Journal of Development Economics 40 (1993) 25552. North-Holland The Kuznets process and the inequality-development relationship* Sudhir Anand St. Catherine’s College, 0x$&-d, UK S.M.R. Kanbur The World Bank, Washington DC, USA Received December 1985, linal version received January 1992 In his classic paper on economic growth and income inequality, Kuznets discussed the process of population shift from traditional to modern activities as the basis for a theory of distributional change during the course of development. In this paper, we present a formaliza- tion of the Kuznets process, conduct a general analysis of distributional change under this process, and derive the functional forms of, and conditions for a turning point in, the inequality- development relationship for six commonly used indices of inequality. The functional form appropriate to each index is then estimated using cross-section data on 60 developing and developed countries. Finally, some extensions to the initial formalization of the Kuznets process are considered. 1. Introduction In a classic paper, Kuznets (1955) introduced the idea of a link between inequality and development. Based on evidence from time-series data on England, Germany and the United States, he hypothesized the now famous ‘inverse-U’ relationship between inequality and development. The zyxwvutsrqponmlkjih mechanisms underlying this relationship were also discussed by Kuznets. He took a somewhat eclectic view, stressing economic, political and social factors as explanations of the statistical regularities he had observed. But the foremost of these factors, one which provided the focus of Kuznets’s analysis and has Correspondence to: Sudhir Anand, St. Catherine’s College, Oxford OX1 3UJ, UK. *We are grateful to the Economic and Social Research Council of the UK for financial assistance under grant no. B 0023 0001, and to Afsaneh Farzin and George Zanias for research assistance. This is a revised version of our paper ‘Intersectoral Shifts Theory and the Inequality- Development Relationship’, tirst presented at the EADI Symposium on Income Distribution at the University of Paderborn, West Germany in April 1981. It has also been presented at seminars at the Universities of Oxford, Cambridge, London (University College and LSE), Princeton and Essex, and was published as University of Essex, Department of Economics, Discussion Paper no. 249, August 1984. 03043878/93/$06.00 0 1993-Elsevier Science Publishers B.V. All rights reserved