Economic growth, income inequality and environment: assessing the applicability of the Kuznets hypotheses to Asia

Abstract

In light of growing threats to sustainable development, two serious challenges (that is, rising income inequality and environmental degradation) have been addressed by numerous empirical studies. However, the results of those surveys undertaken for varied samples over different time periods have in many cases turned out inconclusive regarding the validity of the two Kuznets related hypotheses that dealt with the challenges. Hence, the two hypotheses are tested in our study for the case of Asia with a view to exploring the interlink between the hypotheses, as there seems to be a limited literature on this issue, especially on Asia. The Kuznets inverted U-curve hypothesis that posits the relationship between income and income inequality has met varying degrees of acceptance. The recent work by Piketty, for example, refuted the hypotheses as irrelevant as the universally applicable theory, though Piketty himself has not dealt with in-depth analysis of Asia, the region that has had the largest increase in income inequality in the developing world since the 1990s. As for the second hypothesis (EKC curve) that postulates the relationship between income and environmental deterioration, diverse results produced by multitudinous surveys need to be re-examined by further studies, especially on Asia, the region that includes three of the world’s top five largest GHG emissions resultant from the highest economic growth rate achieved since 1990. Our cross-country and non-econometric analysis of 20 Asian countries shows that the Kuznets inverted U-curve hypothesis is valid with some limitations. Both Asian trends in income inequality and in environmental degradation (CO2 emissions) appear, by and large, to follow Kuznets’ hypothesized curve up to the lower level of high income as income rises, whereas a divergent trend could be observed among high income economies, generating a second inverted U-curve with frequent irregularities in the trend curve as income increases. Irregularities in the curves that are frequently observed among high income economies seem to be apparently generated by country-specific conditions, policy, technology and so on. Thus growth impacts on income inequality and environmental deterioration differ substantially among the high income economies, whereas among the countries with lower income, growth impacts generated on inequality are generally small, though their impacts on environment tend to be large. While environmental and income policy is often non-existent for low income countries, high income countries have generally introduced varied policies to cope with growing income inequality and environmental degradation. Since irregular patterns in the two Kuznets inverted U-curves seem to be generated by country-specific conditions and policies, that appear to be wide-ranging among economies within higher income range, econometric analyses that have produced divergent results on the validity of Kuznetsian hypothesis may need to be supplemented by different approaches that take in to account country-specific conditions. This study raises the question whether it is possible to promote equitable income growth that could reconcile with environmental protection. The governments of high income countries, the largest emitters of all income groups, may need to cope with the issue by devising policies that seek a proper link between development and environment.