Salı, Mayıs 21, 2024

Income Equality in Growth

Sustainable growth is the way for low income groups to jump to higher income groups in the long run. In parallel with the growth rate achieved, per capita income also increases. However, in which income groups does per capita income increase at a higher rate? Fair sharing of income increase through growth is one of the factors that determine the “quality of growth”.

Analysis of the relationship between income distribution and growth reveals extremely complex equations. Discussions on the cause and effect relationships are never ending. For instance, there are opinions that some deterioration in income distribution at the first stages of transition to growth in economies emerging from recessionary periods may be acceptable.

In order for the income distribution imbalance to make a positive contribution to growth, certain conditions must be met. The fact that the existing economic, legal and social environment in a country supports development and entrepreneurship, that high income groups increase savings and investment rates, that new business areas are opened especially in poor countries, and that the level of education exceeds a certain level makes a positive contribution to growth for a while. However, what matters is the balanced and sustainable distribution of income in the long run.

Arthur Okun says that perfect equality and perfect efficiency cannot coexist. He argues that societies must decide what balance to achieve between perfect equality and perfect efficiency.

In the long run, inequality in income distribution threatens growth. In most countries, it is preferred to provide ease of utilization of credit to low-income groups as a way of supporting low-income groups. This method has been frequently used in Turkey in recent years. Yet, credit is debt, not a source of income. In the long run, granting more loans to support low-income groups may have negative effects on both the households’ financial strength and the potential growth of the country.

Numerous academic studies have proven that equality in income distribution has positive effects on growth. At this point, it is clear that political economy comes into play strongly. Economic policies consist of a set of political preferences and have a great impact on income distribution.

Within the framework of the above explanations, we observe that high inflation has been distorting income distribution in Turkey. However, this is not yet reflected in the data revealed. Continuously rising inflation after the CBRT’s interest rate cuts in September 2021 leads us to estimate that income distribution has begun to deteriorate within the year 2022.

Income distribution is analyzed through the Gini coefficient. If the coefficient is equal to zero, there is absolute equality. If the coefficient is equal to 1, it means that all income is obtained by only one person.

The Gini coefficient for Turkey was estimated at 0.401 for 2021. No significant change has been observed since 2012. In other words, it is seen that there is no deterioration or improvement in income equality. We will probably see income distribution deterioration due to high inflation in the data to be announced for 2022.

In addition to income equality, growth’s reflection on income per capita is also important. In dollar terms, income per capita in Turkey has been in a downward trend since 2014. The fact that income per capita in dollars has decreased continuously except in 2021 explains Turkey’s structural predicaments. Income in Turkish Lira increases on the other hand. Therefore, it should not be thought that there is a contradiction with the statement at the beginning of the article that “income per capita increases in parallel with the growth rate”.

A country in which income per capita in dollar terms has declined and income inequality is worsening means that it will pay the price in the future for the growth it has achieved without relying on its own resources. Especially when the correct economic policies are implemented. Turkey should keep that in mind. The issue is as politically important as economically.

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