Kuznets-NewSchoolUmass

8/13/2019 Kuznets-NewSchoolUmass

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How Urbanization Affects the Inequality in Developing Countries: A Critique of

Kuznets Curve

Cem yvat

According to the Kuznetss U-curve theory, urbanization increases inequality in

developing countries during the first phase of industrialization. This argument is based

on to assumptions. !irstly, the increase in productivity is greater for the industrial

population" secondly, inequality in urban areas is greater than or equal to inequality for

rural areas. #oever, the Kuznetsian argument could be false for many cases including

the Tur$ish case, in hich rural inequality as relatively higher due to the social

structure of the country. Therefore, in many developing countries the relation beteen

inequality and income may be negative or be only slightly positive for the first phase of

industrialization.

This paper aims to prove that% &'( The argument suggested by Kuznets may not

e)plain real changes in income distribution for many cases including Tur$ey &*( The

long-run fall in +ini coefficient in Tur$ey may be highly related to the migration process

ithin the country.

Intro!uctionIn developing countries, the growth process not only alters the level of output or

technology, but also changes the economic relations and the social structure. The

development process involves significant changes in the levels of income of individuals;

however, a part of the society usually benefits relatively more from the rising incomes.

Therefore, in many cases the development process changes the income distribution; the

income of a specific part of the society increases relatively more compared to the rest of

the society.

The first stage of the development process is usually associated with

industrialization. As a country industrializes; individuals in urban areas benefit from

rising productivities and the gap between per capita incomes of urban and rural areas

increases. The growing benefits in the urban areas also alter the structure within the


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society. Many individuals in rural areas decide to migrate to urban areas to take

advantage of the industrialization and rising urban incomes.

A part of the migration stream may be formed by lowerincome individuals that

are mostly unskilled and illiterate. These individuals mostly have individual concerns and

they mostly move to the informal urban sector for earning wages. The higher income

individuals also migrate for e!ploiting the advantages of urban society; however, these

individuals concern more about their family re"uirements and aim to generate income,

education or remittances that could be useful for the whole family #$ipton, %&'(). In any

case, urbanization preceded by industrialization changes economic structure and gains in

the society. As the urbanization process alters the incomes of individuals, it will create

significant changes in the income distribution both in the short and the long run.

The impact of migration on ine"uality is e!plored by *uznets #%&++) in his A-

article conomic /rowth and Income Ine"uality0, which forms a basis for *uznets1s

inverted 2curve theory. In his article, *uznets shows how demographic changes

followed by industrialization alter income distribution within a country. 3e should notice

that in his theory, *uznets is only concerned about the one way relation from

development to ine"uality, he never mentions anything on the impact of ine"uality on

growth. In fact, *uznets #%&45) says that6 All we can say is that the une"ual distribution

of income in the earlier decades in the presently developed countries did not prevent

economic growth. 7ut8we cannot say that a somewhat or less #or more) une"ual size

distribution might not have contributed to even faster growth.0. Therefore, our focus on

this study will be on how development and urbanization affect the income distribution.

The development process can change the overall ine"uality by affecting three

factors. 9irstly, as the urban share increases, the urban ine"uality starts to make a greater

contribution to overall ine"uality. :econdly, the industrialization could widen the urban

rural gap; however, the impact of industrialization would be offset by factors like

technological spillovers, changes in the terms of trade and rising land per capita. Thirdly,

the development could change both within rural and urban ine"ualities.

In *uznetsian framework, development may bring une"ual gains and the first

phases of industrialization are associated with higher ine"uality. owever, in some cases

the urbanization followed after the early stage of industrialization may have instant


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positive effects on ine"uality. This instant positive effect may even offset the

une"ualizing effect of the early industrialization. Thus, the start of industrialization does

not guarantee a rise in ine"uality.

Development" urbanization an! the change of inequality in Kuznetsian framewor#

The *uznetsian approach is considered as one of the most important approaches for

e!plaining, how development affects ine"uality. According to *uznets #%&++),

urbanization followed by industrialization is an important factor in the shift of ine"uality.

*uznets says an invariable accomplishment of growth in developing countries is the

shift away from agriculture, a process usually referred to as industrialization and

urbanization0. Thus, *uznets sees industrialization and urbanization as processes that are

mutually developing at the same time. *uznets claims that urbanization increases

ine"uality in the first stages of industrialization and he makes two crucial assumptions for

strengthening his claim6

a) the average per capita income of the rural population is usually lower than that of the

urban; b) ine"uality in the percentage shares within the distribution for the rural

population is somewhat narrower than in that for the urban population


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The *uznetsian framework relies on the $ewis #%&+=) model that was outlined in

$ewis1s classic article conomic >evelopment with 2nlimited :upplies of $abor0.

$ewis claims that development is driven by rising profits and accumulation in the

capitalist sector. The saving rates for the capitalist class are relatively higher compared to

the working class, since the working class could only save for its essential e!penditures

like housing, education etc. Therefore, according to $ewis, the amount of savings grows

as the relative income of the capitalists rises. In his model, savings are realized as the

ma?or source of capitalist accumulation, so $ewis concludes that the central fact of

economic development is that the distribution of incomes is altered in favor of the saving

class0.

The capitalist group accumulating in $ewis1s conte!t is mainly the capitalist

industrial class. $ewis argues that merchants use their profits mainly for speculation and

peasants would prefer to spend his profits for enlarging his land, not his capital. @nly the

class of industrialists reinvests its profit productively; only the industrialists have

incentives towards using profits to create a bigger empire of bricks and steel0.

$ewis argues that the subsistence sector, which is mostly associated with the

agricultural sector, cannot stimulate development, since the subsistence sector cannot

produce reproducible capital. >uring the development process, the incomes of capitalist

industrialists will increase, whereas incomes in the subsistence agricultural sector stay

relatively stagnant, unless the subsistence sectors start benefiting from the development

of the capitalist sector. ventually, the emergence of development in the $ewis model is

associated with higher urban ine"uality and a rising income gap between urban and rural

areas. The development of the capitalist sector will be supported with the labor supplied

by the subsistence agriculture sector, which will lead to urbanization as it is claimed by

*uznets. As a result, the urban population grows and higher ine"uality will be e!pected

at least in the first stage of $ewisian development.

$ewis says the subsistence sector could be more productive, if the peasants start

to imitate capitalist techni"ues by using new seeds and fertilizers or if they start to benefit

from capitalist investments in irrigation, in transport facilities or in electricity. owever,

in his statement $ewis does not say whether increase in productivity in the subsistence

sector will be bigger or less than the increase in productivity in the capitalist sector. Thus,


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he does not imply anything about the changing income gap between the urban and rural

sectors. e only argues that higher productivity of the subsistence sector will lead to

higher real wages in the capitalist sector and reduce the capitalist surplus and

accumulation. ence, $ewis focuses on the relationship between the development of

subsistence sector and the income distribution within the capitalist sector.

The *uznets process is depicted in some studies by using modeling. The model

proposed by -obinson #%&4) claims that the *uznets process holds even if the rural

ine"uality is greater than the urban ine"uality. owever, he assumes that both within

rural and urban ine"ualities and ruralurban income gap are constant, while developing

his model. -obinson1s assumption is not applicable for many cases; the changes that may

occur in inter and intrasectoral ine"ualities could falsify -obinson1s model.

Another model that e!plains the *uznets process is developed by Anand and

*anbur #%&&5). Bonsistent with the *uznetsian approach, Anand and *anbur assume that

population moves to the urban sector, where ine"uality is larger. The model decomposes

the ine"uality into withinsector and betweensector component. Anand and *anbur first

assume that means and the withingroup ine"ualities of the urban and rural sectors are

constant and the change in ine"uality is occurring only due to population shifts. They

show that the withinsector component should be increased due to the greater population

in the more une"ual urban sector and therefore the betweensector ine"uality should be

reduced for the 2 curve to be formed under their assumptions. owever, empirically they

show that their assumptions do not hold and the model should allow the sectoral means

and sectoral ine"ualities to shift over time. The model concludes that ine"uality changes

not only due to the population shifts, but also due to the changes in sectoral means and

within sectoral ine"ualities. This result is consistent with the *uznetsian approach that

e!plains the mechanisms that reduces urban ine"uality. ence, e!plaining the changes in

ine"uality merely by urbanization is not enough; the results of urbanization on both

sectoral mean incomes and ine"ualities should also be e!plored.

Urban$%ural Income &aps

The urbanization changes the overall ine"uality in a country by raising the impact of

urban ine"uality on the overall distribution. owever, the industrialization and


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urbanization processes can affect the overall ine"uality not only by shifting the sectoral

shares, but also by changing the intra and intersectoral ine"ualities. As a country

develops, the intersectoral ine"uality between the urban and rural sectors changes due to

first and secondary effects of industrialization.

According to *uznets #%&++), the early effects of industrialization could raise the

income gap between the urban and rural sectors. In his A- article, *uznets #%&++)

claims that6

The relative difference in per capita income between the rural and urban populations

does not necessarily drift downward in the process of economic growth6 indeed, there is

some evidence to suggest that it is stable at best, and tends to widen because per capita

productivity in urban pursuits increases more rapidly than in agriculture.0

The intuition behind this argument could come from the $ewis model #%&+=). In

$ewis model, the development is mainly driven by the industrial sector. owever, $ewis

also e!amines the secondary effects of development on the subsistence sector #mainly

agriculture). 9irstly, $ewis mentions that the subsistence sector could also increase its

productivity by imitating the techni"ues in the capitalist sector. 9or e!ample, peasants

could get new seeds or they could use fertilizers for raising their productivities. e also

says that the subsistence sector could benefit from the capitalist investments like

irrigation works, transport, and electricity.

$ewis secondly claims that if the capitalist and subsistence sectors specialize in

different products #like agriculture and industry), the urbanization could lead to greater

demand and relative shortage of agricultural commodities. As a result, the agricultural

output will not be enough to feed the industrial workers. The terms of trade will worsen

for the industrial sector, which would partially close the urbanrural income gap. $ewis

also mentions that the terms of trade effect might not be seen, if the capitalist sector

invests on agriculture or the productivity in the subsistence sector increases significantly.

-anis and 9ei1s #%&4%) arguments in their article The Theory of conomic

>evelopment0 could be considered as a complement to $ewis model. In their study,

-anis and 9ei claim that $ewis8has failed to present a satisfactory analysis of the


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subsistence or agricultural sector.0 Thus, they propose a more detailed analysis for

e!amining the secondary effects of industrialization and urbanization on agriculture.

In their model, -anis and 9ei #%&4%) claim that the economy could follow a

balanced growth, in which time to time deviations are seen. As in the $ewis model, in the

case of overinvestment in the industrial sector, the shortage of food could lead to

deterioration of the terms of trade in the industrial sector and industrial wages will rise

due to growing food prices. As a result of this, the industrial investments will be

discouraged; hence, there will be more incentives to invest on agriculture. Thus, the

actual growth path could return to the balanced growth path and the urbanrural income

gaps could narrow down.

The urbanization could also increase the income in rural areas through the

remittances. The urban settlers can transfer money to their relatives, which could

generate an e!tra income for the rural dwellers #$all, :elod and :halizi, (CC4).

-emittances also create an e!tra economic activity in the rural sector, when the new

urban settlers spent their income for investments like housing in their origins #>-,

(CC&). Many studies show that remittances increase the level of education and improve

health of origin families #7ecker, (CC). Improved human capital could also contribute to

rural productivity positively.

There are also studies that show how urbanization can change the ine"uality by

altering the land per capita. In fact, many studies #:en, %&&4; /riffin, *han and Ickowitz,

(CC() claim that the land productivity might be lower in small scale farms since family

farms have advantages in monitoring and effort. owever, the migration of rural

individuals could still increase the rural income per capita #7ourguignon and Morrisson,

%&&'), although it might not lead to higher land productivity, as in the case of shift from

small to large scale farming. In addition, urbanization might not lead to a transformation

from small to large scale farming. The family farming structure could continue, only the

family members that cultivate the land could be reduced due to the migration. In this

case, it is more probable that the rural income per capita will increase with urbanization.

:tiglitz #%&'() also focuses on increases in agricultural productivity; however, he

makes an alternative interpretation by using his efficiency wage model. According to

:tiglitz, the migration of a family member changes the marginal product of the other


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members that stay in the rural sector. If output is proportional to effort, e"ual share of

output between many family members could reduce output by lowering incentives for

supplying effort. This might cause a loss of efficiency in agricultural production. In such

cases, the migration of an individual within the rural family could increase the efficiency

by bringing better incentives to the peasants for supplying more effort. Therefore,

migration process could close the urbanrural income gaps by not only increasing average

rural incomes, but also by raising total productivity in the planted areas.

'ithin Inequality

In his article, *uznets #%&++) also claims that the ine"uality will decrease in the later

stages of development. owever, unlike the studies mentioned above #-anis and 9ei ,

%&4%; 7ourguignon and Morrisson, %&&'; :tiglitz, %&'(), *uznets focuses on the changes

in urban ine"uality rather than the narrowing intersectoral income gap. e uses the long

term effects of urbanization for making his analysis and perceives urbanization as a

process that would reduce ine"uality in the long run.

According to *uznets, raising ine"uality will be narrowed, mostly due to the

declining ine"uality within the urban groups. *uznets claims that, within years the

economic positions of new urban dwellers and their descendants improve. The social

mobility e"ualizes economic differences, and hence ine"uality follows a declining path.

The mechanism behind the social mobility is e!plained by *uznets. 9irstly, as the

development process continues a larger share of the urban population becomes native0

urban dweller. Thus, a larger proportion of population benefits from the advantages of the

city life. :econdly, in democratic societies the growing political power of the lower

income groups resulted in changing legislation and new policies that counteracts against

the negative conse"uences of rapid industrialization and urbanization.

Thirdly, the forces of freedom of individual opportunity0 enable development of

new fields that bring opportunities for new entrepreneurs. Dew and profitable industries

will be run by the new entrepreneurs, unless the descendants of upperincome groups do

not shift to the new industries. owever, *uznets says that the successful great

entrepreneurs of today are rarely sons of the great and successful entrepreneurs of


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yesterday0. Therefore, *uznets claims that the development of new industries stimulates

social mobility by creating opportunities for different income groups.

$astly, the improvement of the service sector reduces income ine"uality. The

service sector is e!pected to grow as a result of the development process and rising />E.

In the earlier stages of development, the proportion of workers in industrial sector

increases as the proportion of workers in agriculture declines. owever, as economic

growth continues the services sector starts to e!pand, while the agricultural sector

continues to decline #:yr"uin, %&'').

According to *uznets, the growth of the service sector decreases ine"uality for

several reasons. 9irst, *uznets argues that service incomes are mostly earned due to the

individual e!cellence; thus, the higher levels of service incomes are not necessarily

pursued by the descendants of the wealthier individuals. *uznets also claims that the

possibilities of rising income are limited for people who are already in highincome

occupations. ence, incomes of the lowerincome workers in services are more likely to

increase. Therefore, incomes are e!pected to be more e"ual within the services sector

compared to industry.

In summary, *uznets e!plains the change in income distribution as increasing in

the first stage of development and declining in the later stages. 3ith this e!planation,

*uznets describes an inverse 2 curve relation between income and ine"uality.

2rbanization is pursued together with industrialization; therefore, migration from rural to

urban areas inherently increases ine"uality by raising the proportion of population of the

more une"ual part of the country. As the development process continues the income

ine"uality declines, due to the factors like social mobility and improving service sector.

There are many e!tensions and criticisms that could made for *uznets1s

arguments on urban ine"uality. 9irstly, the pace of social mobility is highly related with

structural factors in the urban sector. Amongst the structural factors, the distinction

between the urban formal and urban informal sectors could be considered as important.

9or e!amining the migration process, unlike arris and Todaro #%&C), Bole and

:anders #%&'+) use a model that distinguishes the urban modern and urban subsistence

sectors. According to Bole and :anders #%&'+), it is more likely that the new arrivals

would enter to the urban subsistence sector #mostly informal), in which barriers to


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employment are few and average income is lower compared to the urban modern sector.

Many other studies #7enar?ee, %&'5; -auch, %&&5) claim that wages in the urban informal

sector are e"ual to or slightly higher than the rural wages. owever, the many migrants

shift to the urban informal sector, preserving their hopes for finding a formal ?ob in

future.

The shares of informalformal sectors change during the different phases of

urbanization. According to -auch #%&&5), the share of being underemployed0 in the

informal sector follows an inverted 2 path as the economy urbanizes. $ikewise the

Todaro parado!0, the growth of the urban formal sector attracts rural workers and leads

to a greater growth in the urban informal sector. owever, as urbanization proceeds,

pressure on the land decreases and the agricultural income rises. The agents become less

willing to leave the rural sector and be underemployed0 in the informal urban sector.

Thus, the share of informal urban sector employment will start to decline. :ince, the

wages are generally lower in the urban informal sector; the inverted 2 curve of the

informal urban sector share could also form an inverted 2 curve between the level of

urbanization and within urban ine"uality.

The migrants could enter to the informal and formal sectors due to several factors.

A study made for 7olivia #Eradhan and Fan :oest, %&&5) show that the education level is

an important determinant of entering the formal sector. Eradhan and Fan :oest show that

factor like ethnicity and unemployment in the region are also important for determining

the possibility of participating in the formal sector. $ikewise in 7olivia, in India the

education level is also an important factor for rising migrants1 possibility of being

employed in the formal sector #7aner?ee, %&'5). The migrants with intermediate and

higher level of education have a greater chance of getting employed in the formal sector.

As e!pected, in many countries the return of education is also found to be higher in the

formal sector #Eradhan and Fan :oest, %&&5; 7aner?ee, %&'5; 9unkhouser, %&&).

The growth of the informal sector could raise the urban ine"uality; however, the

ine"uality could be reduced if there is a significant social mobility between the formal

and informal sectors. Devertheless, the social mobility might not be high for many cases.

7aner?ee #%&'5) shows that in %&41s >elhi only (=G of those who entered the informal

sector on arrival was switched to the formal sector. e also shows between the years


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%&4+%&+, only +%+G of the new arrivals were switched to the formal sector in a year.

In addition, the potential mobility was found to be low; only %+G of the informal sector

wage employees and %(G of the nonwage workers were actively looking a ?ob in the

formal sector.

The network of between the agents is important for enabling the mobility between

the formal and informal sectors. In India, 4CG of migrants who moved from the informal

to the formal sector found out their current ?ob with the help of their relatives and friends.

The level of education is again found to be an important factor of mobility. The informal

sector employees who have a middle school or intermediate college level education have

a greater likelihood of shifting to the formal sector.

In summary, along with the other factors the access to education is an important

factor for enabling the social mobility and reducing the urban ine"uality. The migrants or

the children in the migrant families should have an access to an education to secondary or

tertiary education for the process depicted by *uznets to happen. @ne impediment of that

is the usage of children as a labor force in the informal sector. Many of the children in the

migrants1 families work #Acikalin, (CC'), they cannot have an access to higher level of

education. Also, the "uality of the education that some children get is e!tremely low even

for the primary school level, since they could not have time to focus on their school,

while they are working.

Another e!tension that could be made to the *uznetsian theory is related with the

services sector. As we mentioned previously, *uznets claims that the growth of services

sector would reduce ine"uality, since the ine"uality in the services sector is lower

compared to the industrial sector. The arguments of *uznets on services are mostly

relevant for the service sectors of %&+C1s. owever, the relations of production are

significantly changed in many of today1s service sectors; employeremployee type of

relations improved, whereas the proportion of selfemployed is declining. Also,

improvements on branding and franchising also created new opportunities for increasing

the incomes of the wealthier individuals in the service sector. Therefore, the difference

between the levels of ine"uality within the industrial and service sectors may not be great

in today1s world, due to the developments in the services sector.


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The property income is another issue that might create a need for the revision of

*uznets1s theory in today1s world. In fact, in his article Huantitative Aspects of the

conomic /rowth of Dations0, *uznets #%&45) shows that the shares of property in total

income are lower in the less developed regions8 they would tend to widen ine"uality

less in the low income, underdeveloped regions than in the developed regions0 in the

2nited :tates.

The current literature on financialization also signs that the situation depicted by

*uznets might be true for the country wise comparisons. The 2: economy has the

highest />E per capita compared to other large scale countries%. 9ollowing the economic

growth, the share of financial income has also risen in the 2: economy #*rippner, (CC+;

Brotty, (CC&). The share of financial and real estate incomes reached to the level of (5G

in (CC% and it continued to rise afterwards. In his empirical study, 9razer #(CC4) finds a

modified inverted 2 curve with ine"uality rising after an income level. This result could

be partially related with the higher urban ine"uality caused by the rising share of property

incomes in the high income countries.

In his %&++ article, *uznets does not focus on the changes in rural ine"uality. e

e!plains the reduction in ine"uality ma?orly by the changes in the urban ine"uality.

owever, in his %&45 *uznets develops an argument on the changes in rural ine"uality.

e claims that6

The rise in productivity within the A sector, indispensable for modern economic growth,

may have been associated with technological changes that raised the scale of production

on farms and introduced a cleavage between the large commercial farms in the

progressive part of agriculture and the small units lagging behind, which would make for

wider ine"uality of income within the A sector, at least until the process of modernization

had been introduced throughout the sector.0

The technological improvements could increase the rural ine"uality for a period

of time. As it happened in Ehilippines during the green revolution #7oyce, %&&5), the

%In fact, the 2nited :tates has the si!th largest />E per capita in the world #IM9, (C%C). owever, the topfive countries Hatar, $u!embourg, :ingapore, Dorway and 7runei have a population smaller than +million; they could be considered as small scale if we use population as a criterion.


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technological improvements0 in agriculture might even lead to the centralization of land

and would make the higher rural ine"uality permanent. owever, in some cases the small

scale farms can also compete with the large scale farms that are technologically

developed. In fact, many recent studies #:en, %&&4; /riffin, *han and Ickowitz, (CC()

show that the small scale farms could have higher land productivity. It is true that the

small scale farms could be technologically behind; however, the small scale farms have

advantages on monitoring and effort. The large scale farms owned by absentee owners

and cultivated by hired workers under supervision of a manager are often considered as

inefficient. These farms have high monitoring costs and the effort shown by the workers

is usually lower compared to the family farms. Also, the proportion of uncultivated land

is higher in the large scale farms.

In summary, the small scale farms can compete with the large scale farms; the

technological improvements followed by growth might or might not lead to a permanent

rise in the rural ine"uality. $astly, successful land redistribution could play an important

role on changing the rural ine"uality. The rural ine"uality would be significantly reduced,

if land is redistributed during the development process #/riffin, *han and Ickowitz,

(CC()

(he cases of higher rural inequality

9or developing his argument, *uznets #%&++) assumes that in any condition ine"uality in

urban areas is larger than the ine"uality in rural areas. e says that 0It seems most

plausible to assume that in earlier periods of industrialization, even when the

nonagricultural population is relatively small in the total, its income distribution was

more une"ual than that of the agricultural population.0. Therefore, the population shift

from relatively e"ual rural sector to une"ual urban sector will firstly result in widening

ine"uality.

The arguments of *uznets could be challenged within his own conte!t, for the

cases in which *uznets1s assumptions do not hold. In some countries, the socioeconomic

structure could create cases that the rural population is more une"ual than the urban

population. In such cases, urbanization means shift to relatively egalitarian areas. ence,


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urbanization could lead to a reduction in overall ine"uality, before the effects of social

mobility is observed.

Table - 1: The Income Inequalities in some countries Rural Gini Urban Gini Total Gini

Argentina 1953 0.50 0.38 0.41

Argentina 1961 0.49 0.48 0.43

Bolivia 1996 0.59 0.51 0.57

Bolivia 1999 0.63 0.48 0.58

China 198 0.3 0.1 0.9

China 1986 0.6 0.16 0.33

China 1991 0.31 0.18 0.38

Co!ta Ri"a 1961 0.53 0.47 0.50

Co!ta Ri"a 1981 0.47 0.43 0.48

Co!ta Ri"a 1991 0.44 0.43 0.46#or$an 1980 0.38 0.34 0.41

%igeria 1975 0.43 0.36 &

'ierra (eone 1968 0.60 0.5 0.60

Tur)e* 1968 0.57 0.50 0.56

Tur)e* 1973 0.5 0.46 0.50

U'A 1957&59 0.4 0.35 &

U'A 1960&6 0.4 0.35 0.36

+ene,uela 196 0.45 0.44 0.54

:ources6Argentina %&+5, %&4%; 2:A %&++&, 2:A %&4C4( < 3eisskoff -.#%&4), ncome distribution andeconomic groth in uerto ico, Argentina and /e)ico

7olivia %&&4, %&&&; Bosta -ica %&'%, %&&%; Digeria %&+; < 2D23I>- #(CC'), 3orld IncomeIne"uality >atabase F(.CcBhina %&'(, %&'4, %&&%; Bosta -ica %&4%; ordan %&'C; :ierra $eone %&4'; Fenezuela %&4( < >eininger*. and :"uire $. #%&&4), A Dew >ata :et Measuring Income Ine"uality0, 0orld 1an$ 2conomic evieF. %C, Do 5 Ep. +4++&%Turkey %&4' 7ulutay,T., Timur,:.and rsel,.#%&%),TJrkiye1de /elir >aKLlLmL, Ankara6:79.Turkey %&5 :E@ #%&4), /elir >aKLlLmL %&5, Ankara

@ne ob?ection to this argument could be brought by -obinson #%&4). According

to -obinson, the 2 curve will be formed even in the condition, where rural ine"uality is

higher. e shows that the parabolic relation between ine"uality and income will be

formed in any case as long as the shift of population from rural to urban sector continues.

owever, in his model -obinson assumes that both within rural and urban ine"ualities

and income gap between urban and rural sectors are constant. 3e have no rational reason

to believe that these measures will stay constant during the development process, in fact


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empirically -obinson1s assumption is disproved #Anand and *anbur, %&&5). The within

ine"ualities or the ruralurban income gap could change as the development process

continues. In the cases where the within rural ine"uality or the ruralurban income gap

are consistently declining, the parabolic relation between income and ine"uality might

not e!ist. In addition to that, there is a greater chance of the 2 curve not to be formed, if

rural ine"uality minus urban ine"uality is larger.

Table% shows some cases where the ine"uality is larger for the rural population.

There could be several reasons of higher rural ine"uality depending on the structural

conditions of the country. In most of the cases, the high rural ine"ualities are caused by

une"ual land distribution. 9or e!ample, in the cases of Fenezuela and Bosta -ica where

higher rural ine"ualities were observed, the /ini coefficients of land concentration for the

early %&C1s are estimated as C.'( and C.&% respectively #@tsuka, Bhuma and ayami,

%&&().

The higher rural ine"uality within the 2nited :tates is realized by *uznets as an

e!ceptional case. According to *uznets #%&45), the higher ine"uality in rural areas could

be related with the une"ual distribution of income in the rural :outh and 3est, the

former because of the cleavage between Degroes and whites, and the latter because of the

cleavage between largescale, capital intensive farms and smaller units0. Thus, *uznets

e!plains the high rural ine"uality in the 2:, both with the e!tending effects of slavery

and the large scale agricultural production.

(he (ur#ish case

The high rural ine"uality, which was observed in %&4'1s and %&51s Turkey was an

inheritance of economic structure in @ttoman mpire. In fact, the traditional relation of

production in @ttoman mpire is defined as an Asiatic mode of production by many

scholars #>ivitioKlu, %&4), since most of the surplus was e!propriated by agricultural

state ta!es. owever, starting from the eighteenth century, a landlord class developed

from the local ta! collectors and state officers. The formation of this structure led to

greater land ine"uality and the emergence of semifeudal relations of production.

The traditional relations of production in @ttoman mpire is e!plained by the

timarsystem. According to the timarsystem, thesipahis #cavalrymen) had the privilege


16/31

of collecting land surplus in from of ta!es. In e!change, they gave support to the @ttoman

army #Islamoglu N *eyder, %&'). owever, it must be noted that the timarholders were

not the owners of the land and the privilege of being timarholder was not surely inherited

by the other generations. The sultan, in fact, could take the privilege of holding timar

freely. :ince all of the timars were given by the sultan directly, the timarholders rarely

transformed into feudal landlords #>ivitioKlu, %&4). Therefore, many scholars like

>ivitioKlu claims that the timarsystem is a form of Asiatic mode of production rather

than being a form of feudal mode of production.

>uring the si!teenth century, as a result of decreasing revenues and increasing

e!penditures, the @ttoman state faced with a fiscal bottleneck #Islamoglu N *eyder,

%&'). 9or overcoming the fiscal bottleneck, the @ttoman state leased out the privilege of

collection of ta!es. The collection of ta!es was issued to the ta! farmers who were mostly

state officers. This led to a crucial change in the relations of production. The leaseholders

started to substitute the state and inclined to ma!imize their share of production and

s"ueeze peasants #reaya) to achieve their goals #Inalcik, %&&%). owever, under a short

lease, ta! farmers aimed shortterm ma!imization, which resulted in the ruin of the area.

Therefore, @ttoman state introduced the mali$ane system, in which collection of ta!es is

issued to ta! farmers on a lifetime basis. The formation of the mali$ane system naturally

led to the development of semifeudal relations of production within the rural areas.

In addition to mali$ane, plantationlike large scale farms called 3iftli$s emerged

during the eighteenth century #Inalcik, %&&%). According to the ciftli$ system, large, waste

or abandoned lands were issued to the local notables with influence and wealth. The aim

of this operation was land reclamation; therefore, the beneficiaries had to make necessary

investments such as irrigation works #Feinstein, %&&%). 3iftli$s became the farms that

were economically motivated to ma!imize the revenues under the impact of growing

uropean demand. The labor force was formed by landless peasant, who worked in

ciftli$ lands as paid agricultural workers or sharecroppers.

In astern Anatolia, ownership of somesanca$s #administrative unit in @ttoman

mpire) were given to local tribal leaders called beys, who in e!change paid a certain

amount of ta! and provided soldiers to the state in the necessary conditions #Aydin,

%&'4). The lands of beys were inherited by their children, and the state could not dismiss


17/31


18/31

:ome scholars like Baglar *eyder #%&'5, %&'&) claim that Turkish agriculture has

historically characterized by the predominance of independent smallscale peasantry and

landless peasantry do not constitute a crucial category within the rural society. It is true

that most of the peasants in Turkey had a land; however, at least until %&Cs, the scale of

land that peasants owned was very small. According to the agricultural survey of %&C,

+.%G and ='.(G of farms were smaller than +C and (C decares respectively. *oymen

#(CC') claims that production level below +C decares insufficient for sustaining a life

above the poverty level. Therefore, although most peasant owned a land, a large amount

of peasants were either living below the poverty line or were enrolling in other activities

#sharecropping, seasonal work, husbandry etc.) for sustaining a reasonable income level.

%&C agricultural survey also shows that 5.(G of rural households owned =%.G of total

land, which again e!hibits the e!tent of high rural ine"uality. It might be reasonable to

assume that many of the unregistered land were not declared in agricultural surveys.

owever, according to Aydin1s #%&'4) field study, de facto owners of undeclared land

were mostly large landowners. Thus, we can claim that undeclared lands result in a

downward bias in the calculations of rural ine"uality.

@ne of the reasons of high rural ine"uality was the semifeudal structure that even

still e!ists in :outheast Anatolia. 3ith the acceptance of private property in land in %&(4,

multezims lost their influence in :outheast Anatolia; however, tribal leaders and big land

owners #beys) who were the de facto owners of land became the de ?ure owners called

agas #Aydin, %&'4). Agas are not only the landowners; they have influence over peasants

beyond their economic power. Eeasants serve as corvee laborer and they have to do all

kinds of duties issued by aga. If they refuse to do orders, agawould either e!pel them

from village or mistreat them. Eeasants cultivate agas1 land usually by different forms of

sharecropping agreements; however, landless agricultural laborers also work in agas1

lands as wage laborers.

Another reason for the high rural ine"uality in Turkey could be the privileges,

which were given to largescale landlords during the early periods of the republic. >uring

%&(C1s and %&5C1s, mostly large landowners benefited from the credits given by the state

owned commercial bank Oiraat 7ankasi. $arge landowners1 privileges on reaching

credits encouraged the usury activities. In many cases, large landowners could get a loan


19/31

with reasonable interest rates and lend this money with interest rates that reached to the

levels of %(C4CCG. According to 7oratav #%&4&), through the usury activities, the usurer

e!propriated an important part of smallscale peasant1s surplus. *oymen #%&'%) claims

that usury activities also changed land distribution significantly. Many of the peasants

who cannot pay their loans had to sell their land to large landowners.

After the :econd 3orld 3ar, the Turkish government started to use the Marshall

Elan aid to finance the importation of agricultural machinery. The number of tractors

?umped from (CCC in %&=' to =(CCC at the end of the %&+Cs. The aid was distributed

through stateowned commercial banks for encouraging tractor purchases; however,

mostly large landowners benefited from these loans. 7y %&45, poorer 4'.'G of farms

only had (CG of tractors; whereas, the richest C.+G owned (4G of tractors #*oymen,

(CC'). The une"ual distribution of tractors was one of the reasons of high rural

ine"uality, which was observed in %&4' and %&5 surveys.

A )imple mo!el for e*plaining the Kuznets process

The *uznets process in Turkey can be e!plored by decomposing ine"uality to its

components. /ini Inde! is the most commonly used inde! in ine"uality analysis.

owever, for a decomposition analysis, Theil Inde! could give stronger results compared

to /ini Inde!. The reason for that is that /ini Inde! cannot be fully decomposed into

between and within components. Along with between and within components, the

decomposition of /ini inde! gives an e!tra intensity of transvariation0 term #>agum,

%&&); whereas Theil inde! can be decomposed into between and within components

without having a residual term. Therefore, for this analysis Theil Inde! is preferred for

more accurate decomposition of ine"uality.

7y using Theil Inde!, the overall ine"uality T can be decomposed into within and

between sector components T0and T1in the following way6

#%) 0 1T T T= +

9or e!ploring the *uznets process, we assume that both within and between

components are dependent on population share of urban sector, which is defined as !.

The overall ine"uality can be rewritten by decomposing within component into urban and

rural components TUand T6


20/31

#()# ) # ) # ) # ) # )

# ) # ) # )#% # )) # )

U U . . 1

U U . U 1

T T ) . ) T ) . ) T )

T ) . ) T ) . ) T )

= + +

= + - +

ereUandare respectively production shares of urban and rural sectors in the

whole economy. It could be reasonable to assume that share of production increases with

the rise in urban population. 9or analyzing the impact of urbanization on overall

ine"uality, we calculate first order conditions of Twith respect to urban population share

#!)6

#5) P P P#% ) P PU U U U . U . U 1T

T . T . T . T . T )

= + + - - +

:inceU&)(4 - &)(, the e"uation could be written as6

#=) P# ) # P P ) PU U . U U . . 1T

. T T T . T . T

)

= - + + +

The e"uation above gives an insight about the development process e!plained by

*uznets #%&++). *uznets assumes that urban sector has always higher ine"uality

compared to rural sector. e claims that moving from relatively e"ual urban distribution

to relatively une"ual rural distribution increases the ine"uality in the early phase of

development. This argument can be seen in the first and third terms. The first term is

naturally positive, if urban ine"uality is greater. The between ine"uality component #T1)

also increases in the first phase of development. Anand and *anbur #%&&5) show that the

relation between share of urban population #!) and between ine"uality component #T1) is

inverse 2 shaped even, if the urbanrural mean income gap is constant. The reason for

that is that the contribution of between ine"uality converges to zero in the economies that

are totally urban or rural #9igure%). In addition to that, *uznets claims that the

productivity gap between the rural and urban sector increases in the first phase of

development. Anand and *anbur show that if *uznets1s assumption is followed the peak

of 2 curve gets greater and the slopes at the end points become even steeper. Therefore,

T11#!) Q C assumption is valid for e!plaining *uznets1s theory, when the value of ! is

smaller. Therefore, assuming that within rural and urban ine"ualities are not declining,

growth of urban sector surely raises ine"uality in the early stage of development. As the

development process continues, for higher values of !, both U1 R C and T11#!) R C


21/31

conditions would be satisfied. This would lead to a decline in overall ine"uality and the

development process would fit to *uznets Burve.

C %

7etweengroup

component #Tb)

3ithingroup

component #Tw)

Ine"uality

#T)

2rban share of population #!)

+igure $,: Change in Inequality in the Kuznets -rocess

:ource6 Anand, :. and *anbur, :.M.-.#%&&5) The *uznets process and the ine"ualitydevelopment

relationship0.5ournal of 6evelopment 2conomics, =C, pp. (+


22/31

C %

3ithingroup

component #Tw)

2rban share of population #!)

Ine"uality

#T)

7etweengroup

component #Tb)

+igure $.: Change in Inequality in a society with higher rural inequality

In Turkey, firstly, rural ine"uality was greater than urban ine"uality in the years

%&4' and %&5. Thus, une"ual urban sector assumption of *uznets does not hold for

Turkey and there was a movement from une"ual to e"ual sector. ence, the first term of

e"uation #+) was negative for a period. :econdly, ine"ualities in the urban and rural

sectors changed. The ine"uality in the urban sector did not rise with urbanization #e!cept

the year of economic crisis %&&=) and a significant decline was observed for the ruraline"uality. Thus, the second term of e"uation #+) is probably negative. These two

conditions reduce theT

)

and hence

T

)

can be negative even when the urban sector is

rapidly growing. Thus, the Turkish case shows that *uznets process might not hold if

*uznets1s assumptions are changed.

3e can e!plain the changes in longterm Turkish ine"uality by using a simple

empirical analysis. 9or the empirical analysis, the Theil entropy indices for the years%&4', %&5, %&' and (CC= are calculated #Table < =). The years %&4', %&5 and %&'

were selected for calculations, since the first three relatively reliable income distribution

surveys were done for these years. The ine"uality for %&45 was not being estimated by

household surveys, it was rather calculated by using the land distribution estimated in

agriculture surveys and the values of income ta!es and social security premiums paid.


23/31

Thus, %&45 income distribution study cannot capture the informal economy. The years

%&&= and (CC( were not used for calculations, since the ine"uality for these years are

biased, due to the effects of the economic crises in %&&= and (CC%. I rather used the year

(CC=, which does not reflect the shortterm effects of economic crises on distribution.

Theil values for %&4' and %&5 were estimated by using the income distribution data of

7ulutay, Timur and rsel #%&%) and :tate Elanning @rganization #%&5) respectively.

9or the years %&' and (CC=, data of Turkish :tatistical Institute :tate Institute of

:tatisticsas used.

Table - *: Inequality in Turkey

,ini - Total ,ini - %rban ,ini - Rural

19+* 0.55 & &

19+ 0.56 0.50 0.5719#* 0.50 0.46 0.5

19# 0.43 0.44 0.4

199. 0.49 0.51 0.41

2!!2 0.44 0.44 0.4

2!!* 0.4 0.4 0.39

2!!. 0.40 0.39 0.37

2!! 0.38 0.38 0.37

2!!+ 0.43 0.4 0.41

2!!# 0.41 0.39 0.38

2!! 0.41 0.40 0.38

:ources 6

%&45 SavuoKlu, T., and U. amurdan#%&44), /elir >aKLlLmL AratLrmasL %&45, :E@, Ankara.%&4' 7ulutay,T., Timur,:.and rsel,.#%&%),TJrkiye1de /elir >aKLlLmL, Ankara6:79.%&5 :E@ #%&4), /elir >aKLlLmL %&5, Ankara%&' < :I: #%&&C), %&' anehalkL /elir ve TJketim arcamalarL >aKLlLmL :onularL, Ankara%&&= < :I: #%&&4), %&&= anehalkL >aKLlLmL Anketi :onularL, Ankara(CC((CC' < T2-*:TAT, ousehold Income >istribution :tatistics #www.tuik.gov.tr)

Table - .: Decom/osition o0 inequality according to urban-rural segmentation

%rban o/)($ ,iniTheil - Total Theil - %rban Theil - Rural Theil - 3et4een

19+ 36.8 0.56 0.664 0.519 0.685 0.056

19#* 40.4 0.50 0.57 0.46 0.557 0.015

19# 55.3 0.43 0.375 0.39 0.39 0.0092!!. 68.0 0.40 0.93 0.84 0.63 0.014

Table = e!hibits Theil values for within and between urbanrural ine"ualities in Turkey.

According to the analysis, the ine"uality between rural and urban areas has only small

impact on the overall ine"uality. The ine"uality for the given years is mostly e!plained


24/31

by the within ine"ualities in urban and rural areas. Therefore, change in overall ine"uality

is mostly related with change in within ine"uality.

The reasons behind the reduction in ine"uality could be predicted by the e"uation

=6

#=) P# ) # P P ) PU U . U U . . 1T

. T T T . T . T)

= - + + +

9or estimating impact of the first term # P# )U U . T T- ), which we call *uznets

effect, we assume that gap between within urban and rural ine"ualities move towards one

direction between the given years. Thus, we multiply rate of urbanization with the higher

and lower differences between within urban and rural ine"ualities for the given period.

7y this method, we find a range showing the possible contribution of *uznets effect on

overall ine"uality. The second # PU UT ) and third # P. .T ) terms give impact of changes

in urban and rural ine"ualities on overall ine"uality. 9or calculating the range of second

and third terms, we again assume that these terms move towards one direction between

the given years. 3e multiply the rate of urbanization with the larger and smaller values of

within urban and rural ine"ualities for the given period. $astly, we estimate impact of the

change in between ine"uality # P1T ) by a simple subtraction.

Table - : Decom/osition o0 changes in Theil 5alues

eriod6hange in

75erall Theil&u8nets '00ect 6hange in %rban 6hange in Rural

6hange in3et4een

19+-19#* &0.19 &0.006 &0.003 &0.01 &0.03 &0.081 &0.077 &0.041

19+-19# &0.89 &0.031 0.01 &0.047 &0.070 &0.5 &0.158 &0.047

19#*-19# &0.160 &0.014 0.009 &0.08 &0.039 &0.135 &0.101 &0.006

19#-2!!. &0.08 0.007 0.003 &0.060 &0.073 &0.09 &0.01 &0.014

Table + e!hibits the decomposition of changes in overall Theil inde! for the given

periods. The first values for the *uznets effectP# )

U U .

T T-and impact of changes in

within urban # PU UT ) and rural # P. .T . ) ine"ualities are calculated by using the

conditions of the previous year and the second values are calculated by using the

conditions of the latter year.


25/31

The results show that the path suggested by *uznets was not followed in the

Turkish case. The direct effect of urbanization on ine"uality was slightly negative for the

period %&4'%&5, since the rural ine"uality was higher for this period. 9or the period

%&5%&', the value of *uznets effect is between C.C%= and C.CC&. The rural ine"uality

was relatively higher in %&5; however, for %&' the rural ine"uality was lower.

Therefore, for the period %&5%&', we can say that the urbanization first had direct

negative and then had direct positive impact on the Theil value. In summary, the shift

from rural to urban areas did not directly increase the overall ine"uality during the early

phase of industrialization.

The estimations also e!hibit that the longrun reduction in ine"uality is highly

related with the decline in rural ine"uality. The rural ine"uality was significantly reduced

between %&4'%&'. The decline in rural ine"uality could be e!plained by several

reasons. 9irstly, a large proportion of migrants came from either smalllandowning or

landless families(. The migration of landless peasants could immediately have reduced

the rural ine"uality by logic, since the poorest individuals left the rural distribution

without transferring any assets to the richer ones. In addition, the benefits like

remittances accruing to migrants1 families or relatives would probably have pulled the

level of rural ine"uality down. Thus, urbanization could have an indirect impact on the

reduction of rural ine"uality.

:econdly, a spillover in agricultural technology was observed after %&4Cs. In

%&41s Turkey, there were only +CCC tractors. These tractors were mostly owned by a

privileged group of large landowners #*epenek N Uenturk, (CC+). owever, the number

of tractors in Turkey increased to %54CCC in %&( and ?umped to 4++CCC in %&'' and

'+CCC in %&&. The spillover of agricultural technology could have positive effects on

rural ine"uality.

Tables = and + also show that urban ine"uality slightly decreased between %&4'

%&5 and %&5%&', although urbanization process continued. The decline in urban

(In a study made for Turkey, *arpat #%&4) shows that most migrants e!plain their decision by pushfactors like low soil productivity, lack of good cultivable land, irrigation, water, division of properties intosmall parcels etc.. G of men and 4+G of women migrants e!plain their behavior by push factors relatedwith poverty, whereas only 'G of men and G of women give search for a better future0 as their reasonfor leaving village. Aydin #%&'4)1s field study also shows that the migrants in :outheast Anatolia weremostly poorer individuals.


26/31

ine"uality for the %&4'%&5 period could easily be e!plained by the rising labor

movements #7oratav, (CC+). As a result of the labor movements, wage share in

manufacturing industry increased from (+.(G in %&4' to (.%G in %&5 and 5'.5G in

%&&.

owever, the gains of labor movements were mostly lost with the antilabor

policies followed after the %&'C military coup. Therefore, labor movements cannot

e!plain the decline in urban ine"uality for the periods %&5%&' and %&'(CC=. The

decline in urban ine"uality for these periods could be partially e!plained by the social

mobility0 effects suggested by *uznets #%&++) for the later stages of development. As

suggested by many scholars #Bole and :anders, %&'+; -auch, %&&5; *arpat, %&4), it is

reasonable to assume that most of the migrants first moved to the informal sector. Thus,

ratio of nonagricultural labor with social insurance was only =5.'G in %&4 and =(G in

%&( #*epenek and Uenturk, (CC+). owever, in time, workers in informal sector moved

to the formal sector; the nonagricultural labor with social insurance increased to C.&G

in %&&C and +.&G in (CC=. The raise in the ratio of formal workers could have decreased

the urban ine"uality.

$astly, between ine"uality declined during the e!amined periods. The impact of

decline in between ine"uality is more noticeable for the %&4'%&5 period. This result is

consistent with >ervis and -obinson #%&'C)1s analysis. >ervis and -obinson show that

the *uznets -atio in Turkey declined between %&4'%&5, since terms of trade changed

in favor of the rural sector. 9ollowing $ewis #%&+=)1s argument, we can say that the

relative growth of the capitalist sector could have shifted the terms of trade in favor of the

rural sector and reduced the between income ine"uality in Turkey.

Conclusion

This study e!plores the effects of urbanization on the changes in income distribution. The

changes on ine"uality are analyzed within the *uznetsian framework and *uznets1s 2

curve argument is e!amined in a critical way. The urbanization followed by

industrialization can change ine"uality by many ways. As urbanization continues, the

urban share raises; changes are observed both in between and within urban and rural

ine"ualities. *uznets brings some e!planations on how development changes the


27/31

structure of ine"uality. owever, the path that ine"uality will follow is also related with

the internal dynamics of a country.

*uznets claims that the first stage of industrialization increases ine"uality by

raising the proportion of the population in the une"ual part #urban) of the society.

owever, there are indeed studies that show that urbanization has counterbalancing effect

against the income gaps caused by the rapid industrialization. *uznets1s assumption on

higher urban ine"uality could also be wrong for many cases, which could disprove

*uznets1s arguments within his own framework. There are in fact cases shown in this

study, where the ine"uality in the rural areas is greater due to the countries1

socioeconomic structure.

In this study, we e!amined the Turkish case in which rural ine"uality was greater

at the earlier stages of development. 2nlike *uznets1s arguments, urbanization did not

lead to greater ine"uality during the first stage of Turkey1s development. The direct

impact of shift from rural to urban sector on ine"uality was not negative for the early

phase of urbanization. In fact, urbanization reduced the ine"uality in Turkey by

decreasing the rural ine"uality and closing the urbanrural income gap. The reduction in

ine"uality pursued during the latter stages of development with the social mobility0

effects suggested by *uznets.


28/31

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