Economic Growth and Income Inequality

Most debate on the internal gap between rich and poor people in developing nations begins with this seminal presidential address delivered by Simon Kuznets to the American Economic Association in 1954. The address, portions of which are reprinted here, uses limited data from Germany; the United Kingdom, and the United States to draw the conclusion that since the 1920s, and perhaps even earlier; there has been a trend toward equalization in the distribution of income. Kuznets discusses in some detail the possible causes for this trend, examining those factors in the process of industrialization that tend to counteract the trend toward the increasing concentration of savings in the hands of the wealthy. That particular discussion is not in the portions of the address included here, but the interested reader can consult the original piece (see citation at the bottom of this page). Our interest lies in Kuznets’s conclusion that the central factor in equalizing income must have been the rising incomes of the poorer sectors outside of the traditional agricultural economy. The critically important notion of the “inverted U curve” although not labeled as such in the address, is introduced in Kuznets’s argument that there seems to be a trend of increasing inequality in the early phases of industrialization, followed by declines in the later phases only. Finally, Kuznets opens the debate over the relevance of these findings for the developing nations by examining data from India, Ceylon (today, Sri Lanka), and Puerto Rico. The findings that income inequality in the developing countries is greater than that in the advanced countries, and that such inequality may be growing even greater, form the basis of virtually all subsequent research and debate on this subject.