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The strange relationship between economic growth and income distribution: Do you know how the Kuznets ratio works?
The Kuznets curve was first proposed by economist Simon Kuznets in the 1950s and 1960s. His hypothesis is that as an economy develops, market forces initially increase inequality and then reduce it. . As more and more data became available, although the initial hypothesis was valid, the data showed fluctuations rather than simple curves.
Taiwan's economic growth was once enviable, and many people benefited greatly from the process. However, upon closer inspection, the closely related issue of income distribution presents a difficult problem to resolve. This involves the concept of the Kuznets ratio.
The Kuznets ratio is a tool for quantifying income inequality by comparing the income of the highest-income households to the lowest-income households. Specifically, the ratio of the top 20% of income households is often compared to the bottom 20% or 40% of income households. Such comparisons can reveal income inequality in a society.
As an economy matures, the accumulation of human capital becomes the main source of growth. This means that when economic development enters a new stage, income inequality is likely to decrease while education levels will increase.
When a country undergoes industrialization, especially agricultural mechanization, its economic center will shift from rural areas to cities. Farmers migrate to cities in search of higher-paying opportunities, resulting in a clear urban-rural income gap. In this process, business owners with capital typically profit, while workers' wages rise more slowly, meaning agricultural workers' incomes may fall. This change is consistent with Kuznets' theory, which states that as per capita income increases, income inequality will experience a process of rising and then falling.
However, over time, the actual data we see are different fluctuations in income inequality rather than a clear Kuznets curve. Especially since the 1960s, inequality has continued to rise in many developed countries, contrary to past predictions. Economist Piketty points out that the decline in income inequality in the first half of the 20th century was a one-off phenomenon, mainly due to the destruction of wealth caused by wars and economic recessions.
As the market changes, the effectiveness of the Kuznets curve has been questioned. Critics point out that the U-shaped shape of the curve is not due to the development process of individual countries, but to historical differences between countries.
In particular, differences between middle-income and high-income countries complicate the interpretation of the Kuznets curve. In many Latin American countries, historically high levels of income inequality persist, and income distribution issues have not been addressed even with economic growth. In this context, further research shows that even economic development may not necessarily improve income inequality.
In the case of East Asia's economic miracle, contrary to Kuznets' theory, these countries' rapid growth did not lead to rising income inequality. In fact, these countries' rapid economic growth, accompanied by increased life expectancy and reduced severe poverty, presents a different picture.
Scholars such as Stiglitz have pointed out that East Asia's economic miracle was achieved by reinvesting initial profits in policies such as soil improvement, universal education, and industrial policies.
These measures not only boosted overall productivity, but also ultimately led to a virtuous cycle of economic growth. The practicality of the Kuznets curve has once again been questioned: Is all economic growth necessarily accompanied by an increase in income inequality? Perhaps we should question the assumptions made by this theory.
Therefore, Kuznets himself expressed concerns about his own curve, pointing out that the fragility of the data and the rarity of historical experience made it challenging to use it as a universal theory. From a historical perspective, it is necessary to think more comprehensively about the relationship between development and inequality.
While we are discussing economic growth, should we pay more attention to the income distribution issue behind it? Perhaps, this is the most important key to understanding the entire economic growth process?
