Economists have had much to say about what causes aggregate economic growth, but they have been more reticent about the distributional dimension of that growth. Understanding development and the process of poverty reduction requires understanding not only how total income grows but also how its distribution behaves over time. This book is a major new contribution to that process. The authors propose a decomposition of differences in entire distributions of household incomes, shedding new light on the powerful, and often conflicting, forces that underpin the changes in poverty and inequality that accompany the process of economic development. This approach is applied to three East Asian countries--Indonesia, Malaysia, and China--and to four in Latin American--Argentina, Brazil, Colombia, and Mexico.
This book is about how the distribution of income changes during the process of economic development. By its very nature, the process of development is replete with structural change. The composition of economic activity changes over time, generally away from agriculture and toward industry and services. Relative prices of goods and factors of production change too, and their dynamics involve both long-term trends and short-term shocks and fluctuations. The sociodemographic characteristics of the population evolve, as average age rises and average family size falls. Patterns of economic behavior are not constant either: female labor-force participation rates increase, as do the ages at which children leave school and enter employment. Generations save, invest, and bequeath, and so holdings of both physical and human capital change. But although change is everywhere and although some patterns can be discerned across many societies, no single country ever follows exactly the same development path. The combination, sequence, and timing of changes that are actually observed in any given country, at any given period, are always unique, always unprecedented.
In this book, we do not suggest yet another grand theory of the dynamics of income distribution during the process of development. Instead, we propose and apply a methodology to decompose distributional change into its various driving forces, with the aim of enhancing our ability to understand the nature of income distribution dynamics.2 In fact, rather than searching for a unifying explanation, we explore the incredible diversity in the distributional experiences and outcomes across economies. Why do changes in inequality differ so markedly across economies that have similar rates of growth in gross domestic product (GDP) per capita, such as Colombia and Malaysia (see table 1.1)? Why do we observe rising inequality both in growing economies (Mexico) and in contracting ones (Argentina)? Why do educational expansions sometimes lead to greater equality (as in Brazil and Taiwan, China) and sometimes to greater inequality (as in Indonesia and Mexico)?