UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INCOME INEQUALITY AND ECONOMIC GROWTH: PANEL DATA IN SOUTH EAST ASIA BY NGUYEN LE PHUONG LINH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, November 2016 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INCOME INEQUALITY AND ECONOMIC GROWTH: PANEL DATA IN SOUTH EAST ASIA A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN LE PHUONG LINH Academic Supervisor: PROFESSOR TRAN TIEN KHAI HO CHI MINH CITY, November 2016 i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT Foremost, I would like to express my sincere gratitude toward my thesis advisor, Professor Tran Tien Khai for his valuable guidance and encouragement for my thesis. His comments helped me for the writing of this thesis. I would also like to thank Professor Truong Dang Thuy who gave me necessary guidance on data processing techniques and was willing to give me a hand whenever I have difficulties from my thesis. I am gratefully indebted for his worthy advises.
Furthermore, I would also like to thank all lecturers, staff and my VNP 20 classmates at the Vietnam Netherlands Program. Finally, I would like to send my deepest thanks toward my family members, my parents, my older sister and younger brother who have always been by my side, and encouraged me throughout my studying years and through the time of writing this thesis. This achievement would not have been possible without them. ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This study has examined the impact of different levels of economic growth toward income inequality, applying the Kuznets reverted U-shape model and the Tribble S-curve model by employing the annual panel dataset from 1990 to 2012 at the country-level in the Southeast Asia.
New econometric technique Driscoll and Kraay is handled with the panel regression technique to correct for the autocorellation, heteroskedasticity and cross-section dependence. The analysis finding reveals the significant relationship between income inequality and economic growth. Furthermore, the empirical evidence also provides support for the existence of Kuznets inverted-U as well as inverted S-shaped curve in eight countries in Southeast Asia. Key words: Income inequality, economic growth, Kuznets curve, S-curve, Southeast Asia, Panel data.
iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENT Acknowledgement. iii Table of content. iv List of table. v List of figures.
vi Chapter 1 Introduction. 3 Chapter 2 Literature review .1 Arguments on the concept of Inequality .1 The Kuznets theory .2 Evolution derived from Kuznets theory.1 Kuznets theory in term of technology process .2 Kuznets theory in term of financial development .1 Empirical papers support the growth-inequality relationship .2 Empirical papers against the growth-inequality relationship .3 Determinants of inequality .2 Education and labor skills. 18 Chapter 3 Research methodology. 22 iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 Measure of income inequality .1 The Lorenz curve .2 The Standardized World Income Inequality Database .3 Estimation strategy and correction model .1 The model of Pooled regression .2 The model of fixed effects estimation .3 The model of random effects estimation .4 The choice of panel regression model .5 Driscoll and Kraay standards and correction model.
30 Chapter 4 Empirical results.1 Overview of the income inequality in Southeast Asia .2 Pattern of change .2 The data descriptions .1 The descriptive statistic .2 The possible relationship by scatter .3 Panel data regression.2 Empirical results and analysis. 39 Chapter 5 Conclusion and policy implication .3 Limitations and directions for further research. 45 Appendix A: Regression results. 49 Appendix B: Results of Breusch-Pagan LM test.
55 Appendix C: Results of Hausman test. 56 Appendix D: Modified Wald Test for groupwise heteroskedasticity. 58 Appendix E: Wooldridge test for autocorrelation in panel data. 59 Appendix F: Pasaran test for Cross-section dependence.
60 v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 3.1: Current level of income inequality in Southeast Asia .3: Measures of GDP per capita and income inequality in Southeast Asia over 5-year period from 1990-2012 .4: Variance inflation factor (VIF). 41 vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 2.1: The Kuznets’ model .2: Lewis’ dual sector model .1: The Lorenz’ curve .1: Gini coefficient index in Southeast Asian from 1980 to 2012 .2: Relationship between income inequality and economic development .36 vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1 Introduction 1.1 Problem statement Although many countries in Asia have witnessed a significant growth in current decades as well as the shrinkage of poverty, the GDP per capita growth rate in South East Asia was approximately 6% in 2007, they also have accompanied a high income inequality level. According to Zhuang, Kanbur, and Maligalig (2014), there are 12 among 30 countries in Asia, which indicated an increase in inequality (worsening in Gini index) during the 1990s and the 2000s, including PRC, India and Indonesia, where have the highest population of the region. Besides that, many of the Asian countries also experienced the rapid spread in expenditure share of top 5% and 1% income classes, implying that the advantage groups in the society is getting richer in a much faster way.
Eventually, in the universal point of view, although gini coefficient in developing Asia is still in an average level 28-51, compared to the income inequality in Latin America the Caribbean and Sub-Saharan Africa, 45-60 and 30-66 respectively, the wider gap of income inequality in those Asian countries is such a considerable issue while the inequality in some Latin America has been remedied over recent years. There are several reasons why economic growth should be concerned with inequality. On the economic point of view, the inequality is not purely a political object but also considered as an important factor, which matters for growth and poverty in long run. Some evidences show that countries with higher level of inequality will hinder the economic growth, thus leading to the increasing level of poverty as well as contributing to the higher inequality degree of education, health and so on.
Furthermore, inequality is an important factor leading to crime, social unrest or violent conflict. There is empirical evidence that income inequality weakened the investment and growth by filling up social discontent, increased political instability (Alesina and Perotti,1996). In fact, the most concerning object in all economic debates is the development of the economy as a whole or the economic growth particularly. On the other hand, inequality or income distribution can negatively affect the physical and human capital accumulation, which is the driving force to growth.
Therefore, it is obvious that poor income distribution 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com may impede the economic growth in the long run. Eventually in order to improve the living standard and optimize social welfare as a whole, it is important to look into the effects of economic growth on income distribution. A desirable economic growth will reduce the income disparity as well as lower poverty rate leading to a stable society. From the current situation of the economy and society, inequality is one of the most worthy issues in economics, yet very few studies are paid certain concern about the effect of economic growth on income inequality, especially for a particular region such as South East Asia, where the inequality is increasing recently, which may worsen economic growth in the long run.
There have been some empirical studies regarding to the relationship between growth and income inequality. It is generally believed that the level of the economic growth is cited as a remedy for improving the poor situation (Adam, 2004; Dollar &Kraay, 2002). However, given evidence that current pattern of growth and globalization are raising income distribution gap, which hinders the poverty reduction rate (Ravallion, 2001). According to Kuznets (1955), growth plays an important growth to inequality by the concept of reverted U-shaped relationship.
In the initial phase of development, increasing economic growth will lead to the increase in inequality, but in latter stage, the inequality will reduce with the upward speed of growth. For those reasons listed, this research will go further to examine the relationship between economic growth and inequality nexus focusing in Southeast Asian region combining of 8 countries from 1990 to 2012, the period of new technologies and institutional transition associated with rapid economic growth. The result is able to suggest some policy implications for the decision-making process. Even though there have been a number for publications in public domain, this study is different with other previous studies conducted in the following key areas: (i) explore the effect of economic growth on income inequality in a new context of sub-region - Southeast Asia - where encountering the increasing income inequality while achieving a faster and higher level of economic growth; (ii) because of the shortage of income inequality data over a long time period, most of empirical studies about growth and inequality have relied on cross-section regression as a framework for their analysis, and have not had further researches for particular regions, this study will apply the Driscoll and Kraay estimation in 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com the panel regression to capture the systematic differences in behavior over time and space; (iii) examine the Kuznet reverted U-shaped hypothesis with two economic sectors and the S- curve hypothesis with the addition of service sector.2 Research Objectives The purpose of this study is to examine the influence of economic growth toward the income inequality in the pattern of the panel data.
Accordingly, the two main objectives have been considered as following: (i) Analyzing the potential impact of economic growth on inequality in Southeast Asia within the context of the Kuznet reverted-U-shape hypothesis.3 Research question In order to answer for the research objectives, the three of research questions have been given as follow: (i) Does economic growth have significant effect on income inequality in Southeast Asia? (ii) Is the relationship of income inequality and economic growth consistent with the hypothesis of Kuznets reverted U-shape? (iii) In the higher level of economic growth, does the reverted U-shape still hold? 1.4 The Research scope This study has analyzed the research objectives by using the 8 countries in Southeast Asian region in the period 1990-2012, where encounters a higher income inequality with a higher level of economic growth. Data are collected at the countries level.5 The research structure The composition of this thesis includes five critical chapters as following: Chapter 2 presents the necessary theories and the empirical researches involving with the theories. 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 3 explores the research methodology, building the models, explain the data measurement, and introduce the applied econometric technique to answer the research question. Chapter 4 analyzes the results of the research from the econometric technique used, as well as explains the findings in the comparison with other empirical papers and reports.
Chapter 5 summarizes discussions, proposes possible policy implications, indicates the limitations and suggests directions for further studies. 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 2 Literature Review This chapter will present the relevant theories and the related empirical studies, as well as analyze different levels of growth on inequality the “reverted U” shape and the “S-shape”. The structure of this chapter will be determined as following: i. The theoretical literature capturing the crucial theories in the study.
The empirical researches providing the empirical evidence for the related theory; iii. The hypothesis construction answering for research questions.