Econometric analysis of economic growth and income inequality through the lens of Kuznets theory: insights across diverse economic groups (2004-2019)

Research Hypothesis

The research investigates the relationship between economic growth and income inequality, drawing on Kuznets' theory of an inverted U-shaped relationship. The central hypotheses are:

H0: Income inequality is not affected by GDP growth, indicating no relationship between economic growth and income inequality.
H1: GDP growth influences income inequality, which may increase or decrease depending on societal and economic contexts.
H2: GDP growth positively affects income inequality, widening income disparities.
H3: GDP growth negatively affects income inequality, reducing disparities and promoting equitable distribution.
H4: In lower-middle-income countries, GDP growth reduces income inequality.

Description of Data

The study utilizes data from the World Bank for 39 countries spanning the years 2004 to 2019. The dataset includes:

Gross Domestic Product (GDP): Measured in constant local currency units (LOGGDP), used as a proxy for economic growth.
Gini Index: A standardized measure of income inequality, ranging from 0 (perfect equality) to 100 (maximum inequality).
Income Categories: Countries are grouped into high, upper-middle, and lower-middle income categories based on the World Bank’s GNI per capita classification.

Methodology and Data Gathering

Selection Criteria: Countries were selected to represent diverse income groups, ensuring a balanced and comprehensive analysis of varying economic contexts.
Data Source: All data were sourced from the World Bank’s publicly available databases.
Data Analysis:
Correlation analysis to explore the general relationship between GDP and inequality.
Linear regression models to identify causal relationships across income categories.
Group-specific analysis to investigate how GDP impacts inequality within high-, upper-middle-, and lower-middle-income countries.

Notable Findings

Overall Trends:
Across all countries, a positive correlation was observed between GDP and the Gini index, indicating that GDP growth is generally associated with increasing income inequality.
The regression model (GINI = 23.931 + 0.937 × LOGGDP) confirmed a statistically significant relationship, with an F-value (p < 0.05) supporting the model’s validity.

Income Group Analysis:
High-Income Countries: No statistically significant relationship between GDP growth and inequality.
Upper-Middle-Income Countries: A weak relationship was observed, but it lacked statistical significance.
Lower-Middle-Income Countries: A significant negative relationship was identified (β = -22.291, p < 0.001), suggesting that in these countries, GDP growth reduces income inequality.

Interpretation and Use of Data: The findings can be interpreted in light of Kuznets' hypothesis, which posits that inequality first rises and then falls as economies develop.