Choose the correct answer and discuss with concrete examples: and give reference,
If the development process is characterized by what we have called "modern sector
enlargement", the relationship between GNP per capita and inequality in the distribution of
income can be expressed as
a. a strictly decreasing relationship b. a strictly increasing relationship c. no relationship d.
first increasing and then decreasing
The correct answer is d. first increasing and then decreasing.
This relationship is often referred to as the Kuznets Curve, named after economist Simon Kuznets. According to the Kuznets Curve, as a country undergoes economic development, income inequality first increases, reaches a peak, and then starts to decrease. This pattern is observed as the modern sector expands and displaces traditional, low-income sectors.
During the early stages of development, income inequality tends to increase. This is because the modern sector, which typically consists of industries with higher productivity and wages, attracts resources and labor from traditional sectors. The shift in resources from traditional to modern sectors leads to a concentration of income and wealth in the hands of those who can participate in the modern sector. This concentration of resources results in an initial increase in income inequality.
However, as development progresses and the modern sector continues to expand, it eventually reaches a point where the benefits begin to trickle down to the rest of the population. The increased productivity and higher wages in the modern sector create spillover effects, leading to improvements in overall living standards and income distribution. This ultimately leads to a decrease in income inequality.
Concrete examples of this pattern can be observed in various countries' development trajectories. For example, consider South Korea. During its rapid economic growth in the 1960s and 1970s, income inequality initially increased due to the concentration of resources in industrial sectors. However, as the country continued to develop and invest in human capital, income inequality began to decline. By the 1990s, South Korea had achieved a more equal income distribution.
Another example is China. Since the implementation of market-oriented reforms in the late 1970s, China has experienced significant economic growth. Initially, this growth led to a significant increase in income inequality as the modern sector expanded and benefited urban areas. However, in recent years, the Chinese government has implemented policies aimed at reducing inequality, such as improving access to education and healthcare in rural areas. These policies have resulted in a decrease in income inequality in China.
Reference:
- Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1-28.