This document presents an analysis of the determinants of inequality. It begins with an introduction discussing the relationship between growth, urbanization, and inequality. It then presents stylized facts about world economic growth, urbanization trends, and the relationship between Gini index and income. The document discusses theories of inequality, particularly Kuznets' theory, and measures of inequality like the Gini coefficient. Empirical models are presented examining the relationship between the Gini index, GNI, FDI, and OECD membership. The conclusion notes limitations of the empirical analysis and areas for further study.

1. Determinants of Inequality
Fakultät Wirtschaftswissenschaften
Lehrstuhl für Wachstums- und Konjunkturtheorie
Prof. Dr. Thomas Gries – Module W4412 Global Growth
Sherif Elkoumy and Rainer Grundmann 15 Jul 2008

2. Agenda
1. Introduction
2. Stylized Facts
3. Theory
4. Empirics
5. Conclusion
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3. Introduction
• Growth, Urbanization Increased
• Urbanization leads to social problems
• Change in inequality is a result of
growth and urbanization processes
• Inequality has been an ongoing
concern for economists and scholars
worldwide
• Inequality is a part of development
economics
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4. Stylized facts
Growth (output) :
World Economic Growth
9
8
7
Annual Growth %
6
5 World
4
OECD
3
2 Low Income
1
0
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
-1
-2
Year
Source: Data from Worldbank (2008)
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5. Stylized facts
Urbanization/Population growth:
Source: United Nations (2008b)
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6. Stylized facts
Relation Gini-Index and Income:
Source: Data from Wolrdbank (2008) and Human Development Reports (2008)
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7. Theory
Measuring Inequality:
• Gini-coefficient
• Most important measure for
income inequality
• Based on the Lorenz curve
Source: Answers.com (2008)
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8. Theory
Kuznets theory:
• developed 1955
• early stages inequality
increases
• then decreases again
• structual transformation
(agricultural, industrial
sector)
• Smith and Todaro:
whether shape is shown
depends on type of
Source: after Smith and Todaro (2003)
structual change
• Empirical works suggest
that it rather works for
cross-country data
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9. Empirics
Model (1):
• 59 % (R2) of GINI
explained
• FDI: positve relation
• GNI negative
• Coeffients not
significantly different
from 0
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10. Empirics
Model (2):
• 60 % (R2) of GINI
explained
• GNI negative
• OECD makes a clear
difference
• Coefficients not
significantly different
from 0
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11. Conclusion
• Statistics do not give clear evidence on GINI
explanation
• Theory of Kuznets asks for an inverted u-
curve
• Estimated model does not allow for this
results blurred
• Increase sample size and improve
variables that indicate development
stage
• Equation estimation leads to a
coefficient
significantly differing from 0
• still overall fit only 43%
• use exponential equations
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12. Sources
Simon Kuznets, 1955. Economic Growth and Income Inequality.
The American Economic Review, 45(1), 1-28.
Smith, S.C. & Todaro, M.P., 2003. Economic Development 8th ed., Boston:
Addison Wesley.
Human Development Report, 2008. Human Development Report 2008.
Available at: http://hdrstats.undp.org/indicators/ [Accessed July 13, 2008].
United Nations, 2008b. World Urbanization Prospects: The 2005 Revision.
Available at: http://www.un.org/esa/population/publications/WUP2005/
2005WUP_FS5.pdf [Accessed July 9, 2008].
Worldbank, 2008. DDP Quick Query. Available at: http://ddp-ext.worldbank.org/ext/
DDPQQ/member.do?method=getMembers&userid=1&queryId=135
[Accessed July 9, 2008]
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13. Thank you for your attention!
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