Curve of Kuznets

The curve of Kuznets describes the relation between the level of development of a country (measured in PIB/hab) and its level of inequality. It takes as a starting point the work of Simon Kuznets on economic development in the Fifties.

General presentation

The curve of Kuznets represents the level of inequality of a country according to its level of development, supposed growing in time:

In the first stages of Development, when the investment in the Capital infrastructurel and the Capital naturalness is the principal mechanism of growth, the inequalities encourage the growth by sharing the resources in favor of those which save and invest more.

Contrary, in the more advanced economies, the increase in the Human capital takes the place of the increase in the physical capital like source of the growth. The inequalities slow down the economic growth consequently by limiting the general level of education, because all cannot directly finance their formation.

The curve of Kuznets shows a graph out of U reversed: the y-axis represents the inequalities or the Coefficient of generally confused Gini; the x-axis represents time or the income per head.

The ratio of Kuznets measures the proportion of the income perceived by the 20% gaining more, divided by the proportion of the income perceived by the poorest 20% of a company. A value of 1 would mean perfect equality.

Kuznets proposed two reasons to explain this historical phenomenon:

the workers moved agriculture towards industry
the rural workers became urban

In these two explanations, the inequalities decrease after 50% of the labor are employed in a sector with higher incomes. The economists, of the classical economists until Marx used the theories of the differential of qualification and the agglomeration of the capital in the young economies for other explanations of the curve of Kuznets.

Critical of the curve of Kuznets

The curve of Kuznets, appeared in the Fifties, according to which the inequalities would be reduced " mécaniquement" with the economic development of a country today are largely discussed as well from the empirical point of view as theoretical.

Critical methodological

Kuznets uses cross data coming from different countries but over the same period. This prevents from using data in time to observe an individual progression of the economic development of the country.
Its data especially carried on countries to intermediate income of Latin America where the inequalities are large for a long time. If this variable is controlled, the shape out of U reversed disappears.
Lastly, the shape out of U reversed of its curve does not seem as well to hold with the progression of the economic development of each country as historical differences between these countries (" paths of croissance").

Critical theoretical

Of one from theoretical point of view, T. Piketty (2005) calls into question the strict causality supposed by the curve of Kuznets between the level of development and the inequalities of income. One could believe, within sight of this relation, that the increase in time in the inequalities in a country is a phenomenon " naturel" who is solved itself in time, in an endogenous way.

However T. Piketty shows, on French and American data, that the reduction of the inequalities is not mechanically associated with the growth of the GDP per capita. Historically, it especially was related to unexpected events affecting the capital (war, inflation, catastrophes) and by the tax (on the income in particular).

Source: PIKETTY T.: “The Kuznets' curve, yesterday and tomorrow”, in BANERJEE A., BENABOU R., MOOKERHEE D. (Eds): Understanding poverty, Oxford: Oxford university near, 2005

It is probable that, melting its intuition in the Fifties at one time when the productivity gains were still very important, Kuznets succumbed to the optimism of the Thirty Glorious ones.

The stake is to however know if it is necessary to install mechanisms of redistribution (by the tax) to reduce the inequalities of incomes, or if one can wait until they reabsorb themselves with the development.

The environmental curve of Kuznets

Origin

According to Grossman and Krueger (1994), the curve of Kuznets can be observed in the field of the Environnement. This curve, in spite of its name, does not derive from work of this economist. It is known as that many indicators of health like the Eau or the Air pollution show a curve out of U reversed at the beginning of economic development: one worries little about the environment and the rise of the pollution which go hand in hand with industrialization.

When the primary education needs are provided, one reaches a threshold where the concern for the environment increases and where the tendency is reversed. The company has the means then and the will to reduce the level of pollution and the use of resources to create a unit of GDP (of richness) tends to decrease.

Empirical validity

However, according to a recent study of Meunié (2004), one notes that " not only this curve is detected only for some pollutants with the located effects, but even in this case, of many methodological criticisms weaken portée." This relation appears true for certain pollutants localized (like the Sulfur dioxide or the Dioxide nitrogen), but one has less evidence for other pollutants with the more total effects on the environment.

For example, the consumption of energy, the occupation or the exploitation of the ground as well as the use of the natural resources (what one calls the ecological Empreinte) are not reduced with the increase in the income. Whereas the ratio energy by GDP Net drops, continuous total power consumption to increase in the majority of the developed countries. Moreover, much of natural services produced by the ecosystems like the supply and the regulation of fresh water, the fertility of the grounds and continuous fishing to decrease in the developed countries.

In general, the curves of Kuznets can be highlighted in some data relating to certain local environmental questions (as air pollution) but it is not the case of others (like the renewal of the grounds or the biodiversity). One must as add as the effects of climate change like the disappearance of species and the loss of biodiversity is irreversible.

References

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