1. Determinants of Inequality
Fakultät Wirtschaftswissenschaften
Lehrstuhl für Wachstums- und Konjunkturtheorie
Prof. Dr. Thomas Gries – Module W4412 Global Growth
Sherif Elkoumy and Rainer Grundmann 15 Jul 2008

2. Agenda
1. Introduction
2. Stylized Facts
3. Theory
4. Empirics
5. Conclusion
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3. Introduction
• Growth, Urbanization Increased
• Urbanization leads to social problems
• Change in inequality is a result of
growth and urbanization processes
• Inequality has been an ongoing
concern for economists and scholars
worldwide
• Inequality is a part of development
economics
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4. Stylized facts
Growth (output) :
World Economic Growth
9
8
7
Annual Growth %
6
5 World
4
OECD
3
2 Low Income
1
0
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
-1
-2
Year
Source: Data from Worldbank (2008)
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5. Stylized facts
Urbanization/Population growth:
Source: United Nations (2008b)
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6. Stylized facts
Relation Gini-Index and Income:
Source: Data from Wolrdbank (2008) and Human Development Reports (2008)
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7. Theory
Measuring Inequality:
• Gini-coefficient
• Most important measure for
income inequality
• Based on the Lorenz curve
Source: Answers.com (2008)
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8. Theory
Kuznets theory:
• developed 1955
• early stages inequality
increases
• then decreases again
• structual transformation
(agricultural, industrial
sector)
• Smith and Todaro:
whether shape is shown
depends on type of
Source: after Smith and Todaro (2003)
structual change
• Empirical works suggest
that it rather works for
cross-country data
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9. Empirics
Model (1):
• 59 % (R2) of GINI
explained
• FDI: positve relation
• GNI negative
• Coeffients not
significantly different
from 0
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10. Empirics
Model (2):
• 60 % (R2) of GINI
explained
• GNI negative
• OECD makes a clear
difference
• Coefficients not
significantly different
from 0
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11. Conclusion
• Statistics do not give clear evidence on GINI
explanation
• Theory of Kuznets asks for an inverted u-
curve
• Estimated model does not allow for this
results blurred
• Increase sample size and improve
variables that indicate development
stage
• Equation estimation leads to a
coefficient
significantly differing from 0
• still overall fit only 43%
• use exponential equations
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12. Sources
Simon Kuznets, 1955. Economic Growth and Income Inequality.
The American Economic Review, 45(1), 1-28.
Smith, S.C. & Todaro, M.P., 2003. Economic Development 8th ed., Boston:
Addison Wesley.
Human Development Report, 2008. Human Development Report 2008.
Available at: http://hdrstats.undp.org/indicators/ [Accessed July 13, 2008].
United Nations, 2008b. World Urbanization Prospects: The 2005 Revision.
Available at: http://www.un.org/esa/population/publications/WUP2005/
2005WUP_FS5.pdf [Accessed July 9, 2008].
Worldbank, 2008. DDP Quick Query. Available at: http://ddp-ext.worldbank.org/ext/
DDPQQ/member.do?method=getMembers&userid=1&queryId=135
[Accessed July 9, 2008]
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13. Thank you for your attention!
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