (1996) and investigate these policies how much attained in
Bangladesh to reduce poverty as well as inequality.
Keywords: Inequality, Growth, Structural Transformation, Policy Suggestions.
1. Introduction
The relationship between growth and inequality has undoubtedly a debating issue among scholars since
Kuznets postulated his famous curve in 1955. Although this issue is controversial, inequality in the distribution
of income either increases or decreases the growth, Kuznets (1955) analysis is still recognized as the starting
point of growth and inequality relation in development studies. According to Kuznets(1955), early stages of
development an economy has low per capita GNP and income inequality. Income inequality tends to increase
with higher growth in the process of development. But after an increase of income inequality, it tends to decrease
at higher GNP growth. Kuznets argument is that during the early stages of development, the low-income
economy is profoundly dependent on agriculture and other rural low-income activities. When the economy is
going to be developed, there are several transformations in the economy, as Kuznets explained that:
(i) Transformation of activities and employment from rural agricultural base economy to an urban industrial
economy.
(ii) In the industrial urban economic setup, income increases because the higher value added activities have been
introduced.
(iii) The income gap between rural agriculture base economy and industrially growing urban economy tends to
increase.
(iv) With the phase of economic expansion a rise in the share industrial and service sectors and a fall in the
agricultural sector in total output.
(v) Starting to employment transfer from rural to an urban economy, it helps to equalize income between the two
sectors.
This is the most famous inverted U-shaped curve relationship between inequality and GNP growth
(Dastidar, 2004).
On the other hand, the explanation of neoclassical economists likes Solow (1965), Cass (1965) and
Koopmans (1965), the per capita growth rate is inversely related to the starting level of income per person in the
economy. In this situation, if the structural parameters remain identical then poor countries tendency to grow
faster than rich countries. There is a tendency of promoting convergence the level of per capita incomes across
countries. The reason behind is that poor countries have a lower capital to labor ratios and high marginal product
of capital. That is why they tend to grow at high rates (Barrow, 1991).
In the present research interest of scholars, not only showing inequality and growth study but also
structural transformational analysis has been added a new dimension. Sarntisart (2000) study emphasizes on the
simultaneous effects in one side poverty reduction and another side in rising income inequality. The study is
showing how much consistency remains in case of income inequality and structural change. The study area is
Thailand. There was outstanding economic growth in Thailand due to the expansion of modern industries and
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Growth, Structural Change and Inequality: An Experience of Bangladesh
other sectors till the 1990s. The expansion of agriculture is in the case of employing the largest labor force. At
the same time, Thailand failed to distribute equitable economic growth. Growth had a positive impact on
reducing poverty but income inequality worsened. This study analyses the changing structure of Thai economy
and relevant development policies undertaken in the past four decades.
Adair (2006) examines the relationship between income inequality and economic growth in Mexico.
This study firstly introduces the industrial trade, production and investment patterns over the liberalization
period in Mexico. These changes lead to a relative high-wage economy with industrial capital goods production
and export. The study shows that annual change in manufacturing creates inequality and simultaneously brings
GDP growth. It finds out that stable and negatively relationship predicted by Kuznets broke down during the
period of structural reform in Mexico.
The study of Ying (2014) proposes a dual growth model showing that economic growth shifts workers
to the comparative advantage. It induces rural-urban structural change. The model also implies different results,
i.e. average individual productivity in agriculture increases while non-agricultural sector decreases during the
structural change. One of the findings of the study shows that inverse correlation between structural change and
dispersion of productivity across workers. In addition, it is not necessary to follow an inverted U-shaped
inequality curve in the period of structural transformation.
Dastidar (2004) addresses the process of industrial transformation affect personal income distribution
within developing economy. The process of structural change and overall distribution of income are interlinked.
Researcher examines the hypothesis of relation between inequality and industrial transformation in developing
countries. In this paper, a group of eighteen countries from Asia and Latin America has been evaluated regarding
this hypothesis. Researcher finds little support on in the data set for Kuznets hypothesis of increasing inequality
with industrial transformation.
In this paper, I have started from Kuznetss structural transmission regarding growth and inequality
relations. Then I will try to give an overview of Benabou (1996) paper. After the study of a structural issue from
Benabou paper, I will try to make it related from the study of Bangladesh. The structural change of Bangladesh
is an interesting issue to the researchers presently. Bangladesh is one of the developing countries where the
transformation happens very fast shift to service sector. On the other hand, the majority of working force is
related to agriculture. Where poverty has been becoming slower, conversely the inequality is intending to
increase. The main objective of this paper is to find that does the structural transformation of Bangladesh show
healthy economic behavior and its consistency with income inequality and growth? To do so first, the trends in
inequality, growth and structural transformation in Bangladesh have been figured out. After that in the empirical
section, I estimate an inequality regression from the data of Bangladesh in the recent period 2000-2015. For this,
I use the some secondary data sources like Bangladesh Economic Review in various years and World Bank data
sources. Finally, the policy recommendations suggested by Benabou (1996) have been discussed regarding
reducing inequality.
significance of this theory is that when the income of the median voter or central middle-class people is lower,
inequality is larger. So there is a common tendency to increase the pressure for redistribution. The model
developed in this paper based on combined features of two papers, such as, Pearson and Tabellini(1994), and
Benabou(1995). Although the mechanisms of this following paper are used in the analysis, it also formalizes the
main concepts of political economy called one person one vote ideal. It analyses the role of productive public
investment where growth in this model always increases simultaneously with the pro-wealth bias in the political
system.
The new result of this paper has some general caution whether inequality affects democracies and non-
democracies differentially. The result shows that income disparities have two more interesting impacts on
redistribution and growth, such as: Firstly, it has a lesser impact on redistribution and growth only in right-wing
or wealth- biased regime.
And another impact on redistribution and growth is that they both have a greater contact in left wing or
populist ones.
Additionally, Benabou paper represents another set of theories based on the distribution of wealth and
in the asset market. The distribution of wealth has macroeconomic significance as a result of imperfection in
asset market. He sets up the model showing growth benefits from land reform, public schooling, or other
progressive transfers and their traditional costs. The traditional mean the depressed incentives for saving or labor
supply for the above expenses. Besides, the linkage between inequality and growth has been addressed in this
paper. Benabou explained this relationship explicitly where he proposed a simple growth version of Prisoners
dilemma. The maximum sustainable growth of the economy is negatively related to the income disparities. It is
the responsibility of rich class to collectively transfer wealth to the poor. The possible strategies are land reform,
a minimum wage, education subsidies or trade protection. This is the main theme which has been addressed in
the present paper as policy recommendation.
is continuously lowering. It is a good sign for the economy of Bangladesh which can be observed from the
following table.
Table 2: Recent poverty gap in Bangladesh
Year Poverty gap at national poverty line (%)
2000 12.8
2005 9.0
2010 6.5
Data source: World Bank
The reason behind is that poverty has been reduced with the continuous process of development. In the
sixth five-year plan of Bangladesh (2011) the possible contributions of the economy for poverty reduction are
conspicuous. According to this report, Bangladesh has been achieved a significant reduction of poverty since
1990. A combination of factors contributes to the significant social and economic transformation. Rapid GDP
growth and urbanization process are closely interlinked with the economic transformation process. While the
economic transformation is the consequent of increase in labor productivity and wages, acceleration of the
returns to human and physical assets, shifting the preference of production and employment from low return
agricultural to non-farm sectors and expansion of export industries. On the other hand, increasing flow of foreign
remittance income and growth of microfinance generate the economy forceful to work against poverty. The
progress of social transformation also contributes to the reduction of poverty such as women empowerment,
decreasing the number of household dependencies, increasing the number of educational attainment has
contributed as well.
Unfortunately, the inequality situation is not much favorable. Though the depth of poverty is reduced,
the inequality is still increasing in Bangladesh. Now we will concentrate on the present inequality trend in
Bangladesh. According to the report of Titumir & Rahman (2011), the Gini-coefficient at the rural level has been
increased although it has a negative growth at the urban level. As only 30 percent1 of total population live in
urban areas, that is why at the national level the growth rate of Gini-coefficient has been also increased at a rate
0.16 percent.
Table 3: The Gini-coefficient rural, urban and national level.
Year Rural Urban National
2000 0.393 0.497 0.451
2005 0.428 0.497 0.467
2010 0.430 0.452 0.458
Growth rate 0.94 -0.91 0.16
Source: Titumir& Rahman (2011) calculation on the base of Household Income and Expenditure Survey (HIES) 2005 and 2010
data for Bangladesh.
The paper of Titumir& Rahman (2011) also alerts about the wide disparities. They started their
argument with the concept that sustained and equitable economic growth inevitably reduces poverty. Growth
might be seemed convenient on poverty reduction however growth is accompanied by rising inequalities. But
current economic crisis might widen the gap between poor and rich if the economic growth has not been fairly
shared.
This inequality can be shown more clearly using the percentage distribution of income accruing to the
household in groups (deciles) and GINI coefficient in periods 2005 and 2010. The information is given below:
Table 4: Household income deciles and Gini-coefficients
Household income deciles and GINI coefficient National (2005) National (2010)
Total/Deciles 100.00 100.00
Lower 5% 0.77 0.78
Decil-1 2.00 2.00
Decil-2 3.26 3.22
Decil-3 4.10 4.10
Decil-4 5.00 5.00
Decil-5 5.96 6.01
Decil-6 7.17 7.32
Decil-7 8.73 9.06
Decil-8 11.06 11.50
Decil-9 15.07 15.94
Decil-10 37.64 35.85
Top 5% 26.93 24.61
Gini Coefficient 0.467 0.458
Source: Household income and expenditure survey (HIES) 2010, Bangladesh Bureau of statistics (cited in
statistical year book Bangladesh 2015).
1
See UNICEF. (2010), especially in the introduction and key concepts for an insightful analysis of Bangladesh
present urbanization.
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Growth, Structural Change and Inequality: An Experience of Bangladesh
Although the income share slightly reduced to the top 10% households during the period 2005-2010, it
is obviously indicating that not only the poor but also the middle class are suffering losses the share of income.
From the lower side households income, there is nearly no change until lower 50% households and it is
indicating they are living with economic difficulties. The Gini coefficient reduces a little amount in 2010
comparing to 2005.
The growth in three major sectors can be shown from the figure 1. The agriculture sector has an upward
growth rate although it is fluctuating over years. The growth in industry is also fluctuating but not as much as in
the agricultural sector. Only the service sector has an increasing and stable growth.
10
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Source: Bangladesh Economic Review-2010, Ministry of Finance Bangladesh (cited in Islam, Musa & Das, 2012 Paper).
Figure 2 shows the employment contribution on these three sectors. The agriculture is using the large
share of labor force till now with a decreasing rate. On the other hand, both the industry and the service sector
have comparatively lower share than the agriculture sector but their rates are on the increase.
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Growth, Structural Change and Inequality: An Experience of Bangladesh
60
50
40
30
20
10
0
1984 1985 1986 1989 1991 1996 2000 2002 2003 2005 2010
4. Regression on inequality
In the econometric analysis, I use the simple linear regression of inequality on the basis of the recent
data from 2000-2015 in Bangladesh. The regression equation is as follows:
= + 1 + 2 + 3 + 4 +
Where; Inequality is the dependent variable and age dependency ratio(Age), structural factor (str),
Unemployment (Unp), economic growth (GDP) are the independent variables. Inequality is positively related to
Age, Str and Unp. Structural factor proxies the employment share of the service sector. It shows that the increase
in labor force involved in the service sector inequality increases. As a result of structural transformation, the
economic advantages are distributed among a few households. On the other hand, growth and inequality has
converse relationship as well. Inequality is positively related to Age, Str, Unp and negatively related to GDP,
with the respective coefficients 0.211, 0.593 , 0.533 and -0.386.There is insignificant positive relation between
inequality and age but negative relation between growth and inequality.
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Growth, Structural Change and Inequality: An Experience of Bangladesh
If productivity does not increase, land reform will still have sufficient supports with the arguments of
equity. In Bangladesh most of the people live in rural areas with a high degree of landlessness and
unemployment problem. In that case land provides employment as well as social security. As we know nearly 48
% of labor force is related to agriculture, land reform is very important for substantial wealth as well as
providing a basic income to the poor families.
In macroeconomic sense, multiplier effect of local consumption might be proved beneficial. For
example, large land holders simple accumulate their profit out of the rural areas. Small holders can accumulate
their investment within the local economy. It provides more potentiality in diversifying local capital
accumulation.
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Growth, Structural Change and Inequality: An Experience of Bangladesh
7. Conclusion
The GDP gap between the rich and poor grows faster with the connection of the progress of average
living standard. In this view, the experience of Bangladesh is identical to most other rapidly growing economies
in Asia(Osmani, S. R. 2015). The structural change is obviously welcomed when it ensures equity. This is not
actually the case in Bangladesh. The development programs of Bangladesh should not only be emphasized on
poverty reduction but also reduction of inequality. The reduction of inequality will care the further economic
progress of Bangladesh. Because of having equitable society, can have fewer economic problem.
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