Income Inequality-Economic growth and Non-Linearity: A Case of Pakistan

Abstract

The aim of present study is to investigate the relationship between income inequality and economic growth both in linear and non-linear specifications. The study has employed annual time series data over the period of 1971 up to 2005. ARDL bounds testing approach has been used for cointegration and error correction method (ECM ) for short run behavior. Unit root problem is handled by the use of ADF unit root test. The findings of our analysis are sharply contrasted to the significant association between income inequality and economic growth found by Alesina and Roderick (1994) and by Persson and Tabellini (1994). The empirical evidence provides support for the existence of Kuznets inverted-U as well as inverted-S shaped curve in Pakistan. This paper opens up new directions for policy making authorities to equalize income distribution in the case of small transition economy like Pakistan. This paper convincingly argues that there is a need for case-by- case study on such a project in view of each country’s unique characteristics. To the best of our knowledge, this study seems to be a good and unique contribution in literature with reference to Pakistan. This study seems to be a pioneering attempt that employs ARDL cointegration approach for a case study on Pakistan in such issue.