A Cross-Country Investigation of Inequality and Growth With Theil Indexes

In our study, we investigate empirically any systematic relationship between income inequality and economic growth in both directions; the effects of growth or development on inequality (the Kuznets hypothesis) and the effects of inequality on subsequent growth. The study is carried out in a traditional cross-country estimation using recently updated data on several variables and Theil indexes as inequality measures. The relationship between inequality and growth are investigated in different samples for two periods; 1965-1985 and 1985-2005 peiods. Our findings do not support the Kuznets hypothesis; the inverted-U relationship between per capita income and inequality seems to be an artificial statistical fact as a consequence of the Latin American countries clustering in the middle, with high inequalities. But our estimation results show that poor countries are statistically more unequal than richer countries and that inequality tends to fall over the course of development. Our estimation results do not also show any statistically significant relationship between inequality and subsequent growth.