Is the Kuznets Curve still relevant?

Kashvi Singh

For the past few decades, economists around the world have used models such as the Kuznets’s curve to support the view that ‘as an economy develops, market forces first increase and then decrease economic inequality.’ However, is it now time to stop putting blind faith into this notion and questioning its reliability?

The Kuznets’s curve is based on the idea that once economic prosperity is achieved through factors such as unequal pay and unequal distribution of resources, the ‘invisible hand’ would ensure that these benefits are gradually passed on to the lower strata of society. This can be achieved in various different ways, such as increased employment due to job creation, increased welfare spending due to increased taxation, and the spill over effects of the same. In a world with stark economic divisions, this theory certainly provides hope for a better and more equal future, but can inequality really lead to equality? And if Kuznets’s theory is in fact accurate, why are countries like China and India still unequal despite being one of the fastest growing economies for many years now?

Comparing lesser developed nations to advanced countries, we can say that a major factor that encouraged the reduction of income gaps in advanced countries, was actually high wages as this increased the incentive to produce efficiently, along with increasing consumer spending and demand. In fact, according to Robert C Allen in ‘Global Economic History’, a major driving force for the industrial revolution, along with technological change of course, was that the workers were paid high wages. According to him, lower wages and cheap labour actually lead to less economic growth. So, does this not contradict Kuznets’s theory?

In Piketty’s Capital, he introduces the idea that the theory of the Kuznets’s curve can be challenged as it was ‘a product of the cold war’. He argues that Kuznet used data from during the war to show that inequality decreased, which was in his (Kuznet’s) view due to the process of intersectoral mobility. However, in reality the reduction in income inequality during this period was mainly due to the war and the economic and political shocks of the time (inequality reduced as even the rich suffered due to economic standstill). This therefore raises the inevitable question of whether Kuznet’s theory was too optimistic.

According to Piketty, inequality is reduced when the poor catch up with the rich as they ‘achieve the same level of technological know-how, skill and education’. These factors have less to do with a nation’s economic growth and are more dependent on the efficiency of governments in providing these facilities to the economically deprived section of the population.

However, all this is not to say that Kuznet’s theory is completely false and baseless. It is a fact that as a nation becomes wealthier, factors such as job creation and high demand help, lifting millions out of poverty, but at the same time we cannot solely depend on economic growth to reduce inequality. The reason being that by doing so, the role of governments in taking essential steps such as providing basic facilities (e.g. education) that help reduce inequality are completely side-lined.