What is the relationship between economic growth and inequalities in developing nations by Gary Fields’ observations?

Relationship between economic growth and inequalities in developing nations by Gary Fields’ observations

In more recent times, Gary S. Fields has offered predictions about what will happen to inequality in the course of economic growth. He has made use of Lorenz curves to explain these. He talks about three different situations, viz.

Traditional-Sector Enrichment Growth Typology:

In this type of growth, all the benefits of growth are divided among traditional-sector workers with little or no growth occurring in the modern sector. This process roughly describes the experiences of countries whose policies focused on achieving substantial reduction in absolute poverty even at very low incomes and with relatively low growth rates.

Growth results in higher-inc.ome, a more equal relative distribution of income and less poverty. Growth causes the Lorenz Curve to shift uniformly upward and closer toward the line of equality as shown in Figure 1.

Modern-sector Enrichment Growth Typology:

In this type of growth, the economy grows, but such growth is limited to a fixed number of people in the modern sector, with both the number of workers and their wages held constant in the traditional sector.

Growth results in higher income, a less equal “relative distribution of income and no change in poverty. Growth causes the Lorenz curve to shift ward and further from the line of equality as shown in Figure

Modern-sector Enlargement Growth:

In this case, the two-sector economy develops by enlarging the size of modern sector while maintaining constant wages in both sectors.

In this type of growth, rise and absolute poverty is reduced, but the Lorenz curves will always cross so that we can not make any unambiguous statement about changes in relative inequality. It may improve or worsen. Fields believes that if this style of growth experience is predominant, inequality is likely to rise in the early stages of development and then it may improve.

In Figure 3 two Lorenz curves cut each other. This may be explained as follows:

The second factor affecting how much economic growth reduces poverty is the extent of inequality. In a straightforward statistical sense, economic growth can be expected to reduce poverty more if inequality falls, than if it does not.

This expectation is confirmed by the previously cited study of Bruno, Ravallion and Squire (1998). For the same 20 developing countries, these authors regressed the rate of change in poverty on both the change in growth and the change in inequality (as measured by the Gini coefficient).

They obtained statistically significant coefficients of-2.28 for the growth variable and 3.86 for the inequality variable. In other words, even small changes in the overall distribution of inequality can lead to sizeable changes in the incidence of poverty.

For any given rate of economic growth, the more that inequality falls, the greater is the reduction in poverty.