Re-examining the Kuznets Curve Hypothesis for South Asian Countries: New Evidences

Abstract

This study re-examines the validity of Kuznets curve hypothesis for six South Asian countries, namely, Pakistan, Nepal, Bhutan, Sri Lanka, India, and Bangladesh, over the period 1991–2018. The Pooled Mean Group (PMG) technique results in the short and long run reveal an S-shaped curve relationship between income inequality and Gross Domestic Product (GDP) per capita for all countries, that is, negative at the beginning, positive after the first turning point (GDP per capita level, US$473), and negative after the second turning point (GDP per capita level, US$3827) when GDP per capita reaches the maximum level. In contrast, the country-specific results show, that the first and second turning points of GDP per capita are US$468 and US$2298 for India, US$445 and US$1408 for Pakistan, US$450 and US$9045 for Bhutan, and US$925 and US$6836 for Sri Lanka, which support the validity of the S-shaped curve. Moreover, the results also show the existence of N-shaped curve with GDP per capita (i.e. first and second) turning points of US$473 and US$2864 for Bangladesh and US$105 and US$3568 for Nepal. The findings suggest that income inequality gaps in Asian countries seem to be conditional on the levels of GDP per capita. In this regard, expansionary fiscal policy, specifically in the form of government spending, promotion of exports and employment, and price stability can play a vital role in increasing the GDP per capita levels and narrowing the income inequlaity gaps in the selected Asian countries.