INCOME DISPARITIES, ECONOMIC GROWTH, AND DEVELOPMENT AS A THRESHOLD

Galor and Moav (2004) argue that in the early stages of development, physical capital accumulation is the primary source of economic growth. Thus, inequality enhances growth by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, physical capital is replaced by human capital as the engine of growth. Accordingly, equality alleviates the adverse effects of credit constraints on human capital accumulation and prompts the growth process. This paper attempts to test empirically the finding that the impact of income inequality on economic growth depends on the development stage. A threshold estimation technique, developed by Hansen (1999), is utilized for a panel of 70 countries for the period between 1970 and 1999. The estimation suggests that there is a statistically significant threshold income per capita, below which the coefficient on the relationship between inequality and growth is significantly negative and above which the estimate is positive, but not statistically significant.