Hypothesis:
A supposition or explanation (theory) that is provisionally accepted in order to
interpret certain events or phenomena, and to provide guidance for further
investigation.
A hypothesis may be proven correct or wrong, and must be capable of refutation.
If it remains unrefuted by facts, it is said to be verified or corroborated.
-www.businessdictionary.com
Kuznets Hypothesis:
Prof. Kuznets is the first economist to study “Economic Growth and Income Inequality”
problem empirically.
He observes that in the early stages of economic growth relative income inequality
increases,stabilizes for a time and then decline in the later stages.
This is known as the inverted U-shape hypothesis of income distribution.
In his 1955 Study, Kuznets takes the following data relating to 3 LDCs-India,
Ceylon, Puerto-Rico and 2 DCs- The UK and US
Income Share %
𝑅𝑖𝑐ℎ𝑒𝑠𝑡 20%
Country Ratio =
𝑃𝑜𝑜𝑟𝑒𝑠𝑡 60%
Poorest Richest
60% 20%
India (1949-50) 28 55 1.96
LDCs
Ceylon (1950) 30 50 1.67
Puerto-Rico (1948) 24 56 2.33
United Kingdom (1950) 34 44 1.29 DCs
United States (1947) 36 45 1.25
Figure: Relative Income Inequality in Various Countries in about 1950
Kuznets comes to the conclusion that the size distribution of income was more
unequal in LDCs than in DCs.
The area of part B represents the total
actual national income. Part A by itself
represents the loss of national income
because everyone does not earn income
as the same as the wealthiest people. The
areas of parts A and B together represents
the national income that would be realized
if everyone earned the same amount as
the wealthiest person. The closer the
country is to an equal income distribution,
the smaller the Gini coefficient.
𝐴
Gini coefficient=
𝐴+𝐵
Fig: Income distribution
The changes in the distribution of
income as measured by the Gini
Coefficient in relation to the increase
in per capita income trace out the
Kuznets inverted U-shaped curve K.
Here,
Kuznets curve lies to the right:
income inequality falls with increase
in per capita income at higher levels
of development .
Fig:Gini coefficient of per capita income
Causes of Increase in Inequality with
Development
When the process of transition from traditional agricultural society to modern
industrial economic begins, it increases inequality in income distribution.
Structural change, increasing employment opportunities exploitation of new
resource, improvements in technology and per capita income in the industrial
sectors are Causes of Increase in Inequality with Development.
Higher growth rate of population in LDCs increase the absolute number of
people and hence relative in inequality .
Causes of Reduction in inequality with Development
Kuznets gives two reasons for the decrease in inequality of
income distribution.
First, the per capita income of the highest income groups falls
because their share of income from property decreases.
Second, the per capita income of the lowest income groups
rises when the government legislative decision with respect to
education and health services, inheritance and income
taxation, social security, full employment and economic relief
either to whole groups or individuals .
Characteristics of Modern Economic Growth
High rates of growth of per capita product and population.
The rise in productivity .
High rate of structural transformation .
Urbanization.
The outward expression of developed countries.
International flows of men, goods and capital .
Criticism:
According to Todaro the long-run data for developed countries do seem to
support the Kuznets hypothesis but the studies of the phenomenon in LDCs have
produced conflicting results.He shows that,”higher income levels can be
accompanied by falling and not rising inequality.” -M.P Todaro,op.cit.p.166
According to Kravis,”Kuznets hypothesis that the degree of inequality first
increases at lower levels of development and the declines at higher levels of
development.”
-I.B Kravis,”International Difference in
Distribution of Income “
According to Adelman and Morris,”income inequality increases up to a certain
level of development and then declines. -Economic growth and social Equity
In Developing Countries.1973
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