Economic Terms | Notions of Kuznets Curve and Environmental Kuznets Curve

In economics, one of the most topical questions is that of solving inequalities of different kinds, e.g. income inequality. Macroeconomics has come up with the so-called Kuznets curve. Making use of some empirical evidence, it predicts that in the long run the relation between income inequality and GDP will develop in the form of the inverted U-letter, i.e. will first rise and than decrease. The notion of the Kuznets curve (baptised 'environmental Kuznets curve') was later used to illustrate the correlation between economic growth and environmental degradation.

Macroeconomics: What is Kuznets Curve ?

Economic Terms | Kuznets curve: empirical evidence of relation between economic growth (rise in GDP) and income inequality

Empirical evidence for the inverted U theory (Kuznets curve) in macroeconomics

The Kuznets curve is one of the crucial economic terms. The hypothesis of relation between GDP and income inequality, supported by the empirical evidence observed in the UK and the US was put forward in economics and, more specifically, macroeconomics several decades ago. The aforementioned hypothesis consisting namely in the fact that as the per capita GDP grows, the level of social and economic - income inequality - first increases and than at some point decreases. The hypothetical assumption was transferred into a curve having the form of the inverted letter U. The curve was named the Kuznets curve, based on the name of the statistician who was first to spot the empirical evidence of causality between economic growth and income inequality. 

Meaning of the Kuznets curve (inverted U hypothesis)

The Kuznets curve implies that as long as the country undergoes a process of industrialisation or experiences intensive economic growth (increase in GDP), the opportunities for those who have money will be multiple, whereas those on the other side of the barrier will have to survive a period of low income (thus, income inequality). After a certain point, however, the economic and financial level of the latter will start to improve and will be gradually moving towards accommodating with the economic level of the affluent. Thus, the income inequality shrinks due to the rise in per capita GDP (economic growth).

Environmental Economics: What is Environmental Kuznets Curve?

Economic Terms |  Environmental Kuznets curve: empirical evidence of relation between economic growth (rise in GDP) and environmental degradation

The inverted U hypothesis applied in environmental economics

In the 1990s the notion of the Kuznets curve was translated to environmental economics. As in the previous case, an empirical evidence has been discovered, now in environmental economics. More precisely, it was observed that there is a correlation between the environmental degradation and increase in per capita GDP. That observation highlighted the fact that if the level of income per capita increases in countries, general level of environmental degradation will fall provided that people put a value on environmental protection and sustainability. 

Controversy of the environmental Kuznets curve

The hypothesis following from the environmental Kuznets curve is highly controversial. It shows namely that the state should not be in a hurry to intervene with its policies aimed at reducing environmental degradation. Instead, it should concentrate on the economic growth. The assumption introduced by the environmental Kuznets curve raises a lot of scepticism, for it implies that promoting economic growth substitutes environmental policies. Therefore, less state intervention. The last point is what governments do not want to hear.