Chapter 7: Income Inequality in Russia: Is The Kuznets Curve A Valid Hypothesis?

In this study the effect of the level of economic development on inequality is estimated. The goal is to determine whether the classical Kuznets curve hypothesis (1955) is applicable to Russia. The idea of Kuznets was that income inequality first rises with economic growth on the low stages of development and then falls as the economy matures. The empirical evidence of the curve applicable for the Russian regions has been found. The reverse casualty problem by using internal and external instruments has been also taken into the consideration. For the internal instruments, the System GMM method, which implies two functions – one in first difference and the other one in levels, has been used. For the external instruments, the net oil export per capita and trade per capita as instruments have been applied. If the quadratic term is not implied, the estimations show a significant robust positive effect of economic development on inequality. Thus, it is assumed that it happens due to the fact that Russia is still on the first upbeat of the curve, and it has not yet reached sufficient levels of development to tear down inequality.