Interrelationships between income redistribution and economic growth with special reference to Sri Lanka

The principal aim of this study is to explore the interrelationships that could exist between the processes of growth and redistribution of incomes by means of a formal model representative of Sri Lanka, and to assess quantitatively the effects of alternative policy options available. The model is based on the Chenery-Ahluwalia model for distribution with growth {1974} and retains some of its original features such as a dualistic pattern of production, differential savings rates and linkages amongst major socio-economic groups through employment. But in many respects this study goes beyond theirs by incorporating the government as a separate entity participating in a growth cum redistribution process, the roles of financial institutions, direct taxes, indirect taxes, subsidies and of foreign aid. In contrast to simulation techniques adopted in the Chenery-Ahluwalia approach, the model in this study is developed in terms of a set of simultaneous differential equations. The model is further extended by introducing considerations of incentives to skilled manpower, optimal growth of incomes of the poor over a finite time horizon, and of resource allocation over the major sectors of the economy. The main conceptual results include the derivation of the Kuznets pattern concerning the behaviour of income inequality as a country develops and the application of optimal control theory to an economic model consisting of three sectors, two control variables and an objective function to be optimised over a finite time horizon. Policy oriented results arc also derived, highlighting in particular, the significance of expanding capital for self employment, the desirability of consumption redistribution rather than income redistribution, the limited impact of subsidies, the importance of the modern (private) sector, the role of skilled manpower in development and the optimal allocation of resources over the major sectors of the economy