How Urbanization Affects the Inequality in Developing Countries: A Critique of
Kuznets Curve
Cem Oyvat
According to the Kuznets’s U-curve theory, urbanization increases inequality in
developing countries during the first phase of industrialization. This argument is based
on two assumptions. Firstly, the increase in productivity is greater for the industrial
population; secondly, inequality in urban areas is greater than or equal to inequality for
rural areas. However, the Kuznetsian argument could be false for many cases including
the Turkish case, in which rural inequality was relatively higher due to the social
structure of the country. Therefore, in many developing countries the relation between
inequality and income may be negative or be only slightly positive for the first phase of
industrialization.
This paper aims to prove that: (1) The argument suggested by Kuznets may not
explain real changes in income distribution for many cases including Turkey (2) The
long-run fall in Gini coefficient in Turkey may be highly related to the migration process
within the country.
Introduction
In developing countries, the growth process not only alters the level of output or
technology, but also changes the economic relations and the social structure. The
development process involves significant changes in the levels of income of individuals;
however, a part of the society usually benefits relatively more from the rising incomes.
Therefore, in many cases the development process changes the income distribution; the
income of a specific part of the society increases relatively more compared to the rest of
the society.
The first stage of the development process is usually associated with
industrialization. As a country industrializes; individuals in urban areas benefit from
rising productivities and the gap between per capita incomes of urban and rural areas
increases. The growing benefits in the urban areas also alter the structure within the
society. Many individuals in rural areas decide to migrate to urban areas to take
advantage of the industrialization and rising urban incomes.
A part of the migration stream may be formed by lower-income individuals that
are mostly unskilled and illiterate. These individuals mostly have individual concerns and
they mostly move to the informal urban sector for earning wages. The higher income
individuals also migrate for exploiting the advantages of urban society; however, these
individuals concern more about their family requirements and aim to generate income,
education or remittances that could be useful for the whole family (Lipton, 1982). In any
case, urbanization preceded by industrialization changes economic structure and gains in
the society. As the urbanization process alters the incomes of individuals, it will create
significant changes in the income distribution both in the short and the long run.
The impact of migration on inequality is explored by Kuznets (1955) in his AER
article “Economic Growth and Income Inequality”, which forms a basis for Kuznets’s
inverted U-curve theory. In his article, Kuznets shows how demographic changes
followed by industrialization alter income distribution within a country. We should notice
that in his theory, Kuznets is only concerned about the one way relation from
development to inequality, he never mentions anything on the impact of inequality on
growth. In fact, Kuznets (1963) says that: “All we can say is that the unequal distribution
of income in the earlier decades in the presently developed countries did not prevent
economic growth. But…we cannot say that a somewhat or less (or more) unequal size
distribution might not have contributed to even faster growth.”. Therefore, our focus on
this study will be on how development and urbanization affect the income distribution.
The development process can change the overall inequality by affecting three
factors. Firstly, as the urban share increases, the urban inequality starts to make a greater
contribution to overall inequality. Secondly, the industrialization could widen the urbanrural gap; however, the impact of industrialization would be offset by factors like
technological spillovers, changes in the terms of trade and rising land per capita. Thirdly,
the development could change both within rural and urban inequalities.
In Kuznetsian framework, development may bring unequal gains and the first
phases of industrialization are associated with higher inequality. However, in some cases
the urbanization followed after the early stage of industrialization may have instant
positive effects on inequality. This instant positive effect may even offset the
unequalizing effect of the early industrialization. Thus, the start of industrialization does
not guarantee a rise in inequality.
Development, urbanization and the change of inequality in Kuznetsian framework
The Kuznetsian approach is considered as one of the most important approaches for
explaining, how development affects inequality. According to Kuznets (1955),
urbanization followed by industrialization is an important factor in the shift of inequality.
Kuznets says “an invariable accomplishment of growth in developing countries is the
shift away from agriculture, a process usually referred to as industrialization and
urbanization”. Thus, Kuznets sees industrialization and urbanization as processes that are
mutually developing at the same time. Kuznets claims that urbanization increases
inequality in the first stages of industrialization and he makes two crucial assumptions for
strengthening his claim:
“a) the average per capita income of the rural population is usually lower than that of the
urban; b) inequality in the percentage shares within the distribution for the rural
population is somewhat narrower than in that for the urban population –even based on
annual income; and this difference would probably be wider for distributions by secular
income levels.”
With the given assumptions Kuznets claims that increasing the urban population
means increasing the share of the more unequal component of the income distribution.
Therefore, according to Kuznets urbanization pursued by the migration process
inherently raises inequality during the first stages of industrialization. Secondly, the
emergence of industrialization raises the per capita income gap between the urban and
rural population, until the benefits of industrialization are also shared by the rural
population. Thus, “the relative difference in per capita income…is stable at best, and
tends to widen because per capita productivity in urban pursuits increases more rapidly
than in agriculture”.
The Kuznetsian framework relies on the Lewis (1954) model that was outlined in
Lewis’s classic article “Economic Development with Unlimited Supplies of Labor”.
Lewis claims that development is driven by rising profits and accumulation in the
capitalist sector. The saving rates for the capitalist class are relatively higher compared to
the working class, since the working class could only save for its essential expenditures
like housing, education etc. Therefore, according to Lewis, the amount of savings grows
as the relative income of the capitalists rises. In his model, savings are realized as the
major source of capitalist accumulation, so Lewis concludes that “the central fact of
economic development is that the distribution of incomes is altered in favor of the saving
class”.
The capitalist group accumulating in Lewis’s context is mainly the capitalist
industrial class. Lewis argues that merchants use their profits mainly for speculation and
peasants would prefer to spend his profits for enlarging his land, not his capital. Only the
class of industrialists reinvests its profit productively; only the industrialists have
incentives “towards using profits to create a bigger empire of bricks and steel”.
Lewis argues that the subsistence sector, which is mostly associated with the
agricultural sector, cannot stimulate development, since the subsistence sector cannot
produce reproducible capital. During the development process, the incomes of capitalist
industrialists will increase, whereas incomes in the subsistence agricultural sector stay
relatively stagnant, unless the subsistence sectors start benefiting from the development
of the capitalist sector. Eventually, the emergence of development in the Lewis model is
associated with higher urban inequality and a rising income gap between urban and rural
areas. The development of the capitalist sector will be supported with the labor supplied
by the subsistence agriculture sector, which will lead to urbanization as it is claimed by
Kuznets. As a result, the urban population grows and higher inequality will be expected
at least in the first stage of Lewisian development.
Lewis says the subsistence sector could be more productive, if the peasants start
to imitate capitalist techniques by using new seeds and fertilizers or if they start to benefit
from capitalist investments in irrigation, in transport facilities or in electricity. However,
in his statement Lewis does not say whether increase in productivity in the subsistence
sector will be bigger or less than the increase in productivity in the capitalist sector. Thus,
he does not imply anything about the changing income gap between the urban and rural
sectors. He only argues that higher productivity of the subsistence sector will lead to
higher real wages in the capitalist sector and reduce the capitalist surplus and
accumulation. Hence, Lewis focuses on the relationship between the development of
subsistence sector and the income distribution within the capitalist sector.
The Kuznets process is depicted in some studies by using modeling. The model
proposed by Robinson (1976) claims that the Kuznets process holds even if the rural
inequality is greater than the urban inequality. However, he assumes that both within
rural and urban inequalities and rural-urban income gap are constant, while developing
his model. Robinson’s assumption is not applicable for many cases; the changes that may
occur in inter- and intrasectoral inequalities could falsify Robinson’s model.
Another model that explains the Kuznets process is developed by Anand and
Kanbur (1993). Consistent with the Kuznetsian approach, Anand and Kanbur assume that
population moves to the urban sector, where inequality is larger. The model decomposes
the inequality into within-sector and between-sector component. Anand and Kanbur first
assume that means and the within-group inequalities of the urban and rural sectors are
constant and the change in inequality is occurring only due to population shifts. They
show that the within-sector component should be increased due to the greater population
in the more unequal urban sector and therefore the between-sector inequality should be
reduced for the U curve to be formed under their assumptions. However, empirically they
show that their assumptions do not hold and the model should allow the sectoral means
and sectoral inequalities to shift over time. The model concludes that inequality changes
not only due to the population shifts, but also due to the changes in sectoral means and
within sectoral inequalities. This result is consistent with the Kuznetsian approach that
explains the mechanisms that reduces urban inequality. Hence, explaining the changes in
inequality merely by urbanization is not enough; the results of urbanization on both
sectoral mean incomes and inequalities should also be explored.
Urban-Rural Income Gaps
The urbanization changes the overall inequality in a country by raising the impact of
urban inequality on the overall distribution. However, the industrialization and
urbanization processes can affect the overall inequality not only by shifting the sectoral
shares, but also by changing the intra and intersectoral inequalities. As a country
develops, the intersectoral inequality between the urban and rural sectors changes due to
first and secondary effects of industrialization.
According to Kuznets (1955), the early effects of industrialization could raise the
income gap between the urban and rural sectors. In his AER article, Kuznets (1955)
claims that:
“The relative difference in per capita income between the rural and urban populations
does not necessarily drift downward in the process of economic growth: indeed, there is
some evidence to suggest that it is stable at best, and tends to widen because per capita
productivity in urban pursuits increases more rapidly than in agriculture.”
The intuition behind this argument could come from the Lewis model (1954). In
Lewis model, the development is mainly driven by the industrial sector. However, Lewis
also examines the secondary effects of development on the subsistence sector (mainly
agriculture).
Firstly, Lewis mentions that the subsistence sector could also increase its
productivity by imitating the techniques in the capitalist sector. For example, peasants
could get new seeds or they could use fertilizers for raising their productivities. He also
says that the subsistence sector could benefit from the capitalist investments like
irrigation works, transport, and electricity.
Lewis secondly claims that if the capitalist and subsistence sectors specialize in
different products (like agriculture and industry), the urbanization could lead to greater
demand and relative shortage of agricultural commodities. As a result, the agricultural
output will not be enough to feed the industrial workers. The terms of trade will worsen
for the industrial sector, which would partially close the urban-rural income gap. Lewis
also mentions that the terms of trade effect might not be seen, if the capitalist sector
invests on agriculture or the productivity in the subsistence sector increases significantly.
Ranis and Fei’s (1961) arguments in their article “The Theory of Economic
Development” could be considered as a complement to Lewis model. In their study,
Ranis and Fei claim that “Lewis…has failed to present a satisfactory analysis of the
subsistence or agricultural sector.” Thus, they propose a more detailed analysis for
examining the secondary effects of industrialization and urbanization on agriculture.
In their model, Ranis and Fei (1961) claim that the economy could follow a
balanced growth, in which time to time deviations are seen. As in the Lewis model, in the
case of overinvestment in the industrial sector, the shortage of food could lead to
deterioration of the terms of trade in the industrial sector and industrial wages will rise
due to growing food prices. As a result of this, the industrial investments will be
discouraged; hence, there will be more incentives to invest on agriculture. Thus, the
actual growth path could return to the balanced growth path and the urban-rural income
gaps could narrow down.
The urbanization could also increase the income in rural areas through the
remittances.
The urban settlers can transfer money to their relatives, which could
generate an extra income for the rural dwellers (Lall, Selod and Shalizi, 2006).
Remittances also create an extra economic activity in the rural sector, when the new
urban settlers spent their income for investments like housing in their origins (HDR,
2009). Many studies show that remittances increase the level of education and improve
health of origin families (Becker, 2007). Improved human capital could also contribute to
rural productivity positively.
There are also studies that show how urbanization can change the inequality by
altering the land per capita. In fact, many studies (Sen, 1996; Griffin, Khan and Ickowitz,
2002) claim that the land productivity might be lower in small scale farms since family
farms have advantages in monitoring and effort. However, the migration of rural
individuals could still increase the rural income per capita (Bourguignon and Morrisson,
1998), although it might not lead to higher land productivity, as in the case of shift from
small to large scale farming. In addition, urbanization might not lead to a transformation
from small to large scale farming. The family farming structure could continue, only the
family members that cultivate the land could be reduced due to the migration. In this case,
it is more probable that the rural income per capita will increase with urbanization.
Stiglitz (1982) also focuses on increases in agricultural productivity; however, he
makes an alternative interpretation by using his efficiency wage model. According to
Stiglitz, the migration of a family member changes the marginal product of the other
members that stay in the rural sector. If output is proportional to effort, equal share of
output between many family members could reduce output by lowering incentives for
supplying effort. This might cause a loss of efficiency in agricultural production. In such
cases, the migration of an individual within the rural family could increase the efficiency
by bringing better incentives to the peasants for supplying more effort. Therefore,
migration process could close the urban-rural income gaps by not only increasing average
rural incomes, but also by raising total productivity in the planted areas.
Within Inequality
In his article, Kuznets (1955) also claims that the inequality will decrease in the later
stages of development. However, unlike the studies mentioned above (Ranis and Fei ,
1961; Bourguignon and Morrisson, 1998; Stiglitz, 1982), Kuznets focuses on the changes
in urban inequality rather than the narrowing intersectoral income gap. He uses the long
term effects of urbanization for making his analysis and perceives urbanization as a
process that would reduce inequality in the long run.
According to Kuznets, raising inequality will be narrowed, mostly due to the
declining inequality within the urban groups. Kuznets claims that, within years the
economic positions of new urban dwellers and their descendants improve. The social
mobility equalizes economic differences, and hence inequality follows a declining path.
The mechanism behind the social mobility is explained by Kuznets. Firstly, as the
development process continues a larger share of the urban population becomes “native”
urban dweller. Thus, a larger proportion of population benefits from the advantages of the
city life. Secondly, in democratic societies the growing political power of the lowerincome groups resulted in changing legislation and new policies that counteracts against
the negative consequences of rapid industrialization and urbanization.
Thirdly, the forces of “freedom of individual opportunity” enable development of
new fields that bring opportunities for new entrepreneurs. New and profitable industries
will be run by the new entrepreneurs, unless the descendants of upper-income groups do
not shift to the new industries. However, Kuznets says that “the successful great
entrepreneurs of today are rarely sons of the great and successful entrepreneurs of
yesterday”. Therefore, Kuznets claims that the development of new industries stimulates
social mobility by creating opportunities for different income groups.
Lastly, the improvement of the service sector reduces income inequality. The
service sector is expected to grow as a result of the development process and rising GDP.
In the earlier stages of development, the proportion of workers in industrial sector
increases as the proportion of workers in agriculture declines. However, as economic
growth continues the services sector starts to expand, while the agricultural sector
continues to decline (Syrquin, 1988).
According to Kuznets, the growth of the service sector decreases inequality for
several reasons. First, Kuznets argues that service incomes are mostly earned due to the
individual excellence; thus, the higher levels of service incomes are not necessarily
pursued by the descendants of the wealthier individuals. Kuznets also claims that the
possibilities of rising income are limited for people who are already in high-income
occupations. Hence, incomes of the lower-income workers in services are more likely to
increase. Therefore, incomes are expected to be more equal within the services sector
compared to industry.
In summary, Kuznets explains the change in income distribution as increasing in
the first stage of development and declining in the later stages. With this explanation,
Kuznets describes an inverse U curve relation between income and inequality.
Urbanization is pursued together with industrialization; therefore, migration from rural to
urban areas inherently increases inequality by raising the proportion of population of the
more unequal part of the country. As the development process continues the income
inequality declines, due to the factors like social mobility and improving service sector.
There are many extensions and criticisms that could made for Kuznets’s
arguments on urban inequality. Firstly, the pace of social mobility is highly related with
structural factors in the urban sector. Amongst the structural factors, the distinction
between the urban formal and urban informal sectors could be considered as important.
For examining the migration process, unlike Harris and Todaro (1970), Cole and
Sanders (1985) use a model that distinguishes the urban modern and urban subsistence
sectors. According to Cole and Sanders (1985), it is more likely that the new arrivals
would enter to the urban subsistence sector (mostly informal), in which barriers to
employment are few and average income is lower compared to the urban modern sector.
Many other studies (Benarjee, 1983; Rauch, 1993) claim that wages in the urban informal
sector are equal to or slightly higher than the rural wages. However, the many migrants
shift to the urban informal sector, preserving their hopes for finding a formal job in future.
The shares of informal-formal sectors change during the different phases of
urbanization. According to Rauch (1993), the share of being “underemployed” in the
informal sector follows an inverted U path as the economy urbanizes. Likewise the
“Todaro paradox”, the growth of the urban formal sector attracts rural workers and leads
to a greater growth in the urban informal sector. However, as urbanization proceeds,
pressure on the land decreases and the agricultural income rises. The agents become less
willing to leave the rural sector and be “underemployed” in the informal urban sector.
Thus, the share of informal urban sector employment will start to decline. Since, the
wages are generally lower in the urban informal sector; the inverted U curve of the
informal urban sector share could also form an inverted U curve between the level of
urbanization and within urban inequality.
The migrants could enter to the informal and formal sectors due to several factors.
A study made for Bolivia (Pradhan and Van Soest, 1993) show that the education level is
an important determinant of entering the formal sector. Pradhan and Van Soest show that
factor like ethnicity and unemployment in the region are also important for determining
the possibility of participating in the formal sector. Likewise in Bolivia, in India the
education level is also an important factor for rising migrants’ possibility of being
employed in the formal sector (Banerjee, 1983). The migrants with intermediate and
higher level of education have a greater chance of getting employed in the formal sector.
As expected, in many countries the return of education is also found to be higher in the
formal sector (Pradhan and Van Soest, 1993; Banerjee, 1983; Funkhouser, 1997).
The growth of the informal sector could raise the urban inequality; however, the
inequality could be reduced if there is a significant social mobility between the formal
and informal sectors. Nevertheless, the social mobility might not be high for many cases.
Banerjee (1983) shows that in 1976’s Delhi only 24% of those who entered the informal
sector on arrival was switched to the formal sector. He also shows between the years
1965-1975, only 5-15% of the new arrivals were switched to the formal sector in a year.
In addition, the potential mobility was found to be low; only 15% of the informal sector
wage employees and 12% of the non-wage workers were actively looking a job in the
formal sector.
The network of between the agents is important for enabling the mobility between
the formal and informal sectors. In India, 60% of migrants who moved from the informal
to the formal sector found out their current job with the help of their relatives and friends.
The level of education is again found to be an important factor of mobility. The informal
sector employees who have a middle school or intermediate college level education have
a greater likelihood of shifting to the formal sector.
In summary, along with the other factors the access to education is an important
factor for enabling the social mobility and reducing the urban inequality. The migrants or
the children in the migrant families should have an access to an education to secondary or
tertiary education for the process depicted by Kuznets to happen. One impediment of that
is the usage of children as a labor force in the informal sector. Many of the children in the
migrants’ families work (Acikalin, 2008), they cannot have an access to higher level of
education. Also, the quality of the education that some children get is extremely low even
for the primary school level, since they could not have time to focus on their school,
while they are working.
Another extension that could be made to the Kuznetsian theory is related with the
services sector. As we mentioned previously, Kuznets claims that the growth of services
sector would reduce inequality, since the inequality in the services sector is lower
compared to the industrial sector. The arguments of Kuznets on services are mostly
relevant for the service sectors of 1950’s. However, the relations of production are
significantly changed in many of today’s service sectors; employer-employee type of
relations improved, whereas the proportion of self-employed is declining. Also,
improvements on branding and franchising also created new opportunities for increasing
the incomes of the wealthier individuals in the service sector. Therefore, the difference
between the levels of inequality within the industrial and service sectors may not be great
in today’s world, due to the developments in the services sector.
The property income is another issue that might create a need for the revision of
Kuznets’s theory in today’s world. In fact, in his article “Quantitative Aspects of the
Economic Growth of Nations”, Kuznets (1963) shows that “the shares of property in total
income are lower in the less developed regions… they would tend to widen inequality
less in the low income, underdeveloped regions than in the developed regions” in the
United States.
The current literature on financialization also signs that the situation depicted by
Kuznets might be true for the country wise comparisons. The US economy has the
highest GDP per capita compared to other large scale countries1. Following the economic
growth, the share of financial income has also risen in the US economy (Krippner, 2005;
Crotty, 2009). The share of financial and real estate incomes reached to the level of 23%
in 2001 and it continued to rise afterwards. In his empirical study, Frazer (2006) finds a
modified inverted U curve with inequality rising after an income level. This result could
be partially related with the higher urban inequality caused by the rising share of property
incomes in the high income countries.
In his 1955 article, Kuznets does not focus on the changes in rural inequality. He
explains the reduction in inequality majorly by the changes in the urban inequality.
However, in his 1963 Kuznets develops an argument on the changes in rural inequality.
He claims that:
“The rise in productivity within the A sector, indispensable for modern economic growth,
may have been associated with technological changes that raised the scale of production
on farms and introduced a cleavage between the large commercial farms in the
progressive part of agriculture and the small units lagging behind, which would make for
wider inequality of income within the A sector, at least until the process of modernization
had been introduced throughout the sector.”
The technological improvements could increase the rural inequality for a period
of time. As it happened in Philippines during the green revolution (Boyce, 1993), the
“technological improvements” in agriculture might even lead to the centralization of land
and would make the higher rural inequality permanent. However, in some cases the small
1
In fact, the United States has the sixth largest GDP per capita in the world (IMF, 2010). However, the top
five countries Qatar, Luxembourg, Singapore, Norway and Brunei have a population smaller than 5
million; they could be considered as small scale if we use population as a criterion.
scale farms can also compete with the large scale farms that are technologically
developed. In fact, many recent studies (Sen, 1996; Griffin, Khan and Ickowitz, 2002)
show that the small scale farms could have higher land productivity. It is true that the
small scale farms could be technologically behind; however, the small scale farms have
advantages on monitoring and effort. The large scale farms owned by absentee owners
and cultivated by hired workers under supervision of a manager are often considered as
inefficient. These farms have high monitoring costs and the effort shown by the workers
is usually lower compared to the family farms. Also, the proportion of uncultivated land
is higher in the large scale farms.
In summary, the small scale farms can compete with the large scale farms; the
technological improvements followed by growth might or might not lead to a permanent
rise in the rural inequality. Lastly, successful land redistribution could play an important
role on changing the rural inequality. The rural inequality would be significantly reduced,
if land is redistributed during the development process (Griffin, Khan and Ickowitz,
2002)
The cases of higher rural inequality
For developing his argument, Kuznets (1955) assumes that in any condition inequality in
urban areas is larger than the inequality in rural areas. He says that
”It seems most
plausible to assume that in earlier periods of industrialization, even when the
nonagricultural population is relatively small in the total, its income distribution was
more unequal than that of the agricultural population.”. Therefore, the population shift
from relatively equal rural sector to unequal urban sector will firstly result in widening
inequality.
The arguments of Kuznets could be challenged within his own context, for the
cases in which Kuznets’s assumptions do not hold. In some countries, the socioeconomic
structure could create cases that the rural population is more unequal than the urban
population. In such cases, urbanization means shift to relatively egalitarian areas. Hence,
urbanization could lead to a reduction in overall inequality, before the effects of social
mobility is observed.
Table - 1: The Income Inequalities in some countries
Rural Gini Urban Gini
Total Gini
Argentina 1953
0.50
0.38
0.41
Argentina 1961
0.49
0.48
0.43
Bolivia 1996
0.59
0.51
0.57
Bolivia 1999
0.63
0.48
0.58
China 1982
0.23
0.12
0.29
China 1986
0.26
0.16
0.33
China 1991
0.31
0.18
0.38
Costa Rica 1961
0.53
0.47
0.50
Costa Rica 1981
0.47
0.43
0.48
Costa Rica 1991
0.44
0.43
0.46
Jordan 1980
0.38
0.34
0.41
Nigeria 1975
0.43
0.36
Sierra Leone 1968
0.60
0.52
0.60
Turkey 1968
0.57
0.50
0.56
Turkey 1973
0.52
0.46
0.50
USA 1957-59
0.42
0.35
USA 1960-62
0.42
0.35
0.36
Venezuela 1962
0.45
0.44
0.54
Sources:
Argentina 1953, 1961; USA 1957-59, USA 1960-62 – Weisskoff R.(1976), Income distribution and
economic growth in Puerto Rico, Argentina and Mexico
Bolivia 1996, 1999; Costa Rica 1981, 1991; Nigeria 1975; – UNUWIDER (2008), World Income
Inequality Database V2.0c
China 1982, 1986, 1991; Costa Rica 1961; Jordan 1980; Sierra Leone 1968; Venezuela 1962 – Deininger
K. and Squire L. (1996), “A New Data Set Measuring Income Inequality”, World Bank Economic Review
V. 10, No 3 Pp. 565-591
Turkey 1968 - Bulutay,T., Timur,S.and Ersel,H.(1971),Türkiye’de Gelir Dağılımı, Ankara:SBF.
Turkey 1973 - SPO (1976), Gelir Dağılımı 1973, Ankara
One objection to this argument could be brought by Robinson (1976). According
to Robinson, the U curve will be formed even in the condition, where rural inequality is
higher. He shows that the parabolic relation between inequality and income will be
formed in any case as long as the shift of population from rural to urban sector continues.
However, in his model Robinson assumes that both within rural and urban inequalities
and income gap between urban and rural sectors are constant. We have no rational reason
to believe that these measures will stay constant during the development process, in fact
empirically Robinson’s assumption is disproved (Anand and Kanbur, 1993). The within
inequalities or the rural-urban income gap could change as the development process
continues. In the cases where the within rural inequality or the rural-urban income gap
are consistently declining, the parabolic relation between income and inequality might
not exist. In addition to that, there is a greater chance of the U curve not to be formed, if
rural inequality minus urban inequality is larger.
Table-1 shows some cases where the inequality is larger for the rural population.
There could be several reasons of higher rural inequality depending on the structural
conditions of the country. In most of the cases, the high rural inequalities are caused by
unequal land distribution. For example, in the cases of Venezuela and Costa Rica where
higher rural inequalities were observed, the Gini coefficients of land concentration for the
early 1970’s are estimated as 0.82 and 0.91 respectively (Otsuka, Chuma and Hayami,
1992).
The higher rural inequality within the United States is realized by Kuznets as an
exceptional case. According to Kuznets (1963), the higher inequality in rural areas could
be related with the unequal distribution of income in the rural South and West, “the
former because of the cleavage between Negroes and whites, and the latter because of the
cleavage between large-scale, capital intensive farms and smaller units”. Thus, Kuznets
explains the high rural inequality in the US, both with the extending effects of slavery
and the large scale agricultural production.
The Turkish case
The high rural inequality, which was observed in 1968’s and 1973’s Turkey was an
inheritance of economic structure in Ottoman Empire. In fact, the traditional relation of
production in Ottoman Empire is defined as an Asiatic mode of production by many
scholars (Divitçioğlu, 1967), since most of the surplus was expropriated by agricultural
state taxes. However, starting from the eighteenth century, a landlord class developed
from the local tax collectors and state officers. The formation of this structure led to
greater land inequality and the emergence of semi-feudal relations of production.
The traditional relations of production in Ottoman Empire is explained by the
timar system. According to the timar system, the sipahis (cavalrymen) had the privilege
of collecting land surplus in from of taxes. In exchange, they gave support to the Ottoman
army (Islamoglu & Keyder, 1987). However, it must be noted that the timarholders were
not the owners of the land and the privilege of being timarholder was not surely inherited
by the other generations. The sultan, in fact, could take the privilege of holding timar
freely. Since all of the timars were given by the sultan directly, the timarholders rarely
transformed into feudal landlords (Divitçioğlu, 1967). Therefore, many scholars like
Divitçioğlu claims that the timar system is a form of Asiatic mode of production rather
than being a form of feudal mode of production.
During the sixteenth century, as a result of decreasing revenues and increasing
expenditures, the Ottoman state faced with a fiscal bottleneck (Islamoglu & Keyder,
1987). For overcoming the fiscal bottleneck, the Ottoman state leased out the privilege of
collection of taxes. The collection of taxes was issued to the tax farmers who were mostly
state officers. This led to a crucial change in the relations of production. The leaseholders
started to substitute the state and inclined to maximize their share of production and
squeeze peasants (reaya) to achieve their goals (Inalcik, 1991). However, under a short
lease, tax farmers aimed short-term maximization, which resulted in the ruin of the area.
Therefore, Ottoman state introduced the malikane system, in which collection of taxes is
issued to tax farmers on a life-time basis. The formation of the malikane system naturally
led to the development of semi-feudal relations of production within the rural areas.
In addition to malikane, plantation-like large scale farms called Ciftliks emerged
during the eighteenth century (Inalcik, 1991). According to the ciftlik system, large, waste
or abandoned lands were issued to the local notables with influence and wealth. The aim
of this operation was land reclamation; therefore, the beneficiaries had to make necessary
investments such as irrigation works (Veinstein, 1991). Ciftliks became the farms that
were economically motivated to maximize the revenues under the impact of growing
European demand. The labor force was formed by landless peasant, who worked in
ciftlik lands as paid agricultural workers or sharecroppers.
In Eastern Anatolia, ownership of some sancaks (administrative unit in Ottoman
Empire) were given to local tribal leaders called beys, who in exchange paid a certain
amount of tax and provided soldiers to the state in the necessary conditions (Aydin, 1986).
The lands of beys were inherited by their children, and the state could not dismiss the
local bey or appoint a new bey to the sancak. Thus, a form of semi-feudal relations of
production was observed in Eastern Anatolia. After the sixteenth century, weakening of
Ottoman state led to Ottoman state’s loss of control over these lands and beys took almost
total control of the land.
The development of the relations of production in Ottoman resulted in a great
inequality in land distribution. The agricultural survey of 1912-1913 exhibits the extent
of land inequality during the last age of Ottoman Empire. The survey shows that 5% of
rural households, who were mostly feudal landlords or agas (owners of the villages),
were holding 65% of the land. 8% of rural households were landless and the rest of the
87% of rural households only had 35% of the total land (Koymen, 2008).
After the foundation of Turkish Republic in 1923, many of the tax-collectors
(multezims) lost their economic power due to several reasons. In 1925, the tax-collecting
system was modernized. In addition with the acceptance of private property in land in
1926, some of peasants who proved that they were the users of the land became the real
owners of the land, which were previously controlled by multezims (Aydin, 1986).
However, the land inequality still continued during the early period of the republic. The
agricultural survey of State Statistical Institute shows that in 1927, 76% of peasants only
owned 7% of the total land (Koymen, 2008). The data for 1950 and 1970 also exhibits
that land inequality existed during the following periods (Table - 2).
Table 2: Regional Land
Distribution in Turkey
(1950,1970)
1950
Midnorth
0.63
Aegean
0.76
Marmara
0.47
Mediterranean
0.93
Northeast
0.58
Southeast
0.80
Black Sea
0.47
Mideast
0.66
Midsouth
0.74
1970
0.57
0.54
0.53
0.64
0.59
0.70
0.53
0.57
0.59
TURKEY
0.62
0.73
Source: Unal (2008)
Some scholars like Caglar Keyder (1983, 1989) claim that Turkish agriculture has
historically characterized by the predominance of independent small-scale peasantry and
landless peasantry do not constitute a crucial category within the rural society. It is true
that most of the peasants in Turkey had a land; however, at least until 1970s, the scale of
land that peasants owned was very small. According to the agricultural survey of 1970,
75.1% and 48.2% of farms were smaller than 50 and 20 decares respectively. Koymen
(2008) claims that production level below 50 decares insufficient for sustaining a life
above the poverty level. Therefore, although most peasant owned a land, a large amount
of peasants were either living below the poverty line or were enrolling in other activities
(sharecropping, seasonal work, husbandry etc.) for sustaining a reasonable income level.
1970 agricultural survey also shows that 3.2% of rural households owned 41.7% of total
land, which again exhibits the extent of high rural inequality. It might be reasonable to
assume that many of the unregistered land were not declared in agricultural surveys.
However, according to Aydin’s (1986) field study, de facto owners of undeclared land
were mostly large landowners. Thus, we can claim that undeclared lands result in a
downward bias in the calculations of rural inequality.
One of the reasons of high rural inequality was the semi-feudal structure that even
still exists in Southeast Anatolia. With the acceptance of private property in land in 1926,
multezims lost their influence in Southeast Anatolia; however, tribal leaders and big land
owners (beys) who were the de facto owners of land became the de jure owners called
agas (Aydin, 1986). Agas are not only the landowners; they have influence over peasants
beyond their economic power. Peasants serve as corvee laborer and they have to do all
kinds of duties issued by aga. If they refuse to do orders, aga would either expel them
from village or mistreat them. Peasants cultivate agas’ land usually by different forms of
sharecropping agreements; however, landless agricultural laborers also work in agas’
lands as wage laborers.
Another reason for the high rural inequality in Turkey could be the privileges,
which were given to large-scale landlords during the early periods of the republic. During
1920’s and 1930’s, mostly large landowners benefited from the credits given by the stateowned commercial bank Ziraat Bankasi. Large landowners’ privileges on reaching
credits encouraged the usury activities. In many cases, large landowners could get a loan
with reasonable interest rates and lend this money with interest rates that reached to the
levels of 120-600%. According to Boratav (1969), through the usury activities, the usurer
expropriated an important part of small-scale peasant’s surplus. Koymen (1981) claims
that usury activities also changed land distribution significantly. Many of the peasants
who cannot pay their loans had to sell their land to large landowners.
After the Second World War, the Turkish government started to use the Marshall
Plan aid to finance the importation of agricultural machinery. The number of tractors
jumped from 2000 in 1948 to 42000 at the end of the 1950s. The aid was distributed
through state-owned commercial banks for encouraging tractor purchases; however,
mostly large landowners benefited from these loans. By 1963, poorer 68.8% of farms
only had 20% of tractors; whereas, the richest 0.5% owned 26% of tractors (Koymen,
2008). The unequal distribution of tractors was one of the reasons of high rural inequality,
which was observed in 1968 and 1973 surveys.
A Simple model for explaining the Kuznets process
The Kuznets process in Turkey can be explored by decomposing inequality to its
components. Gini Index is the most commonly used index in inequality analysis.
However, for a decomposition analysis, Theil Index could give stronger results compared
to Gini Index. The reason for that is that Gini Index cannot be fully decomposed into
between and within components. Along with between and within components, the
decomposition of Gini index gives an extra “intensity of transvariation” term (Dagum,
1997); whereas Theil index can be decomposed into between and within components
without having a residual term. Therefore, for this analysis Theil Index is preferred for
more accurate decomposition of inequality.
By using Theil Index, the overall inequality T can be decomposed into within and
between sector components TW and TB in the following way:
(1)
T = TW + TB
For exploring the Kuznets process, we assume that both within and between
components are dependent on population share of urban sector, which is defined as x.
The overall inequality can be rewritten by decomposing within component into urban and
rural components TU and TR:
(2)
T = TU ( x) RU ( x) + TR ( x) RR ( x) + TB ( x)
= TU ( x) RU ( x) + TR ( x)(1- RU ( x)) + TB ( x)
Here RU and RR are respectively production shares of urban and rural sectors in
the whole economy. It could be reasonable to assume that share of production increases
with the rise in urban population. For analyzing the impact of urbanization on overall
inequality, we calculate first order conditions of T with respect to urban population share
(x):
(3)
¶T
= TU ' RU + TU RU '+ TR '(1- RU ) - TR RU '+ TB '
¶x
Since R’U(x) = - R’R(x), the equation could be written as:
(4)
¶T
= RU '(TU - TR ) + (TU ' RU + TR ' RR ) + TB '
¶x
The equation above gives an insight about the development process explained by
Kuznets (1955). Kuznets assumes that urban sector has always higher inequality
compared to rural sector. He claims that moving from relatively equal urban distribution
to relatively unequal rural distribution increases the inequality in the early phase of
development. This argument can be seen in the first and third terms. The first term is
naturally positive, if urban inequality is greater. The between inequality component (TB)
also increases in the first phase of development. Anand and Kanbur (1993) show that the
relation between share of urban population (x) and between inequality component (TB) is
inverse U shaped even, if the urban-rural mean income gap is constant. The reason for
that is that the contribution of between inequality converges to zero in the economies that
are totally urban or rural (Figure-1). In addition to that, Kuznets claims that the
productivity gap between the rural and urban sector increases in the first phase of
development. Anand and Kanbur show that if Kuznets’s assumption is followed the peak
of U curve gets greater and the slopes at the end points become even steeper. Therefore,
TB’(x) > 0 assumption is valid for explaining Kuznets’s theory, when the value of x is
smaller. Therefore, assuming that within rural and urban inequalities are not declining,
growth of urban sector surely raises inequality in the early stage of development. As the
development process continues, for higher values of x, both RU’ < 0 and TB’(x) < 0
conditions would be satisfied. This would lead to a decline in overall inequality and the
development process would fit to Kuznets Curve.
Figure -1: Change in Inequality in the Kuznets Process
Inequality
(T)
Within-group
component (Tw)
Between-group
component (Tb)
0
Urban share of population (x)
1
Source: Anand, S. and Kanbur, S.M.R.(1993) “The Kuznets process and the inequality-development
relationship”. Journal of Development Economics, 40, pp. 25–52
However, the interpretations of Kuznets Curve could change for the conditions in
which rural sector is more unequal or urban and rural inequalities decline with the growth
of urban sector. In these cases, the following condition can be satisfied for all x values
and the overall inequality could consistently fall down.
(5)
¶T
= RU '(TU - TR ) + (TU ' RU + TR ' RR ) + TB ' < 0
¶x
The condition above might explain the inequality in Turkey (Figure-2). The income
distribution statistics for Turkey show that inequality in Turkey has a downward trend
during the industrialization period (Table-3). The first statistic presenting urban and rural
inequality is the statistic for the year 1968. During 1968, urban share of population was
36.8%. The urban share of population consistently rose after 1968; it reached to 43.9% in
1980, 53.0% in 1985 and 59.0% in 1990. However, the rapid growth of urban sector did
not seem to lead to a systematic increase in inequality.
Figure -2: Change in Inequality in a society with higher rural inequality
Inequality
(T)
Within-group
component (Tw)
Between-group
component (Tb)
0
Urban share of population (x)
1
In Turkey, firstly, rural inequality was greater than urban inequality in the years
1968 and 1973. Thus, unequal urban sector assumption of Kuznets does not hold for
Turkey and there was a movement from unequal to equal sector. Hence, the first term of
equation (5) was negative for a period. Secondly, inequalities in the urban and rural
sectors changed. The inequality in the urban sector did not rise with urbanization (except
the year of economic crisis 1994) and a significant decline was observed for the rural
inequality. Thus, the second term of equation (5) is probably negative. These two
conditions reduce the
¶T
¶T
and hence
can be negative even when the urban sector is
¶x
¶x
rapidly growing. Thus, the Turkish case shows that Kuznets process might not hold if
Kuznets’s assumptions are changed.
We can explain the changes in long-term Turkish inequality by using a simple
empirical analysis. For the empirical analysis, the Theil entropy indices for the years
1968, 1973, 1987 and 2004 are calculated (Table – 4). The years 1968, 1973 and 1987
were selected for calculations, since the first three relatively reliable income distribution
surveys were done for these years. The inequality for 1963 was not being estimated by
household surveys, it was rather calculated by using the land distribution estimated in
agriculture surveys and the values of income taxes and social security premiums paid.
Thus, 1963 income distribution study cannot capture the informal economy. The years
1994 and 2002 were not used for calculations, since the inequality for these years are
biased, due to the effects of the economic crises in 1994 and 2001. I rather used the year
2004, which does not reflect the short-term effects of economic crises on distribution.
Theil values for 1968 and 1973 were estimated by using the income distribution data of
Bulutay, Timur and Ersel (1971) and State Planning Organization (1973) respectively.
For the years 1987 and 2004, data of Turkish Statistical Institute - State Institute of
Statistics was used.
Table - 3: Inequality in Turkey
Gini - Total Gini - Urban Gini - Rural
1963
0.55
1968
0.56
0.50
0.57
1973
0.50
0.46
0.52
1987
0.43
0.44
0.42
1994
0.49
0.51
0.41
2002
0.44
0.44
0.42
2003
0.42
0.42
0.39
2004
0.40
0.39
0.37
2005
0.38
0.38
0.37
2006
0.43
0.42
0.41
2007
0.41
0.39
0.38
2008
0.41
0.40
0.38
Sources :
1963 - Çavuşoğlu, T., and Y. Hamurdan(1966), Gelir Dağılımı Araştırması 1963, SPO, Ankara.
1968 - Bulutay,T., Timur,S.and Ersel,H.(1971),Türkiye’de Gelir Dağılımı, Ankara:SBF.
1973 - SPO (1976), Gelir Dağılımı 1973, Ankara
1987 – SIS (1990), 1987 Hanehalkı Gelir ve Tüketim Harcamaları Dağılımı Sonuçları, Ankara
1994 – SIS (1996), 1994 Hanehalkı Dağılımı Anketi Sonuçları, Ankara
2002-2008 – TURKSTAT, Household Income Distribution Statistics (www.tuik.gov.tr)
Table - 4: Decomposition of inequality according to urban-rural segmentation
Urban Pop.(%) Gini Theil - Total Theil - Urban Theil - Rural Theil - Between
1968
36.8
0.56
0.664
0.519
0.685
0.056
1973
40.4
0.50
0.527
0.462
0.557
0.015
1987
55.3
0.43
0.375
0.392
0.329
0.009
2004
68.0
0.40
0.293
0.284
0.263
0.014
Table 4 exhibits Theil values for within and between urban-rural inequalities in Turkey.
According to the analysis, the inequality between rural and urban areas has only small
impact on the overall inequality. The inequality for the given years is mostly explained
by the within inequalities in urban and rural areas. Therefore, change in overall inequality
is mostly related with change in within inequality.
The reasons behind the reduction in inequality could be predicted by the equation
4:
(4)
¶T
= RU '(TU - TR ) + (TU ' RU + TR ' RR ) + TB '
¶x
For estimating impact of the first term ( RU '(TU - TR ) ), which we call Kuznets
effect, we assume that gap between within urban and rural inequalities move towards one
direction between the given years. Thus, we multiply rate of urbanization with the higher
and lower differences between within urban and rural inequalities for the given period.
By this method, we find a range showing the possible contribution of Kuznets effect on
overall inequality. The second ( TU ' RU ) and third ( TR ' RR ) terms give impact of changes
in urban and rural inequalities on overall inequality. For calculating the range of second
and third terms, we again assume that these terms move towards one direction between
the given years. We multiply the rate of urbanization with the larger and smaller values of
within urban and rural inequalities for the given period. Lastly, we estimate impact of the
change in between inequality ( TB ' ) by a simple subtraction.
Table - 5: Decomposition of changes in Theil values
Change in
Change in
Period
Kuznets Effect
Change in Rural
Overall Theil
Urban
1968-1973
-0.129
-0.006 -0.003 -0.021 -0.023 -0.081 -0.077
1968-1987
-0.289
-0.031 0.012 -0.047 -0.070 -0.225 -0.158
1973-1987
-0.160
-0.014 0.009 -0.028 -0.039 -0.135 -0.101
1987-2004
-0.082
0.007 0.003 -0.060 -0.073 -0.029 -0.021
Change in
Between
-0.041
-0.047
-0.006
-0.014
Table 5 exhibits the decomposition of changes in overall Theil index for the given
periods. The first values for the Kuznets effect RU '(TU - TR ) and impact of changes in
within urban ( TU ' RU ) and rural ( TR ' RR ) inequalities are calculated by using the
conditions of the previous year and the second values are calculated by using the
conditions of the latter year.
The results show that the path suggested by Kuznets was not followed in the
Turkish case. The direct effect of urbanization on inequality was slightly negative for the
period 1968-1973, since the rural inequality was higher for this period. For the period
1973-1987, the value of Kuznets effect is between -0.014 and 0.009. The rural inequality
was relatively higher in 1973; however, for 1987 the rural inequality was lower.
Therefore, for the period 1973-1987, we can say that the urbanization first had direct
negative and then had direct positive impact on the Theil value. In summary, the shift
from rural to urban areas did not directly increase the overall inequality during the early
phase of industrialization.
The estimations also exhibit that the long-run reduction in inequality is highly
related with the decline in rural inequality. The rural inequality was significantly reduced
between 1968-1987. The decline in rural inequality could be explained by several reasons.
Firstly, a large proportion of migrants came from either small-landowning or landless
families2. The migration of landless peasants could immediately have reduced the rural
inequality by logic, since the poorest individuals left the rural distribution without
transferring any assets to the richer ones. In addition, the benefits like remittances
accruing to migrants’ families or relatives would probably have pulled the level of rural
inequality down. Thus, urbanization could have an indirect impact on the reduction of
rural inequality.
Secondly, a spillover in agricultural technology was observed after 1960s. In
1967’s Turkey, there were only 75000 tractors. These tractors were mostly owned by a
privileged group of large landowners (Kepenek & Yenturk, 2005). However, the number
of tractors in Turkey increased to 136000 in 1972 and jumped to 655000 in 1988 and
875000 in 1997. The spillover of agricultural technology could have positive effects on
rural inequality.
Tables 4 and 5 also show that urban inequality slightly decreased between 19681973 and 1973-1987, although urbanization process continued. The decline in urban
2
In a study made for Turkey, Karpat (1976) shows that most migrants explain their decision by push
factors like low soil productivity, lack of good cultivable land, irrigation, water, division of properties into
small parcels etc.. 77% of men and 65% of women migrants explain their behavior by push factors related
with poverty, whereas only 8% of men and 7% of women give “search for a better future” as their reason
for leaving village. Aydin (1986)’s field study also shows that the migrants in Southeast Anatolia were
mostly poorer individuals.
inequality for the 1968-1973 period could easily be explained by the rising labor
movements (Boratav, 2005). As a result of the labor movements, wage share in
manufacturing industry increased from 25.2% in 1968 to 27.1% in 1973 and 38.3% in
1979.
However, the gains of labor movements were mostly lost with the anti-labor
policies followed after the 1980 military coup. Therefore, labor movements cannot
explain the decline in urban inequality for the periods 1973-1987 and 1987-2004. The
decline in urban inequality for these periods could be partially explained by the “social
mobility” effects suggested by Kuznets (1955) for the later stages of development. As
suggested by many scholars (Cole and Sanders, 1985; Rauch, 1993; Karpat, 1976), it is
reasonable to assume that most of the migrants first moved to the informal sector. Thus,
ratio of non-agricultural labor with social insurance was only 43.8% in 1967 and 42% in
1972 (Kepenek and Yenturk, 2005). However, in time, workers in informal sector moved
to the formal sector; the non-agricultural labor with social insurance increased to 70.9%
in 1990 and 75.9% in 2004. The raise in the ratio of formal workers could have decreased
the urban inequality.
Lastly, between inequality declined during the examined periods. The impact of
decline in between inequality is more noticeable for the 1968-1973 period. This result is
consistent with Dervis and Robinson (1980)’s analysis. Dervis and Robinson show that
the Kuznets Ratio in Turkey declined between 1968-1973, since terms of trade changed
in favor of the rural sector. Following Lewis (1954)’s argument, we can say that the
relative growth of the capitalist sector could have shifted the terms of trade in favor of the
rural sector and reduced the between income inequality in Turkey.
Conclusion
This study explores the effects of urbanization on the changes in income distribution. The
changes on inequality are analyzed within the Kuznetsian framework and Kuznets’s U
curve argument is examined in a critical way. The urbanization followed by
industrialization can change inequality by many ways. As urbanization continues, the
urban share raises; changes are observed both in between and within urban and rural
inequalities. Kuznets brings some explanations on how development changes the
structure of inequality. However, the path that inequality will follow is also related with
the internal dynamics of a country.
Kuznets claims that the first stage of industrialization increases inequality by
raising the proportion of the population in the unequal part (urban) of the society.
However, there are indeed studies that show that urbanization has counterbalancing effect
against the income gaps caused by the rapid industrialization. Kuznets’s assumption on
higher urban inequality could also be wrong for many cases, which could disprove
Kuznets’s arguments within his own framework. There are in fact cases shown in this
study, where the inequality in the rural areas is greater due to the countries’
socioeconomic structure.
In this study, we examined the Turkish case in which rural inequality was greater
at the earlier stages of development. Unlike Kuznets’s arguments, urbanization did not
lead to greater inequality during the first stage of Turkey’s development. The direct
impact of shift from rural to urban sector on inequality was not negative for the early
phase of urbanization. In fact, urbanization reduced the inequality in Turkey by
decreasing the rural inequality and closing the urban-rural income gap. The reduction in
inequality pursued during the latter stages of development with the “social mobility”
effects suggested by Kuznets.
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