Wednesday, October 24, 2007

Kuznets in Action

In my economic development class the other day I was teaching my students about the idea of a Kuznets curve (link to Wikipedia Entry on Kuznets). Kuznets found an inverted U-shaped relationship between economic inequality and GDP per capita. Specifically he found that as countries develop there tends to be an increase in economic inequality, until the country passes a certain level of development and inequality starts to decrease.

The recent IMF World Economic Outlook for 2007 has shown that economic inequality is increasing in the developing world. Nancy Birdsall of the Center for Global Development has an interesting take on the situation. You can read her blog entry linked here, but she makes three main points

1. Inequality can inhibit future growth
2. Education is the main tool used to combat inequality, but education is highly dependent on income/wealth so education inequality is likely impacted by income inequality.
3. Globalization has losers and winners, in some cases the losers may be the already poor.

The policy to address inequality I'm most familiar with the conditional cash transfer, which pays money to families that send their children to school and if the family visits health clinics. In Brazil and Mexico a significant part of population (10-20%) receives funds through these programs. Although my research and that of most economist has focused on the impacts of these program on education it is worth noting that these programs give substainal cash payment to families usually increasing their income 10-20%. I have not seen an analysis of the long term impacts of these programs on income potential of both parents and children, but perhaps given Dr. Birdsall's 2nd point it is worth examining.

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