Abstract
Income inequality in many middle-income countries has increased at an alarming level. While the time series relationship between income inequality and economic growth has been extensively investigated, the causal and dynamic link between them, particularly for the middle-income countries, has been largely ignored in the current literature. This study was conducted to fill in this gap on two different samples for the period from 1960 to 2014: (i) a full sample of 158 countries; and (ii) a sample of 86 middle-income countries. The Granger causality test and a system generalized method of moments (GMM) are utilized in this study. The findings from this study indicate that causality is found from economic growth to income inequality and vice versa in both samples of countries. In addition, this study also finds that income inequality contributes negatively to the economic growth in the middle-income countries in the research period.
Highlights
From the World Bank’s classifications, middle-income countries (MICs) are nations with a per capita gross national income (GNI) between US$1005 and US$12,235
The results consistently indicated that income inequality truly retarded economic growth in various subsamples, which were established by income level by the ratio of nonperforming loans to bank loans
For the former, it was stated that income inequality was found to be positively correlated with economic growth using the generalized method of moments (GMM) technique (Biswas et al 2017; Fawaz et al 2014; Forbes 2000)
Summary
From the World Bank’s classifications, middle-income countries (MICs) are nations with a per capita gross national income (GNI) between US$1005 and US$12,235. The World Bank considers that MICs are essential for continued global economic growth and stability. Sustainable growth and development in MICs, including poverty reduction, international financial stability, and cross-border global issues including climate change, sustainable energy development, food and water security, and international trade, have positive spill-overs to the rest of the world. In China, it was found that in 2015 the top 10 percent of the population accounted for nearly 42 percent of the national income, but the bottom 50 percent only owned 15 percent of the national income; these groups both shared nearly one-third of the national income in 1978. Urban households earned twice as much as rural households in 1978. They earned a 3.5 times higher amount in 2015.
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