BibTeX | RIS | EndNote | Medlars | ProCite | Reference Manager | RefWorks

Heidari H, Hassanzadeh A. (2017). Investigating the Relationship between Income Inequality and Economic Growth in Iran. *refahj*. *16*(63), 89-125.

URL: http://refahj.uswr.ac.ir/article-1-2720-en.html

URL: http://refahj.uswr.ac.ir/article-1-2720-en.html

**Introduction: **Providing social justice and eradication of poverty and deprivation by creating balance between the distribution of income and wealth among the people of society is emphasized in the constitution. In this regard, explaining the relationship between income inequality and economic growth has been the most challenging economic issues in the recent decades and despite extensive research in this area, there are still unclear topics in this subject and empirical studies have also led to contradictory results. Some believe that there is a conflict between these two categories and argue that the unequal distribution of income in the early stages of development of each country is essential for growth and in contrast, opponents of this theory argue that an increase in the income inequality prevents economic growth. In this regard and in the present study, in addition to reviewing the theoretical foundations of the different effects of income inequality on economic growth, the level of inequality as a determinant factor of this relation has been taken into account and a non-linear relationship between these two variables has been specified.

**Method: **Using smooth transition nonlinear regression model, the effects of income inequality on Iran's GDP per capita over the period of 1391-1348 have been examined.

**Findings**: The link between income inequity and economic growth in Iran is nonlinear and includes a two-regime structure, that is the effect of income inequality on GDP per capita is negative in the first regime and positive in the second. Therefore, a net positive or negative impact of the inequality on growth that was achieved in most studies, cannot be accepted. Additionally, an optimal rate of Gini coefficient equal to 0.3838 was estimated that maximizes GDP per capita and at levels less than this rate, an increase in GDP per capita has led to an increase inequality and vice versa.

**Discussion:** The role and impact of income inequality on the path to economic growth achievement is important and economic development strategies must be based on rapid economic growth and equitable distribution of income. Considering the results and estimating the optimal rate for the Gini coefficient, policymakers should adopt a policy of "growth with distribution" in order to reduce income inequality and increase the share of low-income classes, particularly the middle class while achieving the optimal rate of income inequality through redistribution leverage such as poverty eradication policies based on reducing income inequality and redistribution using targeted subsidies and taxation of high-income groups.

Type of Study: orginal |

Received: 2017/03/13 | Accepted: 2017/03/13 | Published: 2017/03/13

Received: 2017/03/13 | Accepted: 2017/03/13 | Published: 2017/03/13

1. Abounoori, E., and Azhdari, H., (2005), “The effect of income distribution on economic growth, a cross-country analysis with an emphasis on Iran”, Journal of Humanities Sciences of Al-Zahra University, No 32, pp. 52-73.159

2. Abrishami. H., Mehrara. M., and Khatabakhsh, P., (2005), “Examine the Relationship between Growth and Income Distribution in Iran”, Journal of Humanities and Social Sciences, No 17, pp. 13-50.

3. Aghion, P., Caroli, E., and Garcia-Peñalosa, C., (1999), “Inequality and economic growth: the perspective of the new growth theories”, Journal of Economic Literature, 37(4), pp. 1615–1660.

4. Aref, A. A., (2016), “Income Inequality and its Impact on Economic Growth: Evidence from Jordan”, European Journal of Business and Management, Vol.8, No.6.

5. Akbarian, R., and Famkar, M., (2010), “Examine the Relationship between Income Inequality, Education Expenditures and Economic Growth”, Journal of Economic Growth and Development Researches, No 1, pp. 161-185.

6. Alesina, A. and Perotti, R., (1996), “Income distribution, political instability, and investment”, European Economic Review, 40, pp. 1203-1228.

7. Alesina, A. and Rodrik, D., (1994), “Distributive politics and economic growth”, The Quarterly Journal of Economics, 109, pp. 465-490.

8. Altman, M. (2003), “Economic Growth and Income Equity: Implications of a Behavioral Model of Economic Growth for Public Policy”, Canadian Public Policy, Vol 60, pp.87-118.

9. Barro, R. J., (2000), “Inequality and growth in a panel of countries”, Journal of Economic Growth, 5, pp. 5-32.

10. Barro, R. J., (2008), “Inequality and growth revisited”, Asian Development Bank, Working Paper Series, (11).

11. Baumol, W. J., (2007), “On income distribution and growth”, Journal of Policy Modeling, Vol. 29: pp. 545-548.

12. Bernstein. J., (2013), “The Impact of Inequality on Growth”, Center for American Progress, December.

13. Boushey, H. and Price, C. C., (2014), “How are Economic iInequality and Growth Connected? A Review of Recent Research”, Washington Center for Equitable Growth.

14. Cassio, D. N. B., Jevuks, M. D. A., Andrea, F. D. S., Eryka, F. M. S., and Thiago, G. P., (2016), “Effects of Income Inequality on the Economic Growth of Brazilian States: An Analysis using the Cointegrated Panel Model”, Area 6, Crescimento, Desenvolvimento Economico e Instituicoes.

15. Chen, B., (2003), “An inverted-U relationship between inequality and long-run growth”, Economic Letters, 78, pp. 205-212.

16. Ehrhart, C., (2009), “The effects of inequality on growth: a survey of the theoretical and empirical literature”, ECINEQ Working Paper Series 2009, 107.

17. Galor, O., (2000), “Income distribution and the process of development”, European Economic Review, Vol. 44: pp. 706 -712.

18. Halter, D., Oechslin, M., & Zweimüller, J., (2014), “Inequality and growth: the neglected time dimension”, Journal of Economic Growth, 19(1), pp. 81-104.

19. Kaldor, N., (1956), “Alternative Theories of Distribution”, the Review of Economic Studies, vol. 23, No. 2, pp. 83-100.

20. Kuznets, s. (1955), “Economic Growth and Income Inequity”, American Economic Review, 65, 1-28.

21. Mahdavi, A. M. H., and Ranjbaraki, A., (2005), “Examine the Long-run Relationship between Economic Growth and Income Distribution in Iran”, Journal of Economics, No 18, pp. 113-137.

22. Malinen, T., (2013), “Inequality and growth: Another look with a new measure and method” Journal of International Development, 25.1: 122–138.

23. Maneejuk, P., Pastipipatkul, P., and Sriboonchitta, S., (2016), “Economic Growth and Income Inequality: Evidence from Thailand”, Springer International Publishing, DOI: 10.1007/978-3-319-49046-5_55, pp. 649–663.

24. Mirrlees, J., (1971), “An Exploration in the Theory of Optimal Income Taxation”, Review of Economic Studies, 38:114, pp. 175-208.

25. Nili, M., and Farahbakhsh, A., (1998), “Relationship between Economic Growth and Income Distribution”, Journal of Plan and Budgeting, No 34-35, pp. 121-154.

26. Partridge, M. D., (1997), “Is inequality harmful for growth? A note”, American Economic Review 87(5), pp. 1019-1032.

27. Piraei, K., and Rezaei, H., (2010), “Optimal Rate of Income Inequality in Iran”, Journal of Economic Studies of Islamic Azad University of Shiraz, No 1, pp. 17-31.

28. Terasvirta, T., (1998), “Modeling Economic Relationships with Smooth Transition Regressions”, in Handbook of Applied Economic Statistics, ed. by Ullah, A. and Giles, D., pp. 507–552.

29. Terasvirta, T., (2004), “Smooth Transition Regression Modeling, in H. Lutkepohl and M. Kratzig (eds); Applied Time Series Econometrics”, Cambridge University Press, Cambridge, 17.

30. Todaro, M. (1997), “Economic Development”, 6th edition, New York: Longman.

32. Van Dijk, D. T., Terasvirta and P. H. Franses, (2000), “Smooth Transition Autoregressive Models, a Survey of Recent Developments”, Econometric Reviews, vol. 21, pp. 1–47.

Rights and permissions | |

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. |