Determinants of income inequality

Abstract

Income inequality is one of the biggest challenges for many countries as it can affect economic growth, inflation, unemployment, etc. This study focuses on the example of Kazakhstan, where President Tokayev stated that income inequality has reached unacceptable levels. The research question addressed is the impact of economic growth on income inequality in Kazakhstan. The study used a positivist approach and quantitative methods for analyzing panel data for the period from 2000 to 2021, covering 14 regions of Kazakhstan. The analysis focuses on the relationship between GDP per capita and the Gini coefficient, a widely used measure of income inequality. However, in this case, the problem of reverse causality arises, then if not only economic growth affects income inequality, but also vice versa. To address this issue, the study is based on different methods. The study uses three methods to analyze the relationship between income inequality and economic growth: OLS method, panel data method (fixed effects model, random effects model) and instrumental variable model. The results of the analysis indicate a negative relationship between economic growth and income inequality in Kazakhstan. In particular, as GDP per capita increases, the Gini coefficient tends to decrease, suggesting that economic growth is associated with a more equal distribution of income. An instrumental variable (IV) model that addresses potential endogeneity issues provides the most robust estimate of this relationship. The results of the IV regression model support the hypothesis that economic development can lead to a more equitable distribution of income in Kazakhstan. These findings have important policy implications for Kazakhstan. However, it is critical for policymakers to consider other factors that influence income distribution, such as education, social welfare programs, and institutional factors. In conclusion, this study contributes to the existing literature by providing empirical evidence of the relationship between economic growth and income inequality in Kazakhstan. It highlights the importance of economic development in achieving more equitable income distribution and provides valuable information for socio-economic policy development.