Does Economic Growth Increase Inequality?: An Empirical Analysis for ASEAN Countries, China and India

Even though 10 member countries of the Associations of Southeast Asian Nations (ASEAN), People’s Republic of China and India (ACI) have adopted polices for archiving more pro-poor or inclusive growth. However, income and non-income inequality in ACI have witnessed an increasing trend in recent years. In view of rising inequality in fast growing Asian developing countries, it is important to study the relationship between economic growth and income inequity which could assist policy makers to adopt appropriate policy action for more inclusive growth. This paper undertakes an empirical analysis to examine if economic growth increases income inequality for ACI. The objectives of the paper are: (i) to develop a simple model of policy-induced growth which shows a nonlinear and wave-like relationship between growth and inequality; (ii) to provide an empirical support to the above model to establish that the intention to use economic growth and inequality as policy instruments to shape economic development can backfire since the possibility of a wave-like function receives an empirical support from ACI data; and (iii) to exhibit that the nonlinear relationship between growth and inequality within ACI nations is mainly driven by the availability of foreign direct investment (FDI). In addition, the paper finds other interesting elements in the relationship between growth and inequality which has profound policy implications for the ACI Economies.