Practical analysis for investment professionals
29 July 2016

Weekend Reads from India: Turkey, Inequality, and the Kuznets Curve

Posted In: Weekend Reads

It is difficult to overlook the recent attempted coup in Turkey. Although Turkey is no stranger to coups, their recurrence, despite the country’s significant economic progress, is striking.

Among the many hurdles in Turkey’s economic transition: its persistently high income inequality score. The nation ranks third worst in income inequality among all OECD countries. Unequal wealth distribution may not have a direct relationship to Turkey’s current challenges, but the concentration of wealth and persistent disadvantage among certain sections of society, over time, can only result in discontent and instability.

Other notable OECD countries with high income inequality scores include the United States, ranked fourth, and the United Kingdom, ranked sixth, according to their Gini coefficients. Some see in the recent Brexit vote and the political volatility in the United States an expression of inequality-driven discontent.

What countries have the lowest income inequality? Denmark and Norway rank at or near the bottom. It may not be a coincidence then that Denmark was rated the happiest country in the world by the United Nations (UN) and Norway came in fourth.

Economic inequality has enhanced significance for low- to middle-income countries like India. In the developed world, inequality is not so easy to discern. It is cushioned by advanced economies and social safety nets and often finds its most vivid expression in books and charts — until it emerges in robust demands for change. But inequality has a much more visible presence in low-income countries. Often these nations have large portions of their populations living hand to mouth. Inequality in these countries tends to be a more multidimensional problem. As Jean Drèze and Amartya Sen demonstrate in An Uncertain Glory — India and Its Contradictions, mutual reinforcement of different inequalities nurtures and creates disparities in a society.

Economists have been studying inequality for over two centuries. David Ricardo’s work, in particular, is instructive. Ricardo, in the context of his simple, agriculture-driven, early 19th-century economy, considered the imposition of an increasing land rent tax to prevent monopoly and inequality. Nobel laureate Simon Kuznets, working in the mid-20th century, hypothesized that income inequality grew at first but then decreased as an economy proceeded through the stages of development, resulting in an inverted “U”-shaped Kuznets curve. Kuznets’s work provides a framework for modeling inequality. Evidence on the relevance of the Kuznets curve, however, has been mixed. Thomas Piketty, offered a critique in his Capital in the Twenty-First Century.

Income inequality is not easily discernible in a highly developed and vibrant economy like that of the United States. But how inequality expresses itself and corrects — often suddenly and unexpectedly — deserves attention.

Below is a list of online resources that I came across in the last several weeks. Happy reading and have a good weekend.

Wisdom on the Markets

Investing

Globalization and Income Inequality

Lighter Reading

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/Christian Mueller

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About the Author(s)
Shreenivas Kunte, CFA, CIPM

Shreenivas Kunte, CFA, CIPM, is director of content at CFA Institute, where he contributes financial market insights about India and the developed world. Previously, he taught at and managed SP Jain’s Trade and Applied Research lab, which he helped found. Kunte also served as a country trading strategist at Citigroup’s Tokyo office. He actively contributes to the development sector in India and is an external research scholar at the Indian Institute of Technology Bombay.

Ethics Statement

Beyond the easier to understand, important codes of conduct, “Ethics” for me is awareness; an endeavor for right thought and action.

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