Factor endowment, human capital, and inequality in developing countries

Purpose - The aim of this paper is to extend a theoretical model due to Ljungqvist and data from a sample of 19 developing economies to empirically test it. Design/methodology/approach - Data for all variables are from the 2005 Human Development Report and the 2006 World Development Report. The author applies the least-squares estimation technique in a multivariate linear regression. Findings - Based on data from the World Bank and the United Nations Development Programme, the paper uses a sample of 19 developing economies and finds that cross-country variations in income/consumption inequality may be explained by inequality of investment in human capital as measured by inequalities in child health as well as inequality in education and by inequality in the distribution of land as measured by the land Gini index. Practical implications - Assuming a population consisting of skilled laborers, unskilled laborers, educators/health care personnel, and farmers, the paper shows that starting from an initial distribution of assets and in the absence of a perfect capital market along with human capital exhibiting increasing returns it is possible to have persistent inequality in the distribution of income or consumption. Regression results also are consistent with the theoretical implication of the model as the extent of inequality in land distribution and in access to education as well as inequalities in child health do linearly influence income or consumption inequality as measured by the ratio of the share of income or consumption accounted for by the richest quintile to that of the poorest quintile. As a result, if governments in developing countries aim to reduce inequality, they need to implement programs designed to reduce inequalities in child health by allowing children from the poorest of the poor to get fully immunized, which in turn would lead to a reduction in infant and child mortality and in education by providing low-income families with means so that their children have better access to education. Government land policies, on the other hand, that succeed in reducing inequality in land distribution in developing countries, may be beneficial in terms of lessening income/expenditure inequality. Finally, while the present model does not test for the impact that improving capital markets would have, it stands to reason that improving capital markets could also have an impact on decreasing inequality. Originality/value - In this paper the author uses a model due to Ljungqvist to show that individuals are relatively wealthy because they either own a fixed input such as land or they are able to invest in human capital, which in turn allow them to earn sufficient rent or labor income to remain wealthy. On the other hand, poor people either do not own land or are not capable of investing in human capital, and, as a result, earn low incomes and remain poor. This joint causation of factor endowment or human capital investment and income helps explain income distribution. Using data from the United Nations Development Programme and the World Bank for a sample of 19 developing economies, it is found that cross-country variations in income/consumption inequality may be explained by inequality of investment in human capital as measured by inequalities in child health as well as well as inequality in education and by inequality in the distribution of land as measured by the land Gini index. These results will help governments in developing countries identify areas that need to be improved upon in order to reduce income/consumption inequality.