Does Economic Growth Increase Inequality?: An Empirical Analysis for ASEAN Countries, China and India

Part of the India Studies in Business and Economics book series (ISBE)


Even though 10 member countries of the Associations of Southeast Asian Nations (ASEAN), People’s Republic of China and India (ACI) have adopted polices for archiving more pro-poor or inclusive growth. However, income and non-income inequality in ACI have witnessed an increasing trend in recent years. In view of rising inequality in fast growing Asian developing countries, it is important to study the relationship between economic growth and income inequity which could assist policy makers to adopt appropriate policy action for more inclusive growth. This paper undertakes an empirical analysis to examine if economic growth increases income inequality for ACI. The objectives of the paper are: (i) to develop a simple model of policy-induced growth which shows a nonlinear and wave-like relationship between growth and inequality; (ii) to provide an empirical support to the above model to establish that the intention to use economic growth and inequality as policy instruments to shape economic development can backfire since the possibility of a wave-like function receives an empirical support from ACI data; and (iii) to exhibit that the nonlinear relationship between growth and inequality within ACI nations is mainly driven by the availability of foreign direct investment (FDI). In addition, the paper finds other interesting elements in the relationship between growth and inequality which has profound policy implications for the ACI Economies.


Growth Inequality Foreign direct investment Poverty ASEAN People’s Republic of China and India 

JEL Classifications

H21 O11 O15 O41 


  1. Alesina, A., & Rodrik, D. (1994). Distributive politics and economic growth. Quarterly Journal of Economics, 109, 465–490.CrossRefGoogle Scholar
  2. Anand, S., & Kanbur, R. (1993). Inequality and development: A critique. Journal of Development Economics, 41, 19–43.CrossRefGoogle Scholar
  3. Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte carlo evidence and an application to employment equations. Review of Economic Studies, 58, 277–297.CrossRefGoogle Scholar
  4. Baele, L., Pungulescu, C., & Horst, J. T. (2007). Model uncertainty, financial market integration and the home bias puzzle. Journal of International Money and Finance, 26, 606–630.CrossRefGoogle Scholar
  5. Banerjee, A., & Duflo, E. (2003). Inequality and growth: What can the data say? Journal of Economic Growth, 8, 267–299.CrossRefGoogle Scholar
  6. Barro, R. (2000). Inequality and growth in a panel of countries. Journal of Economic Growth, 5, 5–32.CrossRefGoogle Scholar
  7. Benabou, R. (1996). Inequality and growth. In B.S. Bernanke & J.J. Rotemberg (eds), NBER macroeconomics annual, Chapter 11 (pp. 11–73). Cambridge: MIT Press.Google Scholar
  8. Besley, T., & Case, A. (2003). Political institutions and policy choices: Evidence from the United States. Journal of Economic Literature, 41(1), 171–189.CrossRefGoogle Scholar
  9. Besley, T., & Coate, S. (2003). On the public choice critique of welfare economics. Public Choice, 114(3), 253–273.CrossRefGoogle Scholar
  10. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 11–143.CrossRefGoogle Scholar
  11. Bourguignon, F. (1981). Pareto superiority of unegalitarian equilibria in Stiglitz’ model of wealth distribution with convex saving function. Econometrica, 49(6), 1469–1475.CrossRefGoogle Scholar
  12. Bourguignon, F. (2004). The poverty-growth-inequality triangle. Paper presented at the Indian Council for Research on International Economic Relations, New Delhi, February 4.Google Scholar
  13. Bourguignon, F., & Da Silva, L. A. (Eds.). (2003). The impact of economic policies on poverty and income distribution: Evaluation techniques and tools. Washington DC: World Bank. Google Scholar
  14. Case, A. C. (2001). Election goals and income redistribution: Recent evidence from Albania. European Economic Review, 45, 405–423.CrossRefGoogle Scholar
  15. Chan, K. S., & Tsay, R. S. (1998). Limiting properties of the least squares estimator of a continuous threshold autoregressive model. Biometrika, 85, 413–426.CrossRefGoogle Scholar
  16. Chen, B. L. (2003). An inverted relationship between inequality and long-run growth. Economics Letters, 78(2), 205–212 (February).Google Scholar
  17. Clarke, G. R. G. (1995). More evidence on income distribution and growth. Journal of Development Economics, 47, 403–427.CrossRefGoogle Scholar
  18. Davidson, R., & Flachaire, E. (2001). The wild bootstrap, tamed at last. GREQAM Document de Travail 99A32.Google Scholar
  19. Davies, R. B. (1977). Hypothesis testing when a nuisance parameter is present only under the alternative. Biometrika, 64(2), 246–254.CrossRefGoogle Scholar
  20. Davies, R. B. (1987). Hypothesis testing when a nuisance parameter is present only under the alternative. Biometrika, 74(1), 33–43.Google Scholar
  21. Deininger, K., & Squire, L. (1998). New ways of looking at old issues: Inequality and growth. Journal of Development Economics, 57, 259–287.CrossRefGoogle Scholar
  22. Deininger, K., & Squire, L. (1999). A new data set measuring income inequality. World Bank Economic Review, 10, 565–591.CrossRefGoogle Scholar
  23. Dollar, D., & Kraay, A. (2002). Growth is good for the poor. Journal of Economic Growth, 7, 195–225.CrossRefGoogle Scholar
  24. Easterly, W. (1999). Life during growth. Journal of Economic Growth, 4, 239–276.CrossRefGoogle Scholar
  25. Easterly, W. (2001). The elusive quest for growth. Cambridge, MA: MIT Press.Google Scholar
  26. Echenique, F., & Edlin, A. (2004). Mixed equilibria are unstable in games of strategic complementarities. Journal of Economic Theory, 118, 61–79.CrossRefGoogle Scholar
  27. Forbes, K. (2000). A reassessment of the relationship between inequality and growth. American Economic Review, 90, 869–897.CrossRefGoogle Scholar
  28. Galenson, W., & Leibenstein, H. (1955). Investment criteria, productivity, and economic development. Quarterly Journal of Economics, 80, 342–370 (August).Google Scholar
  29. Gangopadhyay, P., & Bhattacharyay, B. N. (2011). On the economics of social inclusion and protection in ASEAN economies, India and the People Republic of China. A background paper for the Asian Development Bank Institute(ADB)/Asian Development Bank’s(ADB) study on role of key emerging economies—ASEAN, the People Republic of China, and India—for a balanced, resilient and sustainable Asia, ADB/ADBI, Tokyo.Google Scholar
  30. Gangopadhyay, P., & Bhattacharyay, B. N. (2015). Is there a nonlinear relationship between economic growth and inequality? Theory and lessons from ASEAN. CESifo Working Paper Series 5377, People Republic of China and India: CESifo Group Munich.Google Scholar
  31. Hansen, B. E. (1996). Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica, 64, 413–430.CrossRefGoogle Scholar
  32. Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing and inference. Journal of Econometrics, 93, 345–368.CrossRefGoogle Scholar
  33. Hansen, B. E. (2000). Sample splitting and threshold estimation. Econometrica, 68, 575–603.CrossRefGoogle Scholar
  34. Hansen, B. E. (2007). Hansen B. E., Trygve Haavelmo Professor [online]. Madison, WI: Department of Econometrics, University of Wisconsin-Madison. Accessed on November 2001.
  35. Kakwani, N., Khandker, S., & Son, H. H. (2004). Pro-poor growth: Concepts and measurements with country case studies. Working Paper of the International Poverty Centre, Brasilia, August 2004.Google Scholar
  36. Kanbur, R. (2005). Growth, inequality and poverty: Some hard questions. Journal of International Affairs, 58(2), 223–235.Google Scholar
  37. Kraay, A. (2005). When is growth pro-poor? Evidence from a panel of countries. World Bank Policy Research Department Working Paper No. 3225.Google Scholar
  38. Kuznets, S. (1955). Economic growth and income inequality. American Economic Review, 45, 1–28.Google Scholar
  39. Li, H., Squire, L., & Zou, H.-F. (1998). Explaining international and intertemporal variations in income inequality. Economic Journal, 108, 26–43.CrossRefGoogle Scholar
  40. Li, H., Xie, D., & Zou, H.-F. (2000a). Dynamics of income distribution. Canadian Journal of Economics, 33, 937–961.CrossRefGoogle Scholar
  41. Li, H., Xu, L. C., & Zou, H.-F. (2000b). Corruption, income distribution, and growth. Economics and Politics, 12, 155–182.CrossRefGoogle Scholar
  42. Li, H., & Zou, H. (1998). Income inequality is not harmful for growth: Theory and evidence. Review of Development Economics, 2(3), 318–334.CrossRefGoogle Scholar
  43. Li, H., & Zou, H. (2002). Inflation, growth, and income distribution: A cross-country study. Annals of Economics and Finance, 3, 85–101.Google Scholar
  44. Lopez, H. (2004). Pro-poor-pro-growth: is there a trade off? The World Bank, Policy Research Working Paper No. 3378.Google Scholar
  45. Lopez, H. (2006). Did growth become less pro-poor in the 1990s? World Bank Policy Research Working Paper, No. 3931.Google Scholar
  46. Lopez, H., & Serven, L. (2006). A normal relationship? Poverty, growth, and inequality. World Bank Policy Research Department Working Paper, No. 3814.Google Scholar
  47. Milgrom, P., & Roberts, J. (1990). Rationalizability learning, and equilibrium in games with strategic complementarities. Econometrica, 58, 1255–1277.CrossRefGoogle Scholar
  48. Persson, T., & Tabellini, G. (1994). Is inequality harmful for growth? American Economic Review, 84, 600–621.Google Scholar
  49. Persson, T., & Tabellini, G. (2000). Political economics: Explaining economic policy. Cambridge: MIT Press.Google Scholar
  50. Persson, T., & Tabellini, G. (2003). The economic effect of constitutions. Cambridge: MIT Press.Google Scholar
  51. Ravallion, M. (1997). Can high inequality development countries escape absolute poverty? Economics Letters, 56, 51–57.CrossRefGoogle Scholar
  52. Ravallion, M. (2004). Pro-poor growth: A primer. The World Bank, Policy Research Working Paper No. 3242.Google Scholar
  53. Ravallion, M., & Chen, S. (2003). Measuring pro-poor growth. Economic Letters, 78, 93–99.CrossRefGoogle Scholar
  54. Savvides, A., & Stengos, T. (2000). Income inequality and economic development: Evidence from the threshold regression model. Economics Letters, 69, 207–212.CrossRefGoogle Scholar
  55. Stiglitz, J. (1969). Distribution of income and wealth among individuals. Econometrica, 37, 382–397.CrossRefGoogle Scholar
  56. Vives, X. (1990). Nash Equilibrium with strategic complementarities. Journal of Mathematical Economics, 19(3), 305–321.CrossRefGoogle Scholar
  57. Vives, X. (2005). Complementarities and games: New developments. Journal of Economic Literature, XLIII, 435–479.Google Scholar
  58. Wu, C. F. J. (1986). Jackknife, bootstrap and other resampling methods in regression analysis. Annals of Statistics, 14(4), 1261–1295.CrossRefGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2017

Authors and Affiliations

  • Partha Gangopadhyay
    • 1
    • 2
  • Biswa Nath Bhattacharyay
    • 3
    • 4
    • 5
  1. 1.School of BusinessWestern Sydney UniversityPenrithAustralia
  2. 2.CEPMUniversity of the South PacificSuvaFiji
  3. 3.Asian Development BankManilaPhilippines
  4. 4.CESIfo (The Center of University of Munich and Ifo Institute)MunichGermany
  5. 5.McGill UniversityMontrealCanada

Personalised recommendations