inequality & growth moritz nagel lois hales charles leury oleksandr bevz
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INEQUALITY & GROWTH
Outline
Hypotheses Context
Setting Measures Causes & Mitigating Factors Snapshot 2009
Conceptualization Debate Conclusion
Hypotheses
Inequality has a positive impact on growth
1
Inequality has a negative impact on
growth
2
What are we talking about?
Inequality: all disparities in the distribution of… Income & assets Consumption Opportunity Social welfare (TRD)
Between who? Countries Individuals & groups within countries
Context
How do we measure inequality?
Datasets UNU-WIDER World Income Inequality Database, Version
2.0c, May 2008 Deininger, Klaus and Lyn Squire, "A New Data Set
Measuring Income Inequality", The World Bank Economic Review, 10(3): 565-91, 1996.
• Gini index• Hoover index• Theil index
Context
What causes inequality?Contex
t
Mitigating factors
Market driven Propensity to spend Unionization Etc.
Government sponsored Public education Progressive taxation Minimum wage legislation Nationalization of products
Context
Snapshot 2009Context
Conceptualization
A social welfare measure may present a more revealing picture than income per capita taken by itself. (Sen 1973)
SW = income per capita * (1 – GINI)SW = income per capita * (1 – GINI)
Conceptualization
A social welfare measure may present a more revealing picture than income per capita taken by itself. (Sen 1973)
SW = income per capita * (1 – GINI)SW = income per capita * (1 – GINI)
Social Welfare, annual average, 1992 - 2007
(Global Ø (64.8) between 8. and 9. at 2,759)
Conceptualization
Social Welfare, annual average, 1992 - 2007
(Global Ø (64.8) between 8. and 9. at 2,759)
What about Total Relative Deprivation?
Conceptualization
What about Total Relative Deprivation?
TRD = (income per capita – SW) * populationTRD = (income per capita – SW) * population
Total Relative Deprivation, annual average, 1992 - 2007
When we discuss income inequality as Development Economists, we implicitly talk about poverty reduction.
Let’s assume that subsistence needs are met, is there global equality of opportunity?
Exhibit A:A person's location and her social class account for more than 90% of her
position in global income distribution. 60% is explained by location, the rest by social class. Not more than 20% can be attributed to effort. (Milanovic 2007)
Exhibit B:While average years of schooling have risen dramatically in the developing
world (from 2.1 years in 1950 to 7.1 years in 2010), there are substantial differences in the rates of return to human capital of an additional year of schooling between regions. (Barro and Lee 2010)
Conceptualization
Source: Barro and Lee 2010, p. 43.
Rates of Return to an Additional Year of Schooling
Conceptualization
Sustainable Growth vs. Equitable Growth?
► There is no such thing as indefinitely sustainable growth in a closed
ecosystem as our planet.
→ Possibility of a growth ceiling (annual or total) due to:
- market saturation/ overproduction
- eventual lack of resources (e.g. copper, oil, etc.)
- pollution/ climate change
- …?
But: Economic growth is very likely not a zero-sum game.
Conceptualization
Preliminary conclusions?
► Inequalities can manifest themselves in quite subtle ways in
addition to (or as a result of) income inequality.
► It is a qualitative choice whether we talk about equality or equity.
While both describe more or less the same phenomenon, their
respective vantage points beg to differ.
► The question of whether income inequality fosters or hinders
economic growth may miss the target altogether.
Conceptualization
Simon Kuznets (1955):
"How can either the institutional and political framework of the underdeveloped societies or the
processes of economic growth and industrialization be modified to favor a sustained rise to higher levels of economic performance and yet avoid the fatally
simple remedy of an authoritarian regime that would use the population as cannon-fodder in the fight for
economic achievement?"
"How can either the institutional and political framework of the underdeveloped societies or the
processes of economic growth and industrialization be modified to favor a sustained rise to higher levels of economic performance and yet avoid the fatally
simple remedy of an authoritarian regime that would use the population as cannon-fodder in the fight for
economic achievement?"
Conceptualization
Historical Trajectory of Income Inequality
Bourguignon and Morrisson (2002)
► 1820 to 1950: World Gini coefficient rose by 1 percentage point for every decade
► Since 1950: World income distribution continued to worsen (only improving from 1950 to 1960 and showing signs of stability between 1970 and 1992)
► Early 19th century: within-country inequality represented 80% and more of the total (it accounted for only around 40% by 1950)
► 1820 to 1950: extreme poverty rates decreased from 84% to 24%, poverty rates declined from 90% to 51.3%
Conceptualization
► Differences in country economic growth rates practically explain all of the increase in world inequality and in the number of poor people.
→ Richer countries become even richer as poor countries are virtually cut off from economic growth in the first 150 years after the industrial revolution.
Conclusion: Income inequality worsened dramatically in the observed period (Gini index by 30%, Theil index by 60%) due to the increase in inequality across countries or World regions.
Conclusion: Income inequality worsened dramatically in the observed period (Gini index by 30%, Theil index by 60%) due to the increase in inequality across countries or World regions.
Source: Bourguignon and Morrisson 2002, p. 741.
ConceptualizationHistorical Trajectory of Income
Inequality
Inequality has a negative impact on growth...
How? Why?
We begin with some theoretical findings…
Credit-Market Imperfections inequality of assets and incomes puts some
constraints on the investment ability of the poor
Political Economy greater degree of inequality requires redistribution
process and distorts economic decisions
Socio-political Unrest inequality of wealth and income motivates the poor
to engage in crime, riots, and other disruptive activities
Negative Impact
More hypotheses…
Self-promotion once there is a gap in distribution in the society,
the rich get richer and poor get poorer
Tough on policy makers high inequality can foster macroeconomic
instability and impede efficiency-promoting
reforms that require cooperation and trust
Negative Impact
Moreover…
Inequality is bad for health … psychological effect more egalitarian societies enjoy better
quality of social relations homicide and violence are strongly related
to income inequality leads to lower levels of social support,
weaker social networks and more domestic conflicts
Negative Impact
Empirical evidence…
Cramer (2003) inequality promotes conflicts
Kawachi (2009) the greater the dispersion of income within a
given society, the lower the life expectancy
Some 20 papers report that inequality leads to
higher mortality, and 2 report the opposite
(both of them use the same data)
Negative Impact
More evidence…
Ezcurra (2007) examines the regional growth of EU and concludes
that it is bad for growth does not depend on the specific measure used
to quantify the degree of income dispersion!
Ravallion (2001) inequality is bad for start-ups of new business, even
though the size of this effect is small
Ravallion (2005) countries with higher initial inequality experienced
lower rates of growth
Negative Impact
Inequality has a positive impact on growth...
How? Why?
Propensity to Save/Stimulates Savings Classical approach: inequality is beneficial
to development in the post-industrialization period (Keynes, 1920 & Kaldor, 1957)
The marginal propensity to save of the rich is higher than that of the poor (Kaldor) Stiglitz (1969): aggregate behaviour is
independent of the distribution of wealth Bourguignon (1981): more unequal
economies grow faster
Positive Impact
Propensity to Invest/Stimulates Investment
Inequality enhances growth due to Investment Indivisibilities (Aghion, Caroli & García-Peñalosa, 1999)
A rise in inequality tends to raise investment Barro (2000)
Positive Impact
Incentives
Trade-off between productive efficiency and equality is based on incentive considerations (Aghion, Caroli & García-Peñalosa, 1999)
Mirrlees (1971) – incentives boost effort
Okun (1975) – wealth transfer policies reduce incentives
Cornia and Court (2001) – inequality of earnings that rewards effort is likely to be pro-growth
Positive Impact
Empirical Evidence
Forbes, 2000 – an increase in a country’s level of income inequality has a significant positive relationship with subsequent economic growth.
Li and Zou, 1998 – income inequality is positively, and most of the time significantly, associated with economic growth.
Cornia and Court (2001) – there is an inequality range that is most efficient for growth.
Positive Impact
The Efficient Inequality Range
Positive Impact
Conclusion
Is inequality a catalyst for growth?
What is government’s role, if any, in the reduction of inequality?
Thank you for your time and attention!
Bibliography
Barro, Robert J. (2008) “Inequality and Growth Revisited”, Working Paper Series on Regional Economic Integration, No. 11 (January).
Barro, Robert J. (2000) “Inequality and Growth in a Panel of Countries”, Journal of Economic Literature, Vol. 4, No. 3, pp. 5 – 32.
Barro, Robert J. and Jong-Wha Lee. (2010) “A New Data Set of Educational Attainment in the World, 1950 – 2010”, NBER Working Paper, No. 15902 (April).
Becker, G., Philipson, T., Soares, R. (2003) “The Quantity and Quality of Life and the Evolution of World Inequality”, NBER Working Paper, No. 9765 (June).
Bello, Walden. (2006) “The capitalist conjuncture: over-accumulation, financial crises, and the retreat from globalisation”, Third World Quarterly, Vol. 27, No. 8, pp. 1345 – 1367.
Bordon, R. B.; M. Bertram and T. E. Graedel. (2005) “Metal Stocks and Sustainability”, Proceedings of the National Academy of Sciences of the United States of America, Vol. 103, No. 5 (31 January), pp. 1209 – 1214.
Bourguignon, Francois. (1992) “The distributional effects of growth: case studies vs. cross-country regressions”, Delta and World Bank: Paris.
Bourguignon, Francois. (1981) "Pareto-Superiority of Unegalitarian Equilibrian Stiglitz' Model of Wealth Distribution with Convex Savings Function," Econometrica. Vol. 49, No. 6, pp. 1469 - 1475.
Bibliography
Bourguignon, Francois and Christian Morrisson. (2006) “Inequality Among World Citizens: 1820 – 1992”, The American Economic Review, Vol. 92, No. 4 (September), pp. 727 – 744.
Chen, S., Ravallion, M. (2001) “How Did the World’s Poorest Fare in the 1990s?”, Review of Income and Wealth, Vol. 47, No. 3 (September).
Cornia, Giovanni Andrea and Court, Julius (2001) “Inequality, Growth and Poverty in the Era of Liberalization and Globalization”, Journal of Economic Literature, Vol. 63, No. 32.
Cramer, C. (2003) “Does Inequality Cause Conflict?”, Department of Development Studies, School of Oriental and African Studies, University of London.
Deininger, Klaus and Lyn Squire. (1996) “A New Data Set Measuring Income Inequality”, The World Bank Economic Review, Vol. 10, No. 3, pp. 565 – 591.
Forbes, Kristin J. (2000) “A Reassessment of the Relationship between Inequality and Growth”, Journal of Economic Literature, Vol. 40, No. 15.
Kawachi, I. (1997) “Social Capital, Income Inequality, and Mortality”, American Journal of Public Health.
Kuznets, S. (1955) “Economic Growth and Income Inequality”, The American Economic Review, Vol. 45, No. 1 (March), pp. 1 – 28.
Li, Hongyi, and Heng-Fu Zou. (1998) “Income inequality is not harmful for growth: Theory and evidence” Review of Development Economics, Vol. 2 No. 3, pp. 318 – 333.
Bibliography
Milanovic, Branko. (2007) “Where in the world are you? Assessing the importance of circumstance and effort in a world of different mean country incomes and
(almost) no migration”, Development Research Group, World Bank. Mukhopadhaya, Pundarik. (2004) “World Income Inequality data base (WIID) Review”,
Journal of Economic Inequality, Vol. 2, pp. 229 – 234. Okun, Arthur M. (1975) “Equality and Efficiency: The Big Tradeoff”, Washington, D.C. Philippe Aghion; Eve Caroli; Cecilia García-Peñalosa (1999) “Inequality and Economic
Growth: The Perspective of the New Growth Theories”, Journal of Economic Literature, Vol. 37, No. 4. (December), pp. 1615 – 1660.
Ravaillon, M. (2005) “A poverty-inequality trade off?”, Development Research Group, World Bank.
Ravaillon, M. (2005) “Inequality is Bad for the Poor”, Development Research Group, World Bank.
Stark, Oded and J. Edward Taylor (1991) “Migration Incentives, Migration Types: The Role of Relative Deprivation, The Economic Journal, Vol. 101, No. 408 (September), pp. 1163 – 1178.
Stiglitz, Joseph E. (1969) "The Distribution of Income and Wealth Among Individuals”, Econometrica, Vol. 37, No. 3, pp. 382 – 397.
Bibliography
Vanhoudt, P. (1998) “An Assessment of the Macroeconomic Determinants of Inequality”, Working Paper Series in Economics and Finance, No. 271 (October).
Wilkinson, R. (1998) “Why inequality is bad for you?” Marxism Today (November/December).
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