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Does the Kuznets Curve still matter 70 years on? Yes! Here’s why

Seventy years ago, Simon Kuznets was immortalised by his finding that inequality rises first and then falls later—the hypothesis widely known as the Kuznets Curve. In a new UNU-WIDER project, we look at what one of the most influential papers in the field means for inequality and development today, with the huge progress on what data is now available.

Seven decades after it was first introduced, the Kuznets curve still has a hold on the development policy debate. The good news is that the inequality data available today is so much better than in 1955. Indeed, his ‘upswing’ of inequality was based on a few data points, not much more. And the ‘downswing’ was not based on any data, rather an arithmetic exercise. Not surprising then, that Kuznets lamented his want for data as an ‘economists pipedream’.

Today, the prospects for empirical investigation are a million miles from the 1950s.

The Kuznets Curve in policy debates

Conceptually, the debate has moved from the observed longitudinal path of inequality to which mechanisms shape the evolution of inequality, including structural transformation of an economy from a rural/agricultural base to an urban/industrial future and beyond; technological change as it alters the relative productivity of factors of production; openness and globalization; and the political economy of redistributive forces as society itself evolves with development.

There has been much discussion (for a taster, see here) of whether the Kuznets curve is an ‘iron law’ and whether and what sorts of policies can influence the trajectory of inequality.

At the same time, the Kuznets curve as a metaphor has shaped the discourse beyond national inequality, to the evolution of global inequality and to areas wholly outside income inequality, such as the environmental Kuznets curve.

With this rich history and background, UNU-WIDER, Cornell University, and Kings College London held a symposium in Helsinki this Autumn. The 70th anniversary of Kuznet’s seminal work is a suitable point to review the various strands of conceptual progress with the latest data on inequality, drawing from economics, political science, and anthropology.

Inequality today amid ‘Piketty plutocrats’ and populism.

In her keynote address to the symposium, Nancy Birdsall highlighted that from Kuznets’ vantage in the 1950s, he could not have foreseen ‘the extent to which, within a few decades, most developing countries would be embedded in a fully globalized market economy, with its global power dynamics, with the considerable benefits but also with the risks and constraints that embeddedness creates.’

In fact, the drivers of Kuznets’ downswing of inequality have all been muted. First, the expected decline in returns to capital, as Kuznets predicted, has not been fully realized due to financial globalization, profit-shifting by transnational corporations, tax havens, financial globalization and other factors. These global mechanisms allow capital to retain high returns despite domestic attempts at taxation. Second, Kuznets anticipated a narrowing of the urban-rural wage gap, but this has not occurred, largely due to persistent urban informality and globalized labour. Third, Kuznets suggested that political demands for redistribution would grow as urban poor populations increased. However, this too seems less likely in an open economy context, as the rise of populist nationalist politics has recently overshadowed redistributive demands.

Additionally, new technologies exacerbate these challenges. Unlike the manufacturing boom in East Asia during the 1970s and 1980s—which created substantial employment—modern technological advances, including services automation and tools like ChatGPT, may change the nature of labour markets. This trend could undermine the capacity for technological progress to reduce inequality.

The evolution of inequality in selected upper middle-income economies

 

Inequality in pre-Modern history

In a remarkable look back at pre-history (‘Kuznets at minus 7000’), anthropologist Timothy Kohler presented an analysis of inequality as revealed by the archaeological record ‘using the consistent proxy of Gini coefficients calculated across areas of contemporaneous residential units’—in other words inequality measured by housing size. He and his associates find a correlation between inequality and average wealth everywhere except North America since the advent of plant domestication. Timothy also discussed key possible mechanisms for this Kuznets affirming association in the archeological record.

The Kuznets Curve meets the Great Gatsby story

In another contribution, which brought Kuznets up to date with contemporary debates, Vito Peragine presented a coming together of the Kuznetsian perspective with the prominence of inequality of opportunity in the inequality discourse. Using the Global Estimates of Opportunity and Mobility database, Peragine showed a Kuznets type inverse-U relationship between inequality of opportunity and development over 40 years. Inequality of opportunity may first rise and then decline because inequality of opportunity and of outcome are two sides of the same coin.

The green Kuznets Curve: What about climate change?

In recognition of the large literature which extends the Kuznets ‘inverse-U’ metaphor to the environment, David Furceri presented work with co-authors that improves the empirics of the Environmental Kuznets Curve by (i) expanding the number of countries and years, (ii) augmenting data granularity at the sub-national level, and (iii) incorporating data on the stringency of environmental regulations. A key finding is that ‘climate change policies—and particularly market-based policies such as carbon taxes and emissions trading systems—make the Environmental Kuznets Curve lower and flatter, thus favouring uncoupling between economic activity and emissions.’

Curve or curse: Is it really all about politics?

Kuznets argued that the downswing of inequality is about politics and ‘legislative interference’. At the symposium, Marc Morgan’s political economy take on Kuznets stands out. Based on a historical investigation of politics and inequality in Brazil since the 1920s, the paper identifies ‘a Kuznets curse’, which is that social conflict is likely during rapid economic development, and economic development can only be sustained by authoritarian politics. The argument is developed with special reference to Brazil between 1950 and 1964 and the subsequent period of military dictatorship.

What does it add up to? Watch this space!

These and other papers from the symposium are coming soon as UNU-WIDER working papers in Q1 2025 and will be found on the project page.

What does it add up to? As a collection, the papers highlight how even after 70 years, Kuznets supposition remains an engaging concept for the discussion of inequality, economic development, and the politics.

Kuznets continues to be as important even as new realities emerge and new data makes fresh assessment possible.