International Journal of Science and Research (IJSR) ISSN (Online): 2319-7064 Index Copernicus Value (2013): 6.14 | Impact Factor (2014): 5.611 Volume 5 Issue 1, January 2016 www.ijsr.net Licensed Under Creative Commons Attribution CC BY The Impact of Income Inequality on Economic Growth: Empirical Evidence from the Organization for Economic Co-operation and Development Member Countries Jihène Sbaouelgi 1 , Ghazi Boulila 2 1 Doctor in High School of Economics and Commerce Sciences of Tunis, TUNISIA, Department of Economics 2 Professor in High School of Economics and Commerce Sciences, Tunisia, PS2D. Department of Economics Abstract: The objective of this article is to quantify the transmission channels of income inequality on economic growth for Organization for Economic Co-operation and Development member countries. We try to determine what is the most important channel through which income inequality affects growth. To do this, we will estimate our basic model with variable rates. Then, we will use a simultaneous equations model to decompose the direct and indirect effects of income inequality on economic growth. According to the results, corruption is the most important channel, while trade openness channel is the least important. Keywords: income inequality, economic growth, transmission channels, corruption 1. Introduction The major economic problem in the world is the fight against poverty. In fact, it is necessary to take into account two aspects: economic growth and income inequality. There must be policy targets for effective redistribution of wealth in order to promote growth. This encourages the state to invest more in different sectors such as education, health, infrastructure, etc... This allows subsequently stimulating growth and then to slow down poverty. Economic researches on the study of the relationship between income inequality and growth have always held an important place in research developing economy. However, they are contradictions in economic thinking. Some economists suggest that unequal distribution of income stimulates economic growth. While others say that income inequality decreases growth and contributes to increase poverty. In addition, Kuznets (1955) [13], known by the famous inverted-U, connects the national per capita income and inequality. He says that the increase in productivity in the modern sector without redistribution in favor of the rural sector, led to a more unequal distribution of income. The Kuznets hypothesis postulates that an increase in inequality during the first period is followed by a decline since the late nineteenth or early twentieth century. 2. Experimental Section Basically on the model of Mo Pak Hung (2009)[18], we will empirically analyze the direct and indirect effects of income inequality on growth through five channels: human capital (Human), financial liberalization (Cp), political stability (Stab), corruption (Icp) and trade liberalization (Trade).The variables used are: 1- Dependant variable GR : growth rate of GDP per capita 2- Gini : Gini index 3- Y60 : initial GDP per capita 4- IY : the investment share of real GDP per capita 5- PopG : the growth rate of the population 6- Pright : index of political rights 7- Stab : measure of political instability 8- Human : the average years of schooling for the population over 15 years 9- Gov : the government as a % of GDP 10- IPC : Index of perception of corruption 11- Trade : Sum of exports and imports of goods and services as a % of GDP 12- CP : Private domestic credit as a % of GDP 13- Inf : Inflation relative to GDP Table 1: Growth Regressions: 2SLS estimation (1) (2) (3) (4) (5) (6) Constant 2,0770 (0,45)* 2,8850 (0,83) 0,4150 (1,61) -1,5445 (-0,53) -1,0069 (-0,32) 1,3225 (0,45) Ly 60 -1,0522 (-0,48) -0,0069 (-0,52) -0,2295 (-0,66) -0,1963 (-0,65) -0,1777 (-0,72) -0,2116* (-1,82) Gini -0,0882 (-2,88)** -0,0652 (-1,25) -0,0132 (-0,38) 0,1326 (0,74) 0,0660 (0,53) -0,0043 (0,18) Human 0,0775 (0,32) 0,0233 (0,46) -0,1472 (-0,37) -0,2467 (-0,32) -0,1148 (-0,45) PopG -0,5767 (-1,32) -0,4014 (-0,32) -0,5231 (-1,17) -0,5172 (-1,23) IPC 0,2775** 0,2212 * -0,0657 Paper ID: NOV152956 1516