Economic growth and inequality: a test of the Kuznets Curve: case study of Tanzania: (1975-2007)

The long-standing debate on whether the poor benefit from economic growth is yet to be resolved conclusively. Inequality has been of central concern to development researchers. Since Kuznets (1955) first proposed an inverted U- shaped relationship between income inequality and a country’s aggregate income level. Tanzania has experienced a relatively rapid growth in per capita Gross Domestic Product in the period 2001-2007. However, there has been limited economic development. One of the arguments in attempting to explain this mismatch is based on the negative impact of inequality on growth. The purpose of this study was to explore the relationship between income inequality and economic growth in Tanzania during the period 1975-2007. The empirical analyse was based on secondary time series data covering the period 1975-2007. The study employed time series estimation technique and used Error Correction Model. The empirical results revealed a negative relationship between income inequality and economic growth. Results also indicated that as poverty is reduced inequality tends to decrease thus confirming a positive relationship between inequality and poverty level in Tanzania. The main conclusion of the study is that income-equalizing policies are justified on growth promoting grounds. Active income redistribution involves a trade-off between the benefits of greater equality and reduction in overall economic growth. In view of the fact that inequality can make economic reforms less plausible it is recommended that care need to be taken in implementing such reforms. This study investigated growth and inequality at national level, Investigation of the same at sub national level such as regions could form an area for further research.