Development and inequality revisited

Three decades after the seminal article of Kuznets (1955) and one decade after the empirical investigation of Ahluwalia (1976b) the relationship between income inequality and economic developement is still controversial. This paper examines the above relationship within a time-series/cross-section framework in a sample of countries which are representative of the non-centrally planned economies of the world. We use GDP per capita in ‘real’ UN International Comparison Project dollors as an indicator of a country's level of economic development. The results lend support to the Kuznets' inverse U-hypothesis, although other factors relfecting the institutional setting of a country are found to affect income inequality significantly during the development process as well. Similar results are obtained if we exclude developed countries from the sample.