A
Kuznets curve is the graphical representation of
Simon KuznetsSimon Smith Kuznets was a Russian American economist at the Wharton School of the University of Pennsylvania who won the 1971 Nobel Memorial Prize in Economic Sciences "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and...
's discovery that
economic inequalityEconomic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. Economic Inequality generally refers to equality of outcome, and...
increases over time while a country is developing, then after a certain average income is attained, inequality begins to decrease.
One theory as to why this happens states that in early stages of
developmentEconomic development is the increase in the standard of living of a nation's population associated with sustained growth from a simple, low-income economy to a modern, high-income economy...
, when investment in
physical capitalIn general physical capital refers to any non-human asset made by humans and then used in production. Often, it refers to economic capital in some ambiguous combination of infrastructural capital and natural capital...
is the main mechanism of economic growth, inequality encourages growth by allocating resources towards those who save and invest the most. Whereas in mature economies
human capitalHuman capital refers to the stock of skills and knowledge embodied in the ability to perform labor so as to produce economic value. It is the skills and knowledge gained by a worker through education and experience...
accrual, or an estimate of cost that has been incurred but not yet paid, takes the place of physical capital accrual as the main source of growth, and inequality slows growth by lowering education standards because poor people lack finance for their education in imperfect credit markets. Kuznets curve diagrams show an inverted U curve, although variables along the axes are often mixed and matched, with inequality or the Gini coefficent on the Y axis and economic development, time or
per capita incomePer capita income means how much each individual receives, in monetary terms, of the yearly income generated in the country. This is what each citizen is to receive if the yearly national income is divided equally among everyone. Per capita income is usually reported in units of currency per year...
s on the X axis.
Since 1991,
Environmental Kuznets Curves (EKC) have become standard features in the technical literature of
environmental policyEnvironmental policy is any [course of] action deliberately taken [or not taken] to manage human activities with a view to prevent, reduce, or mitigate harmful effects on nature and natural resources, and ensuring that man-made changes to the environment do not have harmful effects on...
.
Kuznets ratio
The
Kuznets ratio is a measurement of the ratio of income going to the highest-earning households (usually defined by the upper 20%) and the income going to the lowest-earning households , which is commonly measured by either the lowest 20% or lowest 40% of income. Comparing 20% to 20%, perfect equality is expressed as 1; 20% to 40% changes this value to 0.5.
Kuznets had two similar explanations for this historical phenomenon:
- workers migrated from agriculture to industry,
- rural workers moved to urban jobs.
In both explanations, inequality will decrease after 50% of the work force switches over to the higher paying sector.
Interpretation
The Kuznets Curve can be interpreted as follows. The transition from an agrarian sector to urban industrialization, in which we see a growth in income inequality as income in agriculture is low compared to income earned in the city. With this opening up of inequality, we also see that the level of income people earn in rural areas is similar to one another, whereas we see wide range of income level in the industrialized city, which further opens up inequality. What then generates decline in Kuznets Curve? First, a rise of mass education movement may open up opportunity for all and reduce the gap in income inequality. Second, social policy put forth by the government as a country becomes rich may explain a decline in inequality as the government provides transfers, welfare, retirement pension, health care, in an effort to redistribute income throughout different levels of income earning groups.
In the case of the United States, we can model income inequality through Kuznets Curve with underlying mechanisms such as education and government redistribution which seem to generate up and down concave shaped curves. We can see from the sources presented by Alice Hansen Jones (1775); Edward Wolff (1915-1995) the share of wealth held by the top 1% from 1775 to 1995. Around 1775, the top 1% owned about 15% of the wealth, then 30% by 1855 according to the U.S Census. The data presented shows inequality to peak around 1935, with the top 1% owning 45% of the share of wealth in the United States and then begin a decline toward the civil-war era levels from the World War II years to the 1970s. This period of decline occurred during Kuznets' lifetime and appears to be consistent with his theory regarding inequality. However, there has since been a steady increase in the share of wealth held by the top 1%. By the 1990s, inequality had climbed back to late-1930s levels. One possible explanation for this divergence from the Kuznets' curve is the impact of American social mobility on wealth distribution. Kuznets believed that as a country grew richer, its government would make a greater effort towards social spending. But in the U.S., high social mobility fostered a belief in the rewards of hard work, which, in turn, may have resulted in more employer-provided social programs (
welfare capitalismWelfare capitalism refers either to the combination of a capitalist economic system with a welfare state or, in a strictly American context, to the practice of businesses providing welfare-like services to employees. Welfare capitalism in this second sense was centered in industries that employed...
) and less of a
welfare stateThere are two main interpretations of the idea of a welfare state:* A model in which the state assumes primary responsibility for the welfare of its citizens...
.
Criticism
Kuznets' conclusion that inequality must increase before decreasing, however, rests on shaky ground, in the case of cross-sectional data. The U-shape in the curve comes not from progression in the development of individual countries, but rather from historical differences between countries. In his data set, many of the middle income countries were in
Latin AmericaLatin America is a region of the Americas where Romance languages – particularly Spanish, Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,501 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
, a region with historically high levels of inequality. When controlling for this variable, the U-shape of the curve tends to disappear.
In accounting for historical changes,
David LempertDavid Howard Lempert , is an anthropologist, author, social entrepreneur/NGO head, legal scholar/lawyer, and international development consultant....
's work in the early 1980s introduced a time dimension and a political dimension to the curve, showing how population and politics interact with economic inequality over time, leading either to long-term stability or to collapse. This neo-Malthusian model incorporating Kuznets' work, yields a
helixA helix is a special kind of space curve, i.e. a smooth curve in three-space. As a mental image of a helix one may take the spring...
model of the relationships over time rather than just a curve.
Environmental Kuznets Curves
Another situation where Kuznets curves have been observed is
the environmentThe biophysical environment is the symbiosis between the physical environment and the biological life forms within the environment, and includes all variables that comprise the Earth's biosphere. The biophysical environment can be divided into two categories: the natural environment and the built...
. Many environmental health indicators, such as
waterWater pollution is the contamination of water bodies such as lakes, rivers, oceans, and groundwater. All water pollution affects organisms and plants that live in these water bodies and in almost all cases the effect is damaging either to individual species and populations but also to the natural...
and
air pollutionAir pollution is the introduction of chemicals, particulate matter, or biological materials that cause harm or discomfort to humans or other living organisms, or damages the natural environment, into the atmosphere....
, show the inverted U-shaped curve. In a developing industrial economy, little weight is given to environmental concerns, raising environmental pollution byproducts. After attaining a certain standard of living from the industrial production system and when environmental pollution is at its greatest, the focus changes from self-interest to social interest. The interests give greater weight to a clean environment by reducing and reversing the environmental pollution trend from industrialization. This parabolic trend occurs in the level of many of the environmental pollutants, such as
sulfur dioxideSulfur dioxide is the chemical compound with the formula SO
2. It is produced by volcanoes and in various industrial processes. Since coal and petroleum often contain sulfur compounds, their combustion generates sulfur dioxide...
,
nitrogen oxideThe term nitrogen oxide typically refers to any binary compound of oxygen and nitrogen, or to a mixture of such compounds:* Nitric oxide , nitrogen oxide* Nitrogen dioxide , nitrogen oxide...
,
leadLead is a main-group element with symbol Pb and atomic number 82. Lead is a soft, malleable poor metal, also considered to be one of the heavy metals. Lead has a bluish-white color when freshly cut, but tarnishes to a dull grayish color when exposed to air...
,
DDTDDT is one of the most well-known synthetic pesticides. It is a chemical with a long, unique, and controversial history....
, chlorofluorocarbons,
sewageSewage is water-carried wastes, in either solution or suspension, that flow away from a community. Also known as wastewater flows, sewage is the used water supply of the community. It is more than 99.9% pure water and is characterized by its volume or rate of flow, its physical condition, its...
, and other chemicals previously released directly into the air or water.
For example, between 1970 and 2006, the United States' inflation-adjusted GDP grew by 195%, the number of cars and trucks in the country more than doubled, and the total number of miles driven increased by 178%. However, during that same time period, annual emissions of carbon monoxide fell from 197 million tons to 89 million, nitrogen oxides emissions fell from 27 million tons to 19 million, sulfur dioxide emissions fell from 31 million tons to 15 million, particulate emissions fell by 80%, and lead emissions fell by more than 98%.
However, there is little evidence that the relationship holds true for other pollutants, for natural resource use or for biodiversity conservation. For example, energy, land and resource use (sometimes called the "
ecological footprintThe ecological footprint is a measure of human demand on the Earth's ecosystems. It compares human demand with planet Earth's ecological capacity to regenerate. It represents the amount of biologically productive land and sea area needed to regenerate the resources a human population consumes and...
") do not fall with rising income. While the ratio of energy per
real GDPReal gross domestic product is a macroeconomic measure of the size of an economy adjusted for price changes and inflation[citation needed]. It measures in constant prices the output of final goods and services and incomes within an economy. The formula for its definition is [/] x 100, however, it...
has fallen, total energy use is still rising in most developed countries. Another example is the emission of many greenhouse gases, which is much higher in industrialised countries. In addition, the status of many key "
ecosystem servicesHumankind benefits from a multitude of resources and processes that are supplied by natural ecosystems. Collectively, these benefits are known as ecosystem services and include products like clean drinking water and processes such as the decomposition of wastes...
" provided by ecosystems, such as freshwater provision and regulation,(Perman, et al., 2003) soil fertility, and fisheries, have continued to decline in developed countries.
In general, Kuznets curves have been found for some environmental health concerns (such as air pollution) but not for others (such as landfills and biodiversity). However, it is important to note that this does not necessarily invalidate the theory - the scale of the Kuznets curves may differ for different environmental impacts. We may still be on the 'upward' leg of the energy use Kuznets curve and have to get even richer still before we see a decline. If so, however, we are causing many irreversible environmental impacts in the process. Also, many of the problems associated with increased energy usage are due to the use of fossil fuels. Alternatives such as
nuclear powerNuclear power is power produced from controlled nuclear reactions. Commercial plants in use to date use nuclear fission reactions....
and
renewable energyRenewable energy is energy generated from natural resources—such as sunlight, wind, rain, tides, and geothermal heat—which are renewable . In 2006, about 18% of global final energy consumption came from renewables, with 13% coming from traditional biomass, such as wood-burning...
would have a much lower environmental impact according to their proponents. Against this must be considered that much of the environmental damage associated with economic growth, such as extinct species and loss of wilderness, is irreversible.
Carbon dioxideCarbon dioxide forms approximately 0.04% of the Earth's atmosphere. It is essential to photosynthesis in plants and other photoautotrophs, and is also a prominent greenhouse gas.-Concentration:...
emissions appears to follow a Kuznets curve; emissions appear to peak at a per capita GDP of approximately $30,000.
DeforestationDeforestation is the clearance of naturally occurring forests by the processes of logging and/or burning of trees in a forested area. There are several reasons deforestation occurs: trees or derived charcoal can be sold as a commodity and used by humans, while cleared land is used as pasture,...
also appears to follow a Kuznets curve. Among countries with a per capita GDP of at least $4,600, net deforestation has ceased to exist.
Rich countries are able to afford
desalinationDesalination, desalinization, or desalinisation refers to any of several processes that remove excess salt and other minerals from water. More generally,desalination may also refer to the removal of salts and minerals, as in soil desalination....
to provide their populations with clean, safe water.
IsraelIsrael officially the State of Israel , is a developed state in Western Asia located on the eastern shore of the Mediterranean Sea. It borders Lebanon in the north, Syria in the northeast, Jordan in the east, and Egypt on the southwest, and contains geographically diverse features within its...
desalinizes water for a cost of 53 cents per cubic meter
SingaporeSingapore , officially the Republic of Singapore, is an island city-state located at the southern tip of the Malay Peninsula, lying north of the equator, south of the Malaysian state of Johor and north of Indonesia's Riau Islands. At , Singapore is a microstate and the smallest nation in Southeast...
desalinizes water for 49 cents per cubic meter . Even people who live far away from the ocean are benefitting from the technology - after being desalinized at
JubailJubail , is a city in the Eastern province on the Persian Gulf coast of Saudi Arabia. It consists of the Old Town of Al Jubail, which was originally a small fishing village, up to 1975 and the new industrial area....
,
Saudi ArabiaSaudi Arabia , is an Arab country and the largest country of the Arabian Peninsula. It is bordered by Jordan on the northwest, Iraq on the north and northeast, Kuwait, Qatar, Bahrain, and the United Arab Emirates on the east, Oman on the southeast, and Yemen on the south...
, water is pumped inland though a pipeline to the capital city of
RiyadhRiyadh is the capital and largest city of Saudi Arabia. It is also the capital of Riyadh Province, and belongs to the historical regions of Nejd and Al-Yamama. It is situated in the center of the Arabian Peninsula on a large plateau, and is home to 1,444,500 people, and the urban center of a...
.
The developing economy of China has been cited as a potential test case for the "environmental Kuznets Curve" (EKC).
Criticisms of environmental Kuznets curves (EKC)
Critics argue that even the US is still struggling to attain the income level necessary to prioritize certain environmental pollutants such as carbon emissions, which have yet to follow the EKC . With other pollutants however, like sulfur dioxide, production seems to coincide with a country's economic development and at a certain threshold level of income a mitigation of environmental damage occurs. This could be related rather causal, because economic growth without institutional reform does not accomplish this environmental improvement. It appears that with GDP growth, government policies are strengthened and populations experience a rise in their demand for improved environmental quality.
This could be a reason why environmental Kuznets curves (EKC) have been found to be applicable to only certain types of pollutants. Yandle
et al. argue that the EKC has not been found to apply to carbon because most pollutants create localized problems like lead and sulfur, so there is a greater urgency and response to cleaning up such pollutants. As a country develops, the marginal value of cleaning up such pollutants makes a large direct improvement to the quality of citizens' lives. Conversely, reducing carbon dioxide emissions does not have a dramatic impact at a local level, so the impetus to clean them up is only for the altruistic reason of improving the global environment. This becomes a
tragedy of the commonsThe tragedy of the commons refers to a dilemma described in an influential article by that name written by Garrett Hardin and first published in the journal Science in 1968...
where it is most efficient for everyone to pollute and for no one to clean-up, and everyone is worse as a result (Hardin, 1968). Thus, even in a country like the US with a high level of income, carbon emissions are not decreasing in accordance with the EKC.
Arik Levinson argues that the traditional "inverse U" shape is actually an "N" shape when longer-term time scales are evaluated. This "N" shape would indicate that pollution increases as a country develops, decreases once the threshold GDP is reached, and then begins increasing as national income continues to increase. While this finding is still being debated, it could prove to be important because it poses the concerning question of whether pollution actually begins to decline for good when an economic threshold is reached or whether the decrease is only in local pollutants and pollution is simply exported to poorer developing countries.
Arrow
et al. argue pollution-income progression of agrarian communities (clean) to industrial economies (pollution intensive) to service economies (cleaner) would appear to be false if pollution increases again at the end due to higher levels of income and consumption of the population at large . A difficulty with this model is that it lacks predictive power because it is highly uncertain how the next phase of economic development will be characterized.
Suri & Chapman argue that a net pollution reduction may not actually be occurring on global scales. Wealthy nations have a trend of exporting the activities that create the most pollution, like manufacturing of clothing and furniture, to poorer nations that are still in the process of industrial development (Suri and Chapman, 1998). This could mean that as the world's poor nations develop, they will have no place to export their pollution. Thus, this progression of environmental cleanup occurring in conjunction with economic growth cannot be replicated indefinitely because there may be nowhere to export waste and pollution intensive processes. However, Grossman and Kruger (1995), the authors who initially made the correlation between economic growth, environmental clean-up, and the Kuznets curve, conclude that there is "no evidence that environmental quality deteriorates steadily with economic growth." And Yandle
et al. conclude that "policies that stimulate growth (trade liberalization, economic restructuring, and price reform) should be good for the environment."
Sources and bibliography
- Grossman, G.M.
Gene Michael Grossman is currently the Jacob Viner Professor of International Economics at Princeton University. He received his B.A. in Economics from Yale University in 1976 and his Ph.D. in Economics from the Massachusetts Institute of Technology in 1980...
and Krueger, A.B.Alan Bennett Krueger is an American economist, Bendheim Professor of Economics and Public Affairs at Princeton University and Research Associate at the National Bureau of Economic Research. On March 7, 2009, he was nominated by Barack Obama to be United States Assistant Secretary of the Treasury...
(1993). Environmental Impacts of a North American Free Trade Agreement. In The Mexico-U.S. Free Trade Agreement, P. Garber, ed. Cambridge, Mass.: MIT Press.
- Shafik, N., “Economic Development and Environmental Quality: An Econometric Analysis”, Oxford Economic Papers, New Series, Vol. 46, Special Issue on Environmental Economics (Oct., 1994), pp. 757–773.
- Deacon, R.T. and C.S. Norman "Does the Environmental Kuznets Curve Describe How Individual Countries Behave?". Land Economics. vol.82. 2 (2006). pp. 291 – 315.
- Brenner, Y.S., Hartmut Kaelble, and Mark Thomas (1991): Income Distribution in Historical Perspective. Cambridge University Press.
- Van Zanden, J.L. (1995). Tracing the Beginning of the Kuznets Curve: Western Europe during the Early Modern Period. The Economic History Review, 48(4), 643-664.
- Tisdell, C.
Clement Allan Tisdell is an Australian economist and Emeritus Professor at the University of Queensland...
(2001). Globalisation and sustainability: environmental Kuznets curve and the WTO. Ecological Economics, 39(2), 185-196.
- Dasgupta, S., Laplante, B., Wang, H. and Wheeler, D. (2002). Confronting the Environmental Kuznets Curve. The Journal of Economic Perspectives, 16(1), 147-168.
- Harbaugh, B., Levinson, A. and Wilson, D. (2002). Reexamining the Empirical Evidence for an Environmental Kuznets Curve. Review of Economics and Statistics, 84(3).
- Munir Khasru Syed, Muaz Jalil Mohammad (2004), Revisiting Kuznets Hypothesis: An Analysis with Time Series and Panel Data,Bangladesh Development Studies, Vol 30 No 3-4, pg 89-112
- Munir Khasru Syed, Muaz Jalil Mohammad (2004), Revisiting Kuznets Hypothesis: An Analysis with Time Series and Panel Data (Draft) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1240658
External links
- "Use Energy, Get Rich and Save the Planet" by John Tierney
John Tierney may refer to:*John Tierney *John Tierney *John Tierney , American journalist*John F. Tierney , American politician...
, New York Times, published April 20, 2009. Includes links to Further reading.
- "The Richer-Is-Greener Curve" by John Tierney
John Tierney may refer to:*John Tierney *John Tierney *John Tierney , American journalist*John F. Tierney , American politician...
, New York Times, April 20, 2009
- More on Kuznets curves by John Tierney
John Tierney may refer to:*John Tierney *John Tierney *John Tierney , American journalist*John F. Tierney , American politician...
, New York Times, April 22, 2009