The causal relationship between income inequality and economic growth: evidence from panel data for Vietnam

Abstract

ABSTRACT By analysing a panel dataset of 63 provinces of Vietnam (2004 − 2021), this study demonstrated that there was a causal relationship between income inequality (measured by the Gini coefficient, income gap, and the income share of the top 20%) and economic growth (expressed by real GDP per capita). The Kuznets curve, which is a well-known inverted U-shaped relationship between real per capita GDP and income inequality, was found by applying the robust fixed-effects method (FEM). In Vietnam during 2004 − 2021, economic growth first increased income inequality and later reduced it at a higher stage of economic development. This empirical evidence demonstrates that the Kuznets curve is an apparent empirical phenomenon in both national and provincial data. The Two-step System GMM Estimation examined the impact of income inequality and other socioeconomic factors on GDP per capita and showed the significant positive impact of income inequality, investment, employment rate, and education attainment, as well as a significant negative impact of headline inflation and the urbanization rate on economic development. Moreover, the results show that not literacy rate but educational attainment (the percentage of the population aged 15 years and older with a bachelor’s degree or higher) significantly influence economic growth.