Interconnection between income distribution and economic growth : cross-country and Thai evidence

Abstract

The relationship between income distribution and economic growth has been one of the most active issues in development economics. While some studies interest in the effect of economic growth on income distribution, others focus on the effect of income distribution on economic growth. By analysing the inequality-growth relationship only in one dimension without taking into consideration another plausible dimension, therefore, can be misleading especially in the policy implication point of view. This study extends previous studies by investigating both causalities simultaneously and indentifying the ways in which income inequality and growth interact in many development aspects. Using both cross-country and Thai datasets, income inequality and economic growth are found to be negatively related in both analyses. Moreover, they can indirectly interact with one another through other economic, social and political factors such as education, health, investment, international trade, credit market, fiscal policies, political institutional environment and cultural diversity. Through these underlying factors, the possible trade-offs between improving income distribution and good economic performances might occur. This study suggests that in order to reach an economy where economic growth is steadily enhanced and income distribution is more equitable, a government should improve the quality of schooling, provide public access to health services, and strengthen labour standards and social-safety net. In the case of Thailand, the inequality problem can be alleviated through direct taxation. More importantly, policy makers should provide all individuals similar chances in lives to be able to attain higher education, acquire better health care, access to credit market, and to become politically and socially active, regardless of their predetermined backgrounds.