A Resource-Based Approach to the Modeling and Simulation of Income Distribution: The Case of Pakistan

Abstract

Developing countries are affected by evident and persistent asymmetric income distribution. The increasing relevance of this issue to development agendas sets the need for planning tools that can support the analysis of the long-term impacts of alternative policies on income distribution. For this purpose we use a resource-based approach and develop a System Dynamics based simulation model, which we apply to the case of Pakistan. The model focuses on the processes of the accumulation of physical and human capital, which we consider as the endogenous sources of household income. Policy analysis suggests that public investment in education and micro-credit, financed by a modest increase in income tax for the high-income groups, positively affects equitable income distribution and economic growth. We believe that the analytical framework developed integrates and complements existing approaches to modeling income distribution by providing a broader and longer term perspective.