Investigating the Relationship between Income Inequality and Economic Growth in Iran

Providing social justice and eradication of poverty and deprivation by creating balance between the distribution of income and wealth among the people of society is emphasized in the constitution. In this regard, explaining the relationship between income inequality and economic growth has been the most challenging economic issues in the recent decades and despite extensive research in this area, there are still unclear topics in this subject and empirical studies have also led to contradictory results. Some believe that there is a conflict between these two categories and argue that the unequal distribution of income in the early stages of development of each country is essential for growth and in contrast, opponents of this theory argue that an increase in the income inequality prevents economic growth. In this regard and in the present study, in addition to reviewing the theoretical foundations of the different effects of income inequality on economic growth, the level of inequality as a determinant factor of this relation has been taken into account and a non-linear relationship between these two variables has been specified.
Using smooth transition nonlinear regression model, the effects of income inequality on Iran's GDP per capita over the period of 1391-1348 have been examined.
Findings: The link between income inequity and economic growth in Iran is nonlinear and includes a two-regime structure, that is the effect of income inequality on GDP per capita is negative in the first regime and positive in the second. Therefore, a net positive or negative impact of the inequality on growth that was achieved in most studies, cannot be accepted. Additionally, an optimal rate of Gini coefficient equal to 0.3838 was estimated that maximizes GDP per capita and at levels less than this rate, an increase in GDP per capita has led to an increase inequality and vice versa.
The role and impact of income inequality on the path to economic growth achievement is important and economic development strategies must be based on rapid economic growth and equitable distribution of income. Considering the results and estimating the optimal rate for the Gini coefficient, policymakers should adopt a policy of "growth with distribution" in order to reduce income inequality and increase the share of low-income classes, particularly the middle class while achieving the optimal rate of income inequality through redistribution leverage such as poverty eradication policies based on reducing income inequality and redistribution using targeted subsidies and taxation of high-income groups.