.
An argument in favor of this point of view is the fact that in early stages of economic development people transfer from poorer sectors to more advanced sectors in the economy. But because this transition process initially involves the transfer of only few people from the poor sector to the more advanced one, it is reasonable to assume that inequality will increase. Furthermore technical progress seems to have uneven effects at low levels of income. In developing countries capital-intensive technology is appropriate only in the relatively small industrial sector, while it is not applicable in the agricultural sector, because alternatively a large number of people that work in the rural sector will become unemployed. .
Moreover, technical progress can enhance inequality because it can be argued that labor-intensive technology is in favor of skilled workers. Of course, in time people will acquire skills and knowledge and inequality might decline. Industrialization, which is a feature of the early stages of development and economic growth, will bring profits only to people that have financial assets, entrepreneurial skills and access in credit markets and thus inequality will increase again (at least initially). .
Another reason why inequality is associated with economic growth in low-income countries is the fact that governments in extremely poor countries might choose to tolerate a certain level of inequality in favor of growth. In order to make this argument more clear we are going to investigate what is the relationship between savings and income in low-income countries, since savings transformed into investment lead to economic growth, and so the rate of savings affects the long-run level of per capita income and consequently the rate of growth of the economy.
In developing countries the concern of people, who are low-income levels, to cover their basic needs such as food, clothing and shelter, dictates current expenditure which limits savings.
