Assessment of Relationship Between Growth and Inequality: Micro Evidence from Thailand

This paper shows that growth and income distribution dynamics are closely linked through occupation, financial intermediation, and education. We use the micro data from Thailand for 1976-1996. The compositional changes across these characteristics account for half of the Thai inequality increase and forty percent of the Thai growth and poverty reduction. Financial deepening and educational expansion contributed to increasing inequality while occupational transformation contributed to poverty alleviation. The changes in income gaps across the income-status groups, that is, divergence and then convergence, give rise to invertedU inequality dynamics. These two growth-related components of inequality dynamics, composition and income-gap dynamics, explain virtually all the change in overall inequality, except its initial rise. Thus, inequality dynamics can be viewed as integral part of wider process of growth as Kuznets speculated. (JEL D31, O41, I32) This paper examines the relationship between growth and inequality using the micro data from Thailand. Due to the scarcity of appropriate data, most empirical studies that attempt to establish the relationship between growth and inequality focus on cross-country regressions though the relationship is dynamic. The results of these studies are, unfortunately, robust neither to the specification of estimation nor to the selection of data. At best, they have provided suggestive clues. A more natural alternative for studying the dynamic relationship between growth and inequality is an analysis of evolution of the income distribution for a given economy over time, using a series of micro data. Following Kuznets’ (1955) original suggestion, the data are classified by average income levels for a long (two-decade) span, so that one can form long-term income-status groups. Then, the changes in the income distribution consist of (1) population shifts across income-status groups, (2) changes in income levels across these groups, and (3) distributional changes within these groups. The first component may be called “composition dynamics,” the second component “income-gap (or convergence-divergence) dynamics,” and the third one “intragroup inequality dynamics.” Kuznets (1955) viewed long term change in income inequality as part of a wider process of growth. Indeed, the first two components of inequality dynamics, (1) and (2) above, are indeed related to growth. As more people join higher-income groups transiting from the lower-income groups, the average income of the economy