Inequality and the Process of Economic Growth: Threshold Effects of Human Capital to Physical Capital Ratio

42 Pages Posted: 16 Mar 2014

See all articles by Arshad Bhatti

Arshad Bhatti

IIIE, International Islamic University Islamabad

Denise R. Osborn

University of Manchester - School of Social Sciences; University of Tasmania

M. Emranul Haque

University of Manchester - School of Social Sciences

Date Written: June 30, 2011

Abstract

This paper explores the relationship between inequality and growth in the context of a unified empirical approach suggested by the theoretical model of Galor and Moav (2004). Based on that model, we construct a new measure, the human capital to physical capital ratio, which is used to study threshold effects in the inequality-growth relationship. Methodologically, we use threshold regression with instruments, developed by Caner and Hansen (2004), which allows us to endogenously identify the threshold human capital to physical capital ratio that alters the inequality-growth relationship. Using data on 82 countries, our results show that there exist significant threshold effects, with a level of the human capital to physical capital ratio below which the effect of inequality on growth is positive and significant, whereas it is negative and significant above it. We also test the robustness of our results using different measures of the human capital to physical capital ratio. These results are consistent with the theoretical predictions of Galor and Moav (2004).

Keywords: Growth, Inequality, Threshold Effects, Human Capital, Physical Capital

JEL Classification: D63, J24, O1, O15, O16

Suggested Citation

Bhatti, Arshad and Osborn, Denise R. and Haque, M. Emranul, Inequality and the Process of Economic Growth: Threshold Effects of Human Capital to Physical Capital Ratio (June 30, 2011). Available at SSRN: https://ssrn.com/abstract=2409215 or http://dx.doi.org/10.2139/ssrn.2409215

Arshad Bhatti (Contact Author)

IIIE, International Islamic University Islamabad ( email )

IIIE, Block II
H-10
Islamabad, 44000
Pakistan
+92519258038 (Phone)

Denise R. Osborn

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

University of Tasmania ( email )

French Street
Sandy Bay
Tasmania, 7250
Australia

M. Emranul Haque

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom
+0161 275 4829 (Phone)

HOME PAGE: http://www.socialsciences.manchester.ac.uk/disciplines/economics/about/staff/

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