“Flipping” Kuznets: Evidence from Brazilian municipal level data on the linkage between income and inequality

Abstract

Using census data (for 1991 and 2000) for more than 5.000 municipalities, we examine the relationship between income per capita and inequality at the municipal level in Brazil. We uncover the existence of an “inverted-U” relationship in 1991 that flipped into a “straight-U” relationship in 2000, both of which are statistically significant. Such a flip has important implications, as it suggests that the current decline in inequality is likely to reverse as GDP per capita increases, with radically different prospects for the evolution of inequality in the country. Building on our case, and very tentatively, we submit that the flip may be due to the association of economic growth with industrialization. As long as the two are positively correlated, as was the case in Brazil and Latin America until late in the 20th Century, in OECD countries until the 1970s, and today in China and India, the standard Kuznets curve adequately describes the relationship between development and inequality. When that correlation is negative, however, i.e. when growth is accompanied by de-industrialization, as is the case in OECD countries since the 1980s and in Brazil since the 1990s, the curve “flips” and inequality declines at first, and then increases again after a tipping point has been reached.