Outline and critically examine the grounds for expecting that in low income economies faster economic growth will be associated with increased inequality. .
In this paper our target is to see if a relationship between inequality and economic growth exists and if it does, whether it is positive or negative. The functional aspects of inequality are more severe in developing countries, because if low-incomes are distributed unequally, the effects of inequality on aggregate economic performance are stronger. The theoretical grounds for expecting that in low-income economies inequality will be associated with economic growth are going to be presented first and then we are going to see some empirical studies that have been conducted referring on this issue.
An increase in per capita income, which means, economic growth, could be caused for 3 reasons. The first one is the fact that people accumulate wealth in time, they acquire skills, they become more productive and thus there is economic growth. Another reason is the fact that during the development process, a new sector that will be created in the economy will increase the demand for individuals with the appropriate skills for that sector. So while it is observed growth for the economy as a whole (per capita income rise), in reality there is growth only at the specific sector. Finally the last reason is the effects that are generated by the expansion of a new sector such the one described above. Growth in one sector means that the demand for all other sorts of goods will increase as well. If this is not the case, then more people will acquire the required skills to join the sector that is increasing, and thus there are more equal increases in incomes across the economy. So we would expect that in low-income economies economic growth would be associated with increased inequality, if the three sources of income growth described above have uneven effects at low levels of income, which will increase inequality, and compensatory effects at higher levels of income, which will reduce inequality in the course of development.
