58. Kuznets curve Lisa Cameron, Lata Gangadharan and Sowmiya Ashok In 1955, Simon Kuznets, the Nobel Prize winning economist, published an influential study on the historical relationship between income inequality and the level of per capita income. Kuznets (1955) argued that as countries develop, income inequality first increases, peaks, and then decreases. As shown in Figure 58.1, this creates an inverted U-shaped relationship, with income inequality (measured by the Gini coefficient) declining after a certain critical threshold level of income is reached. He documented this using both cross-country and time-series data. This empirical phenomenon is now known as the Kuznets curve. The work that Kuznets and his successors have undertaken has had a great influence on how the development process is viewed, even if subsequent studies have cast considerable doubt on the robustness of the relationship. KUZNETS INVERTED-U CURVE Interpretation of the Kuznets Curve Kuznets (1955) not only was the first to uncover the statistical relationship described above but also put forth a theoretical explanation for this phenomenon. His theory was based on dual economy dynamics, which are generated by people moving from the agricultural to the industrial sector. The income distribution of the total population is a combination of the income distributions of the rural and urban populations. Kuznets observed that not only is the average per capita income of the rural population normally lower than that of the urban population; the rural population normally also has lower income inequality. In the early stages of economic development, the gap...
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