Equality, Participation, Transition: Essays in Honour of Branko Horvat

Branko Milanović 49
everybody lives at, or close to, subsistence level. There is no room
for increased inequality because with the small size of overall output,
increased inequality would push many people below the subsistence
level. As the process of growth begins, income inequality increases.
People migrate from the traditional agricultural sector where incomes
are low to the modern industrial sector where both the (expected) wage
is higher and wage differentiation is greater. Kuznets’ model is also
consistent with the Lewis-type pattern of growth. At the early stage of
development, both physical and human capital are scarce and
unequally distributed (that is, heavily concentrated among the few),
and owners of human and physical capital are able to command high
returns. As the two types of capital accumulate and become more diffused
among the population, the rate of return on the physical capital
declines while wage differentials between skilled and unskilled labour
diminish. Income distribution becomes more equal. The process was
summarized by Kuznets (1966: 217) as follows:
It seems plausible to assume that in the process of growth, the earlier
periods are characterized by a balance of counteracting forces
that may have widened the inequality in the size distribution of
total income for a while because of the rapid growth of the non-A
[non-agricultural] sector and wider inequality within it. It is even
more plausible to argue that the recent narrowing in income
inequality observed in the developed countries was due to a combination
of the narrowing inter-sectoral inequalities in product per
worker, the decline in the share of property incomes in total
incomes of households, and the institutional changes that reflect
decisions concerning social security and full employment. 1
Kuznets’ empirical relationship has been extensively studied in both
the cross-country and inter-temporal contexts. It remains the subject
of controversy. 2 The controversy has centered on: (1) the very existence
of the relationship (it was argued that the Kuznets relationship
critically depends on the Latin American countries which are at an
intermediate stage of development, and for reasons peculiar to them,
exhibit high inequality); 3 (2) its validity for different countries and
regions; 4 and (3) its validity for different epochs. Kaelble and Thomas
(1991: 32) have recently thus summarized the empirical results of the
Kuznets hypothesis:
Income levels explain only a small part of the variance of the inequality
measures. This suggests that national characteristics (whether in