Income inequality,welfare and poverty in a developing economy with applications to Sri Lanka

This paper explores how the behaviour of welfare, income inequality and poverty changes during the course of a country's economic development. the analysis is based on Kuznet's model of sectorial dualism. The various propositions proved in the paper provide conditions under which the modern sector enlargement and enrichment will lead to higher social welfare and lower income inequality and poverty. It is demonstrated that Kuznet'sU-shaped curve may not exist or even if it does, the turning point may occur at a later stage of development. The paper provides numerical illustrations of the results using Sri Lankan data.This paper was written while I was a Senior Fellow at the World Institute for Development Economics Research, Helsinki, Finland. I am grateful to Juhani Holm for providing me with expert computational assistance. A referee of this Journal made some useful comments which led to considerable improvement in the paper.