Policy-Induced Changes in Income Distribution and Profit-Led Growth in A Developing Economy

In a demand-side growth model we show that a developing economy may experience a steady positive equilibrium growth rate of investment and profit as long as– investment in the economy is responsive to the aspirations of the richer section of the population to match the consumption level of the developed world and imitation of foreign production technology is not very expensive. A worsening of income distribution is not required to sustain this kind of growth process but a sufficiently unequal initial distribution of income is enough to propel it. We also show that the technologically dynamic sector producing for the rich is incapable in generating much employment. If the process is accompanied by no change in the distribution of income then the employment share of the the technologically stagnant sector producing for the poor increases at the cost of declining growth rate of real wage. In case the growth process is accompanied by an exogenous change in the distribution of income induced by shifts in economic policy regime then the positive and stable equilibrium growth rate of investment is associated with an increasing growth rate of output though more is gained in terms of increase in output growth when income distribution improves rather than worsens. On the other hand, growth rate of employment for the entire economy might decline.