Do the Benefits of Economic Growth Favor the Rich? Theory and Evidence from Developed and Developing Countries

Abstract

This paper focuses on the relationship between economic growth and the distribution of the income. However, previous attempts to answer this question have ignored, for the most part, government social spending, aimed at redistributing wealth. Using data from 40 countries over 80 country-years, this paper analyzes economic growth in terms of GDP, GDP Change, and GDP per capita, income inequality in terms of the Gini index, and government social spending in terms social contributions in both the currency and as a percentage of GDP, to determine this relationship. Based on the multivariate regression output, this study has shown that as a country grows economically, the Gini index increases. Concurrently, social spending begins to increases, albeit slowly. However, at a point, the Gini index plummets as the amount of social contributions drastically increases. Based on this, the hypothesis is correct in poor countries, but is incorrect in wealthy countries.