Kuznets and Environmental Kuznets Curves for Developing Countries

Abstract

Under the Kuznets Curve hypothesis, as an economy develops, income inequality increases initially during early development or industrialization phases and then tends to decline as the country attains a higher level of GDP per capita. Thus, inequality follows an inverted U-shape by first increasing and then declining as a function of GDP per capita. The environmental Kuznets Curve, on the other hand, shows the relationship between environmental quality and economic development. The hypothesis is that the environmental quality worsens up to some income levels as the country undergoes the industrialization process.

The aim of this chapter is to consider a cluster of countries in a comparable situation and to estimate the Kuznets curve and the Environmental Kuznets Curve. Our cluster consists of Turkey, Azerbaijan, Iran, Bulgaria, Romania, Mexico, and Gabon. The situation of the developing countries in the cluster is analyzed in terms of sustainability, as an economy facing increasing pollution or ever increasing inequality would not be sustainable. Our data do not generally support the idea of classical or environmental Kuznets curves that are inverse U. Rather, it emphasizes that there is a trade-off between the environment and equality. It appears that pollution and inequality are correlated features, with some countries under study heading toward more equality but also increasing emission and pollution, while other countries tidy up their environments but are becoming increasingly unequal. Therefore, it is suggested that current optimal policy would have to choose a compromise between the two conflicting targets.