Income Inequality and Human

Development

An analysis of the relationship between income inequality and human development

Jonathan Michaiel University of California Davis Department of Economics

2014

Abstract

Unequal access to resources, such as income, is a significant issue in the world

with especially severe consequences on human development in poor countries. In 1990 the

United Nations Development Program (UNDP) created the Human Development Index (HDI),

defining human development to be “a process of enlarging people’s choices and enhancing their

capabilities.” Income inequality is described as the dispersion of income across a country or

population. This paper draws from international data sources to explore the relationship

between income inequality and human development. I provide a theory to explain why income

inequality is correlated to human development, and then test the hypothesis that income

inequality impedes human development to a greater degree in poor countries. The models

developed incorporate the Human Development Index (HDI) as a measure of human

development, Gross Domestic Product per capita (GDP) as a measure of income and the GINI

coefficient as a measure of income inequality. I find that income inequality is negatively

correlated to human development and that the magnitude of this correlation is dependent on

income level. Through econometric modeling and regression analysis, I hope to shed new light

on the relationships among these three indicators and provide insight into how income inequality

affects the development process.

Key Terms: income, inequality, income inequality, human development, poverty, basic

capabilities, transaction cost, life expectancy, education

I am indebted to my mentor professor Dr. J. Edward Taylor and Dr. John Constantine as

well as postdoctoral fellow Karen Thome and Ph.D candidates Aleks Schaefer and Lester Lusher

for their invaluable assistance on previous versions of this paper and data processing.

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I. Introduction

Among all development measures, income inequality and human development are the

most widely discussed. Income inequality is the dispersion of income across a population

(OECD Social Indicators , 2011). Though human development and its measurement have been

heavily critiqued, the idea behind them remains crucial to development economics. This paper

aims to illustrate the relationship between income inequality and human development.

Furthermore, it addresses two core questions: 1) how does income inequality relate to human

development? and 2) if there is an effect or correlation, is it larger in Low Income Countries

(LICs)? I test the hypothesis that income inequality has a significant negative association with

human development and that LICs suffer larger losses in human development due to income

inequality than richer countries do.

I provide a theory and evidence to support the claim that in regions with low levels of

human development, income inequality will yield large disparities in access to basic needs and

capabilities, whereas in regions with high levels of human development, income inequality will

not result in large disparities in access to human development components. The motivation for

this theory can made clear, however first it is crucial to distinguish income inequality and other

forms of inequality.

Equality can be divided into three distinct groupings: equality of process, equality of

opportunity and equality of outcome (Kovacevic, 2010). Here I focus only on equality of

outcomes. Income inequality is a violation of equality of outcomes. Equality of outcomes is

typically associated with the efforts of an individual. Denying the rewards of an individuals’

work, usually money, is inequality of outcomes. Note this paper is not about individuals with

different skill sets earning different wages; it is about denying the rewards of labor. Inequality of

outcomes is measured primarily by income due to its tangibility and relatively easy

measurement. This paper focuses on income inequality and it’s relation to human development.

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The subsequent sections are as follows

Section II: Income inequality

Section III: Human development

Section IV: Motivation and Theory

Section V: Data and methods

Section VI: Results

Section VII: Conclusion and implications

Section VIII: Limitations and further research

II. Income inequality

A. Definition

“Income inequality describes the distribution of income across a society” (OECD Social

Indicators 2011). Income inequality occurs when a country has an uneven distribution of wealth

or access to assets across its population. A common description of income inequality uses

quintile analysis. The statement that “the richest 20% of a country earn or control 80% of the

income” illustrates income inequality. In a perfectly equal world the wealthiest 50% of a

population would earn 50% of the country’s income, the wealthiest 2% would earn 2%, etc.

Measuring income inequality gives a true sense of the dispersion of wealth in a country, in

contrast to national income per capita, which is simply an average but says nothing about income

distribution. Income inequality is descriptive and does not necessarily connote positive or

negative effects on economies. There are conditions that deem income inequality to be beneficial

or detrimental. Such conditions as poor market efficiency and structure, poor social mobility,

limited primary schooling and inadequate health systems tend to lead income inequality to have

detrimental effects (Melamed and Samman 2013). Enturpernaual drive is a situation where

income inequality may be benficial. In some cases, usually if there is social mobility, the divison

between rich and poor motivates people to take large risks to break into the wealthy category. In

simple terms, if a medical doctor and a street cleaner were paid roughly the same, then there

would be less motovation to pay for medical school and become a doctor. Given different

conditions, like social mobility, income inequality can induce people to become wealthy or be

trapped in poverty.

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B. Relevance to Development

A simple definition of a market is a place where buyers and sellers meet to agree on

prices and quantities. In poor countries, there are several factors limiting who is able to meet, and

what prices and quantities they can agree upon (Taylor & Lybbert, 2012). These factors or

transaction costs get in the way of efficiency. An example of transaction costs in developing

countries could be poor roads, limiting access to the local market. With high levels of income

inequality, these transaction costs are transferred to poorer groups who have less access to

markets (Feldstein, 1998). More specifically, efficiency is lost in the credit market since

impoverished people do not have readily available access to credit. Banks tend to not loan to

risky individuals whose output is strongly dependent on weather patterns as is the case in most

developing countries. Thus if the majority of a population is deprived there is less credit

available and less overall investment (Taylor & Lybbert, 2012).

i. Economic structure

In developing countries income inequality has consequences in determining market

structure. Wealthy individuals are more likely to invest abroad and consume imported products

while spending habits of low income and middle groups tend to focus on locally produced

products and services (Feldstein, 1998). In developing countries, income inequality widens the

gap between the rich and the poor causing the market for foreign goods and services to be

inflated while local markets stagnate (Taylor & Lybbert, 2012). Domestic markets become

largely concentrated with low income groups and are slower to grow. The market structure of a

county can greatly be affected by income inequality.

ii. Basic needs

Income inequality is strongly linked to poverty. The correlation between income

inequality and poverty is quite simple. With a small economic pie and high inequality, those who

get smaller slices of the pie are left hungry. Yet the reality is that income inequality in

developing countries does not only leave people hungry but rather starving, malnourished, and

destitute leading to millions of lives lost. Therefore, in the case of developing countries

inequality analysis is integral for humanitarian efforts. Milorad Kovacevic, in his paper on

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inequality in human development states that “poverty reflects failure to enhance basic

capabilities while inequality depicts disparities in the capabilities enjoyed by individuals that

enable them to do or be what they value in their lives.” (Kovacevic, 2010) This basic capabilities

notion is fundamental to studies of poverty and development (I revisit “basic capabilities” in

section III). In low income countries, governments have limited tax revenue disabling public

goods and services which are cause for more strife (Taylor & Lybbert, 2012).

iii. Political conflict

Many countries are plagued with political unrest. Though each country is unique in its

political climate, income inequality often is a contributing factor to political unrest. Lower

income groups become dissatisfied with unjust income distribution and tensions arise.1 This

phenomenon is not restricted to developing countries but also appears in developed countries.

The United States among various OECD countries2 (Organization for Economic Cooperation and

Development) were home to the Occupy Movement (originally Occupy Wall Street). The tag

line of this protest was “We are the 99%”, referring to the richest 1% of the population

controlling a disproportionally larger share of wealth than that of rest, the 99%. This is a clear

statement of income inequality. This and many other historical social movements were centered

on high levels of income inequality.

C. Measuring Income Inequality (GINI)

Economists have established the GINI coefficient as a measurement of income inequality.

To illustrate income inequality I use a graph in Figure 1. The graph plots cumulative share of

population on the X-axis and the cumulative share of income on the Y-axis. Curves within this

graph show levels of income inequality. A perfect equality line would be a 45° degree line

indicating each share of the population earns exactly their respective share of income. The true

1 This phenomena of one group feeling deprived of their entitlement while it is available to another group is referred

to as relative deprivation. 2 The OECD is an organization of some developed nations committed to promoting policies that improve socio -

economic well-being. The organization consists of Australia, Switzerland, the United States and the United

Kingdom among other nations.

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plot of a country is called the Lorenz Curve (Giovanni & Paolo, 2005).The area between the 45°

line and the Lorenz Curve, relative to the entire area under the 45° line represents inequality and

is thus the GINI coefficient. The GINI coefficient (GINI index) is used to compare inequality

within a country, between countries and over time. Because the GINI carries all the properties of

an index it ranges from 0 to 1 (sometimes reported in a multiple of ten.) A value below .5

represents societies that have low amounts of inequality where as a GINI score above .5 indicates

relatively high income inequality. A GINI value of zero would indicate absolutely no inequality.

Figure 1. Lorenz Curve

Source: US Census Bureau 1992

III. Human Development

A. Definition

The Human Development Report defines human development as “a process of enlarging

people’s choices and enhancing their capabilities.” Though this may seem like an

oversimplification of human development, the implied meaning of this statement is complex.

First, human development is a process. Contextually, a single year of human development data is

meaningless without a comparative trend. “Choices and capabilities” are derived from three

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engrossing components, income, education and health. Income is the first most basic mechanism

of expanding choice, with limited income there is little choice as to where to live, what to eat,

what to wear etc. As income increases so does the level of choices the earner has. With more

money individuals can spend on achieving basic capabilities, increases in income for the poorest

result in doctor’s visit and school enrollment. With a higher level of income an individual can

spend on health and education to increase their human capital. The second mechanism of choice

is education. To expand and make choices consumers need to be educated and informed3. Being

educated or informed is fundamental to choice. Therefore education is crucial in defining human

development and is the second component in defining human development. Education and

income do not fully encompass what human development is. To be of sound mind and body

empowers and drives individuals to “enlarge” their choices and capabilities. Health is an equally

if not more relevant mechanism to enlarging ones choices and capabilities.

I can now construct a definition of human development using the Human Development

Report (HDR) as a foundation. Human development is the process of enlarging people’s choices

and enhancing their capabilities through increasing levels of income, education and health. It is

this encompassing notion of improving economic agents’ standard of living and quality of life

over time through income, knowledge/education and health that drives my theory. By limiting

access to income, and thus health and education, human development cannot grow.

B. Relevance

Human development is important because it provides us with a universal measure of how

well off a countries citizens are. Human development measures how much basic capabilities

have been achieved and how far a country has exceeded beyond basic capabilities. It is in a sense

a combination of standard of living and quality of life. It goes beyond using GDP per capita to

measure welfare and gives a way to compare countries’ levels of development. Human

development is integral in studying countries and societies. Development experts pursue the

3 There is a large body of literature discussing the economics of information and perfect information. Here I simply

take information as critical to making choices.

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advancement of those suffering from poverty, malnutrition, disease, famine and the development

and growth of poor economies. This is vital to global well-being since in a perfect world all

would be educated, healthy and wealthy.

C. Measuring Human Development

The task of measuring and quantifying these three components has been taken up by the

United Nations Development Program (UNDP). The Human Development Index (HDI) is a

composite of three sub-indices, an index for income, an index to measure health and an index to

measure education. Income is measured in GDP per capita-PPP4 terms. Health is measured by

life expectancy index and the education index is a composite of two sub-indices. The first being

average years of schooling for the adult population at the time of data collection and the second

is the expected years of schooling for a child born when the data was collected. This accounts for

cross generational changes in education. Due to their construction the HDI along with all its sub-

indices fall between zero and one (although sometimes reported as a single multiple of ten) and

are relative to the maximum and minimum of the category of measurement. The HDI is then the

geometric mean of its sub-indices as below where the variable Y denotes the income measure,

LE represents life expectancy and E is the education index.

HDI=√(Yindex × LEindex × Eindex )3 (1)

Since its inception in 1990 by Amartya Sen, the HDI has come under criticism. Some

opponents of the HDI argue that HDI does not account for true poverty or state that the HDI

hides disparities in development within countries. Another critique of the HDI is that it does not

show true human development. In broader terms human development is “a process of enlarging

people’s choices and enhancing their capabilities” (Human Development Report, 2013). So how

can one index show this engrossing concept?

Advocates of the HDI assert that the HDI components are strongly correlated to all

features of human development. Health can be strongly related to life expectancy, income has

been the standard measure of quality of life and education is correlated to human capital and thus

4 Purchasing Power Parity (PPP) in an adjustment to Gross National Product (GDP) to account for currency

exchange rate and is used to show relative prices.

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capital stock which furthers development. Despite its critiques the Human Development Index

(HDI) remains to be the accepted measurement of human development. All of the HDI

components are significant variables in determining development. The major pitfall of the HDI

is that it does not account for inequality of income, health and education within a country.

Corruption is a common feature of developing countries yet the HDI has no variable or

tabulation to account for corruption.

Figure 2. Human Development Histogram

This graph illustrates the distribution of human development across countries worldwide.

Source: Authors own tabulation from the 2012 Human Development Report

As can be seen from the graph about 30% of all countries suffer low levels of human

development ranging from .3 to .5. One-third of countries have medium human development levels

between .6 and .7. The high human development grouping contains roughly 36% of all countries.

This graph shows the large distribution of human development across nations. Many countries

have high human development yet many countries have very low levels of human development.

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IV. Motivation and Theory

It is important to note that when measuring human development, income is one of the three

sub-indices used to form the Human Development Index (HDI). The other components are

health (measured by life expectancy) and education. As income rises, holding education and life

expectancy constant, so does human development, though it is subject to diminishing marginal

returns to income. Figure 3 demonstrates this correlation

Figure 3. 2012 HDI value on Gross National Income per capita

Source: Authors own tabulation from the 2012 Human Development Report

The graph shows a clear positive correlation between income and human development.

The takeaway from this graph is that this relationship is nonlinear. This is due to the direct and

indirect parts income plays in determining human development. As a part of the Human

Development Index, rises in income yield rises in human development. However, income also

funds the other two components, health and education, thus having an indirect influence on

human development. It is stated then that income is the mechanism or mode of achievement for

the two other development components. The intuition here is simple; as incomes rise people

spend more on attaining education and increasing their health status. Individual income growth

enables access to higher levels of education and health (Taylor & Lybbert, 2012). At low levels

of human development the gains from income growth are large due to spending on accessing

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0 20000 40000 60000 800002012 Gross National Income (GNI) per capita

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healthcare and schools. Once basic capabilities have been met, the correlation between income

and human development weakens. The bowed out shape of the scatter plot is due to the fact that

once basic capabilities have been met increasing income does not increase human development

as dramatically.

I have shown that income is directly related to human development as well as indirectly

by spending on health and education. This relation is crucial in the special case of low income

countries. In the context of developing countries or Low Income Countries there is limited access

to basic capabilities. Income inequality exacerbates this due to concentrations of wealth creating

a limited pool of who can increase their individual human development, more importantly their

achievement of basic capabilities. Only the select few can increase their human development

while most are left “hungry.” Even when the gap between the rich and the poor is not large in

terms of income, because income influences health and education, the difference in human

development is great. These larger disparities hinder human development since poorer groups

have limited access to basic health and education. As stated, a small pie and lots of unequal

slices yields many sick, uneducated and very poor people. Countries are in a sense like

individuals; once basic capabilities have been met an increase in income will not raise human

development greatly. The key is basic capabilities; LICs simply cannot “afford” income

inequality because it creates large disparities in basic needs. Wealthier countries can achieve

high levels of human development and high levels of income inequality without large scale

poverty due wide access of basic capabilities.

Figure 4. HDI and GINI

Country income Level

HDI average GINI coefficient Average

High Income Countries (HIC)

.836 36

Upper middle income (UMIC)

.698 40

Lower middle income (LMIC)

.514 41

Low income (LIC)

.371 41

Source: Authors own tabulation of Human Development Report Data 2013

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Figure 4 presents the average HDI and GINI coefficients per World Bank income groups.

The first item to note is the range of human development. Low Income Countries (LICs) have a

significantly less human development index score than High Income Countries (HICs.) Also

recognize the limited range of GINI scores. HICs and LICs have similar levels of income

inequality within the country; yet low income countries have much lower human development

scores. This is due to access to basic capabilities; low income countries suffer larger losses in

human development since there is less access to basic capabilities. Limited access to basic needs

and capabilities is derived from income inequality; few people have lots, many are left with

nothing.

Although Figure 4 affirms my hypothesis that low income countries suffer larger losses

in human development than high income countries due to income inequality, this preliminary

data tells nothing of the strength of the correlation but shows a general relationship.

V. Data and Methods

To identify the relationship between income inequality and human development I use

regression analysis. Recall the graph of Figure 3. The bowed out shape of income on HDI

implies that at low levels of human development a rise in income will boost human development

a great deal (human development is more responsive to income growth at low levels). However

at high levels of human development rises in income will not yield large jumps in human

development. This is a logarithmic relation (increasing at a decreasing rate) thus the natural log

of income is used as my first explanatory variable as Gross National Income (GNI).

What is the relationship between income inequality and human development? The intuition

here is similar to that of income. At low levels of development, where there are limited basic

capabilities, income inequality causes large disparities in basic capabilities so human

development is hindered. At high levels of human development, income inequality does not

generate wide scale disparities in basic capabilities since a large portion of the population has

achieved basic capabilities and more. The data suggests that at high levels of income the GINI

will not have as much power in explaining human development, thus I use the natural log of the

GINI coefficient as the second explanatory variable. Therefore my standard regression model

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takes the following form where α is a constant, β1 and β2 are correlation coefficients, and ε is an

unknown error term:

𝐻𝐷𝐼 = ∝ +𝛽1 𝐿𝑜𝑔𝐺𝑁𝐼 + 𝛽2𝐿𝑜𝑔𝐺𝐼𝑁𝐼 + 𝜀 (2)

The interpretations of 𝛽1 and 𝛽2 are the changes in HDI per percentage change in either

income (𝛽1) or income inequality (𝛽2), respectively. A one-percent change in income is associated with a

𝛽1 change in human development score, whereas a one-percent change in the GINI is associated with a 𝛽2

change in the Human Development index. Note that income is positively linked to human development,

so I expect the sign of 𝛽1 to be positive and the sign of 𝛽2 to be negative.

The data were collected from the 2013 Human Development Report as well as from the

World Bank’s available online database, The World Databank. The Human Development Index,

per capita Gross Domestic Product (GDP) in current 2014 United States dollars (USD) and the

GINI index have been collected for the years 2005-2012 for 255 countries. Due to a small time

series set (only eight years) I do not use panel methods to include a time trend. All data are

publically available and models were constructed using Stata IC 13.

VI. Results

Recall the hypothesis upon reviewing results: A) Income inequality has a negative effect

on human development; and B) this effect is greater in less developed regions or LICs.

Model 1 gives regression output for the base model while model 2 includes an interaction

term.

Figure 5.Model 1

𝐻𝐷𝐼 = ∝ +𝛽1 𝐿𝑜𝑔𝐺𝑁𝐼 + 𝛽2𝐿𝑜𝑔𝐺𝐼𝑁𝐼 + 𝜀

_cons -.425848 .0675238 -6.31 0.000 -.5588308 -.2928652

LogGINI -.0258277 .0154192 -1.68 0.095 -.0561947 .0045393

LogGNI .1342107 .0039193 34.24 0.000 .1264919 .1419296

HDI Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 4.389087 254 .01727987 Root MSE = .05536

Adj R-squared = 0.8227

Residual .772236693 252 .003064431 R-squared = 0.8241

Model 3.6168503 2 1.80842515 Prob > F = 0.0000

F( 2, 252) = 590.13

Source SS df MS Number of obs = 255

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There are two major findings in these results. First, income is largely correlated with the

human development index. A t-statistic of 34.24 is statistically significant across all confidence

levels. The coefficient of 𝛽1 , the income variable is .134. This means a one percent increase in income

adds .134 to the HDI. Given the average range of HDI scores from Figure 4, a .134 increase is significant.

The coefficient on the GINI index variable is negative and statistically significant only at a

10% confidence level. The correlation coefficient of the GINI variable, 𝛽2 ,is -.025. For a one

percent increase in GINI score, the HDI declines by .025. This is also significant.

These facts support my hypothesis that income inequality is negatively correlated with the

Human Development Index. How income is dispersed in a country has a negative impact on its

level of human development. The R-squared statistic is the percentage of variation in the

dependent variable attributed to the independent variables. Both the R-squared and adjusted R-

squared statistics show that over 80% of variation in the HDI is due to variation in the

explanatory variables, income and income inequality. These results show that there is a

correlation between income inequality and human development and that it is negative.

A secondary functional form will add one more variable, the interaction of income and

income inequality. The interaction term is meant to illustrate a case when the effect of

explanatory variables on the dependent variable is based upon the values of both. The

explanatory variables “interact” so that the effect of income on human development is dependent

on the level of income inequality, or the impact of income inequality on the HDI is dependent on

the level of income. This case is true only if the interaction term is significant.

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Figure 6.Model 2

𝐻𝐷𝐼 = ∝ +𝛽1𝐿𝑜𝑔𝐺𝑁𝐼 + 𝛽2𝐿𝑜𝑔𝐺𝐼𝑁𝐼 + 𝛽3(𝐿𝑜𝑔𝐺𝑁𝐼 ∗ 𝐿𝑜𝑔𝐺𝐼𝑁𝐼) + 𝜀

The model with the interaction term gives the most robust findings. The interaction term is

negative and significant. The correlation coefficient for the interaction of income inequality and

income is -6.15 X 10-8. This is a very large negative number, indicating that the correlation of

income inequality with human development is dependent on the value of income, and the

correlation of income with human development is in part dependent on the level if income

inequality. The sign of this coefficient supports that income inequality has a significant negative

relation to human development when accounting for the level of income.

Note that when the interaction term is added the coefficient for the GINI,𝛽2 loses all of its

significance. This does not nullify the conclusions from Model 1. Rather, the interaction term

absorbs the explanatory power of the GINI alone. This does not mean that the GINI and HDI are

not correlated; it means that the GINI alone without accounting for income level does not carry

significance in explaining human development.

_cons -.6243601 .0761561 -8.20 0.000 -.7743466 -.4743736

interact -6.15e-08 1.25e-08 -4.92 0.000 -8.61e-08 -3.69e-08

LogGINI -.006296 .0152777 -0.41 0.681 -.0363849 .0237929

LogGNI .1511515 .0050893 29.70 0.000 .1411283 .1611746

HDI Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 4.389087 254 .01727987 Root MSE = .05297

Adj R-squared = 0.8376

Residual .704213726 251 .002805632 R-squared = 0.8396

Model 3.68487327 3 1.22829109 Prob > F = 0.0000

F( 3, 251) = 437.79

Source SS df MS Number of obs = 255

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VII. Conclusion and Implication

I have provided a theoretical framework as to how and why income inequality is related to

human development. Income is part of the Human Development Index and is the mechanism of

achievement for access of health and education. Low income countries (LICs) have limited

access to basic capabilities thus income inequality restricts who is granted basic health and

primary education and who is not. Once basic needs are met the increases in human development

due to increases in income diminish (Figure 3). High income countries (HICs) have widespread

achievement of basic capabilities and thus income inequality has little power in hindering human

development. Therefore, my hypothesis is that income inequality has a negative relation to

human development and LICs suffer larger losses in human development due to a small

economic pie and uneven slices. My first model finds that there is a correlation between income

and human development but more importantly that there is a negative correlation between

income inequality and human development. The second model, including an interaction term,

finds that the relationship between income inequality and human development is conditional on

the value of income. If income is low the GINI will have a very strong negative correlation to

human development whereas if income is high income inequality will not hinder human

development as much. These two models and their findings support my hypothesis.

Income inequality is critical to study in the developing world. It furthers poverty, creates

socio-political tension, and skews market structure and growth. Income inequality is a hindrance

to human development. This research affirms many programs that commit to the just distribution

of income to promote human development and restrict poverty. Programs like social cash

transfers (SCT), which distribute wealth to low income groups, are one possible way to achieve

just income distribution. However, giving cash to poor people is not the only answer. Providing

goods and services that give the same benefits to human development as “free money” is a viable

option. Goods could be livestock, a strong belief of Heifer International, an organization that

donates livestock and training to impoverished families on the condition that the first female

offspring of the animal is passed on to another family. In addition, public safety nets like social

insurance and other welfare systems give similar effects of increasing income by cutting costs.

In contrast, many people think that the current income distribution is fine. However, in LICs,

a just wealth distribution is vital for development and growth. Though there have been major

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strides in poverty reduction and increases in human development, many of the UNDP’s global

goals for 2015 (The Millennium Development Goals) are far from being achieved. Income

inequality runs rampant, with disastrous effects worldwide. For the betterment of global welfare

income inequality must be reduced.

IIX. Limitations and further research

The analysis of income inequality and human development provides development

economists with a unique challenge: Even if a correlation can be drawn, does this correlation

imply causation? I have proposed a theory as to how income and inequality are related to human

development, but can it be true that human development also affects income and inequality?

Intuitively, if people are healthy and educated they will be more productive and thus earn higher

wages—and they might demand greater equality. Therefore do income and inequality affect

human development, does human development affect income and inequality, or both? In

addition, there could be other variables affecting human development and income and inequality.

This causation problem is a major challenge to this, like other studies of income, inequality, and

human development (Taylor, 2012).

Figure 7. Problems with causation

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Line one relates human development to country wide factors. These factors include

income, health education, culture, institutions, rule of law, religion, political structure and

virtually anything pertaining to a country outside of human development and inequality. The

bilateral direction of line one implies human development causes these factors and that these

factors depict human development. Line two represents the relationship of inequality and human

development. Inequality relates directly to human development as a shown in Figure 4 as well as

by shaping country wide factors (line 3). Human development has some effect on inequality as

well. This paper is limited in its scope in that I do not define income inequality to cause low

human development but recognize a bilateral relationship. My regressions show income

inequality is negatively related to human development (more so in LIC than in HIC), yet I

acknowledge the simultaneous effects of human development playing a part in determining

income as well as other factors. Further research would be ideal to identify exactly how income

inequality causes human development, and vice-versa.

Inequality and human development change slowly over time and are hard to monitor

closely. A major limitation for inequality studies is the limited available data on the GINI. To

collect a GINI coefficient, statistical agencies need household surveys of the population. The

World Bank has assisted poor countries in this regard, but data on inequality remain scarce.

Given the available data, this study has provided empirical evidence on the complex relationship

between inequality and human development. I have shown, both theoretically and empirically,

that income inequality is negatively related to human development to a greater degree in low-

income countries.

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