Convergence or divergence patterns in income distribution across countries: A new evidence from a club clustering algorithm

Abstract

Since globalisation accelerated in the early 1990s, income inequality has increased in most developed countries and in some middle-income countries, including China and India. Also, inequality has declined in most countries of Latin America and the Caribbean and in many Sub-Saharan African and South Asian countries. This observation corroborates the neoclassical models of convergence that predict that, in the long-run, income distribution will tend to converge across countries. In this study, I examined whether there has been convergence in inequality between 2000 and 2015. To this end, I constructed a large panel of Gini indices of 142 countries and tested for the existence of convergence clubs using the econometric methodology proposed by Phillips and Sul. The results indicate that there is no uniform convergence to one club. Instead, I found that countries’ income inequalities are converging into five different clubs. This finding is different from those reported by the few existing c ross-country studies on convergence in inequality. Furthermore, the analysis reveals strong evidence that between-club inequality increases, while within-club inequality decreases over the years. Between-club inequality is found to be determined by population growth, population density and the ratio of physical to human capital.

Keywords:

• Beta convergence
• Gini index
• income distribution
• Log t test
• club convergence

JEL Classifications:

• O15
• O47
• C23
• D31
• R11

PUBLIC INTEREST STATEMENT

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Disclosure statement

No potential conflict of interest was reported by the author.

Opposing interest

The School of Economics and Econometrics of the University of Johannesburg had no role in the design of the study; in the collection, analyses, or interpretation of data; in the writing of the manuscript, and in the decision to publish the results.

Notes

1. The SWIID is a cross-sectional time-series data that was produced by Solt for the first time in 2009. it contains comparable Gini indices of disposable and market income inequality for more than 190 countries for a period starting from 1960 to the present. More details regarding the SWIID are provided in the data section an at: https://fsolt.org/swiid/

2. Although the $\beta$-convergence and $\alpha$-convergence methods are now less employed in studies that are more robust to the analysis of convergence, the two methods can still be used as benchmark. This allows to compare the results obtained by robust econometric methods such as the Log t test.

3. Our estimation procedure used the Epanechnikov kernel functions in all the calculations. The smoothing parameter was determined following the methodology of Silverman (1986).

4. Beta convergence is evident when countries with high initial inequality register smaller increases (or larger decreases) in inequality, while countries with low initial inequality register a greater increase (or smaller decrease) in inequality.

5. Newey and West (1987) method was employed with the rule of a log order L =$T^{1/4}$=${\left(16\right)}^{1/4}$=2

6. Note that the potential Gini coefficient for club 3 was found within Panama (mean Gini of 52.58%), while the potential Gini coefficient for club 4 was found within Burkina Faso (mean Gini of 47.53).

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Notes on contributors

Delphin Kamanda Espoir

Delphin Kamanda Espoir is a lecturer at the School of Economics at the University of Johannesburg. He received his PhD in Economics in 2021 from the University of Johannesburg, South Africa. The author does research in various areas such as: Growth and Development Economics, International Trade and Regional Economic Communities, Energy and Environmental Economics.