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Home / IAS Preparation / Kuznets Curve

Kuznets Curve - Definition, Explanation, Evidence, Environmental Kuznets Curve, Criticism And More

Last Updated on Oct 09, 2023
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A Kuznets Curve is a graphical representation. It is used to demonstrate the hypothesis that economic growth initially leads to greater inequality, which is later followed by the reduction of inequality. It is a representation of market forces and income as and when an economy develops. 

Kuznets Curve is important from the perspective of UPSC IAS Examinations, which falls under General Studies Paper 3 and particularly in the Indian Economy section area. In this article, we shall discuss the Kuznets Curve, its explanation, and its criticism.

Check out the Economy UPSC Notes.

What is Kuznets Curve?

Kuznets Curve is an inverted U shape that, initially, economic growth leads to greater inequality, which is later followed by the reduction of inequality. Economist Simon Kuznets developed the Kuznets Curve in the 1950s and 1960s.

Fig: Kuznets Curve

Also, check the article on the Consumer Price Index for UPSC Exam.

Kuznets Ratio

The Kuznets ratio is a way to measure the income distribution by comparing the income received by the highest-earning households (typically the top 20%) to that received by the lowest-earning households, usually represented by either the lowest 20% or lowest 40% of income recipients.

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Kuznets Curve – Explanation
  • The Kuznets Curve shows the relationship between economic growth and income inequality.
  • It shows that in the early stages of growth, inequality increases with more growth.
  • This is because, in the early stages, some sectors and parts of the economy grow faster than others. This increases inequality.
  • However, after a certain level of income, inequality starts to decrease even as the economy grows.
  • This is because, in later stages, faster growth spreads more evenly across the economy.
  • So, the curve has an inverted U shape. Inequality first increases and then decreases with economic growth.
  • The curve suggests that in poor countries, economic growth can increase inequality initially. But, it leads to less inequality in rich countries.
  • Economist Simon Kuznets developed the curve based on data from some developed countries.
  • However, data from many developing countries only sometimes follow this inverted U shape.
  • Other factors like technology, globalization, and institutions also impact inequality apart from just growth.

Check out the article on the Wholesale Price Index here!

Simon Kuznets

  • Simon Kuznets was a Russian-American economist. He won the Nobel Prize in Economics for his research on economic growth.
  • He developed the standard for national income accounting. It helped advance Keynesian economics and the study of econometrics.
  • He also developed the Kuznets curve. It hypothesizes that income inequality in industrializing nations rises at first and then declines.

Also, Read about the Gini Coefficient for UPSC Exam here.

Kuznets Curve and Development Economics

The Kuznets curve hypothesis has important implications for development economics:

  • Growth vs inequality: It highlights the trade-off between economic growth and income inequality. Many developing countries most commonly face this. In the initial stages, policies aimed at faster growth end up increasing inequality.
  • Inequality as transitional: The curve suggests that high inequality in poor countries may be a transitional phenomenon. It declines as the economy develops further. Yet, this is not inevitable and requires appropriate policies.
  • Focus on inclusive growth: policies need to focus on inclusive growth that allows the widespread distribution of gains from growth. Only then can the developing countries reap the benefits of economic growth. Narrow growth may not reduce inequality in the long run.
  • Importance of redistribution: The curve indicates that a reduction in inequality happens only after a certain level of income is achieved. Developing countries need to prioritize redistribution from the start.
  • Role of infrastructure: Investments in infrastructure, education, and health that benefit the poor can contribute to more equal growth.
  • Limits of the curve: The curve is not observed uniformly across developing countries. This indicates that other factors beyond growth also impact inequality. Policies need to account for these factors.

Study in detail about Lorenz Curve here!

Evidence for Kuznets Curve

The evidence for the existence of an inverted U-shaped Kuznets curve relationship between economic growth and income inequality is as follows:

Cross-country studies

  • Income inequality tends to be higher in less developed countries than in more developed countries. This has been found in many cross-country studies. 
  • This suggests that income inequality may follow a U-shaped curve. 
  • Inequality rises during the early stages of development. It then declines as countries become more developed.

Time-series studies

  • Some time-series studies have found that income inequality has increased in many developed countries. 
  • Yet, other time-series studies have found it to decline in some developed countries. 
  • This suggests that the Kuznets curve may not be a universal phenomenon. 
  • The relationship between income inequality and development may vary from country to country.

Sectoral shifts

  • The Kuznets curve hypothesis argues that income inequality rises during the early stages of development. This is a result of sectoral shifts from agriculture to manufacturing and then to services. 
  • This is because manufacturing and services tend to be more capital-intensive than agriculture. This leads to higher wages for skilled workers and lower wages for unskilled workers. 
  • As countries develop, their economies become more diversified. The share of employment in agriculture declines. This leads to a decline in income inequality.

Education

  • The hypothesis also argues that income inequality rises during the early stages of development as a result of differences in education levels. 
  • This is because people with higher levels of education tend to earn higher wages. This leads to a widening of the gap between rich and poor. 
  • As countries develop, more people will have access to education. The gap between rich and poor tends to narrow.

Also, Read about the Measurement of National Income for UPSC Exam here.

Environmental Kuznets Curve

The Environmental Kuznets Curve (EKC) suggests a link between environmental quality and economic development. It proposes that environmental issues worsen initially with economic growth but improve after a certain income threshold is reached. There's evidence supporting the EKC for indicators like water quality, air pollution, and ecological footprint. These indicators follow an inverted U-shaped curve as per capita income or GDP increases.

For instance, the U.S. saw significant economic growth between 1970 and 2006, with more cars and miles driven. However, regulatory changes and technology reduced emissions of pollutants like carbon monoxide, nitrogen oxides, sulfur dioxide, and lead. Deforestation might also follow a Kuznets curve, with net deforestation stopping in countries with per capita GDP above $4,600. However, wealthier nations may contribute to global deforestation through consumption patterns.

Major Causes of Environmental Kuznets Curve

  • Evidence shows pollution decreases as the economy grows. For example, in the US, as economic growth led to more cars, regulations reduced air pollution, like sulfur dioxide.
  • Economic growth provides extra income, making people willing to pay more for better environmental standards.
  • Rather than just real GDP, there's a growing focus on improving living standards, which can be more politically appealing.
  • Technological advancements drive long-term economic growth, allowing higher output with fewer resources. For instance, cars have become more fuel-efficient since the 1950s.
  • Improved technology, like cheaper solar energy, reduces environmental harm potential.
  • As economies shift from farming to manufacturing and then to services, the environmental impact tends to decrease.
  • Government regulation grows with economic development, addressing environmental issues affecting health and living standards.
  • As income rises, the additional utility of more income diminishes, leading people to prioritize other aspects of living standards over high salaries when faced with environmental problems like congestion and pollution.

Read about Fiscal Discipline here!

Criticism of Kuznets Curve

The criticism of the Kuznets Curve is given below:

  • The U-shape of the Kuznets curve does not represent progress in the development of individual Nations but the historical differences between them. This is because most of the data in the Kuznets Curve is gathered from Latin America, which is a middle-income region with a history of inequality. This U-shape of the curve disappears when this variable is taken into account.
  • To criticize the validity of the Kuznets curve theory, the economic rise of East Asia has been used. The Rapid economic rise of Japan, South Korea, China, and Singapore, who were known as the four Asian tigers between 1965 and 1990, was called the East Asian miracle. At this time, manufacturing and export grew quickly and powerfully. In this period, life expectancy was found to increase, and population levels living in absolute poverty decreased.
  • These developments contradict Kuznet's theory because of the economic development of the East Asian economy that distributed the benefits of economic growth among the population when the idea stated that rapid capital accumulation would lead to an increase or rise in inequality.

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Kuznets Curve – FAQs

The Kuznets curve expresses a hypothesis advanced by economist Simon Kuznets in the 1950s and 1960s. It expresses economic inequality against per capita income over a period of time.

The Kuznets curve is a graphical representation to showcase the inequality in income against the per capita income. It was developed by Simon Kuznets in around 1950s-60s.

Simons was a Russian American development, economist and statistician who set the standard for national income accounting. He was awarded the 1971 Nobel Memorial Prize in Economics for his research on economic growth.  The national accounting developed by him helped advance ideas of Keynesian economics and study of econometrics.

The criticism of the Kuznets Curve are given below: It does not represent progress in the development of individual nations but the historical differences between them. This is because most of the data in the who is net but gathered from Latin America which is a middle income region with a history of inequality. This U-shape of the curve disappears when this variable is taken into account.

The U-shape of the curve diasppears when the data from the individual nations are taken into account.
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