Inequality and Growth Revisited

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Inequality and Growth Revisited

• Robert J. Barro
• Presentation prepared by
• Levan Bzhalava
• WARSAW UNIVERSITY

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Outline

• I. Measures of income inequality (Gini
  coefficient)
• II. Kuznets hypothesis
• III. Previous Study (2000)
• IV. The present analysis (January 2008)
• V. Income-Inequality Data
• VI. Estimated Kuznets Curves
• VII. Inequality as a Determinant of Economic
  Growth
• VIII. Concluding Observations
• IX. Is Inequality Harmful for Growth?

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I. Measures of income inequality

• Gini coefficient - most prominently used as a
  measure of inequality of income distribution or
  inequality of wealth distribution. It is defined
  as a ratio with values between 0 and 1.
• Gini 1 perfect inequality
• Gini 0 perfect equality

source www.wikimedia.org
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Gini Map 2008
source www.wikimedia.org
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II. Kuznets hypothesis

• Economic inequality increases over time, then at
  a critical point it begins to decrease

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Kuznets Curve

• Why in poor countries economic growth increases
  inequality and in rich countries economic growth
  decreases inequality?
• Why?

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Kuznets Curve

• Why?
• Economic development-including shifts from
  agriculture to industry and services and the
  adoption of new technologies-initially benefits
  mainly a minority of the population.
• As the new methods of production become
  widespread, the benefits from economic
  development are shared more evenly, and higher
  per capita GDP tends to reduce inequality.

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III. Previous Study(Barro 2000) Inequality and
Growth

• The effect of GDP on inequality inverse-U-shaped
  (as the Kuznets curve).
• Starting from a low value GDP - inequality
• Relation flattened out at sufficiently high per
  capita GDP
• Further increases tended to reduce inequality.
• Previous results confirmed the presence of the
  Kuznets curve across countries and over time.
• (However, the curve did not explain a
  large fraction of the observed variation in
  income inequality)

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IV. The present analysis

• Updates the previous cross-country research
• Motives
• Globalization
• International trade

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V. Income-Inequality Data

• Previous study -World Banks Deininger and Squire
  (1996) data set
• The present work World Income Inequality
  Database from May 2007 compiled by the United
  Nations (UN). (Better international information
  on income inequality)
• The number of country observations
• 54 - 1960s
• 77 - 1970s,
• 90 - 1980s,
• 120 - 1990s,
• 92 - 2000s

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Income inequality for world averages 1960s - 2000s
The table considers three standard measures of
income inequality the Gini coefficient the
share of income going to the lowest quintile of
the income distribution and the share going to
the highest quintile.
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VI. Estimated Kuznets Curves
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Estimated Kuznets Curves

• Effect on the Gini coefficient
• Positive from log (per capita GDP)
• Negative from the square of the log (per capita
  GDP)
• Positive from openness variable
• (more trade creates more income inequality)

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VII. Inequality as a Determinant of Economic
Growth

• Cross-country growth regressions

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Inequality as a Determinant of Economic Growth

• The Gini variable is significantly negative.
• The impact of inequality on growth is most
  negative for the poorest countries - the
  significantly positive coefficient of
  interaction term
• At higher per capita GDP effect of inequality on
  growth may become positive.
• Inequality is bad for growth in poor countries
  and good in rich countries

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De Gregorio and Lee (2004)

• Income inequality affects economic growth
  indirectly by influencing other determinants of
  growth
• Inequality raises fertility and lower secondary
  school enrollment and the rule of law
• Greater income inequality would lower economic
  growth
• Not in De Gregorio and Lee (2004)
• Higher income inequality leads to lower
• life expectancy

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VIII. Concluding Observations

• Effects on inequality is positive from
  international openness.
• But enhanced trade can lower poverty even
  if income inequality rises.
• Negative effect from income inequality on
  economic growth

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VIII. Concluding Observations

• Effect of inequality on growth diminishes as per
  capita GDP rises and may be positive for the
  richest countries.
• Growth is encouraged by greater international
  openness, higher life expectancy, better rule of
  law, and lower fertility.

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IX. Is Inequality Harmful for Growth?
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Why do we care aboutinequality?

• Sociopolitical Instability
• In poor countries high Inequality generates
  sociopolitical
• conflict that are detrimental for growth
• Income redistribution and Credit-market failures
• More credit-constrained people means lower
  investment and growth
• In case of high inequality redistribution is
  necessary
• High redistribution may reduce incentives to
  accumulate - imply
• less growth

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Sociopolitical Instability
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Good and Bad Inequalities

• Good inequality increase incentives for
  innovation, entrepreneurship and economic growth.
• Bad inequality creates obstacles for poor people
  to receive education and to access credit, that
  impediment economic development

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Supplementary sources

• Martin Ravallion (2007), Economic Growth is Not
  an Antipoverty Policy, Development Research
  Group World Bank. Conference Taking Action for
  the Worlds Poor and Hungry People
  www.ifpri.org/2020chinaconference/day1/presentatio
  ns/B-2_MRavallion.ppt
• Lina Tolvaisaite, Katharina Maier, Tamara
  Tschentscher, Income Inequality and Development
  lehre.wiwi.hu-berlin.de/Professuren/vwl/fw/lehre/w
  s0607/.../income_inequality_and_development_semina
  r_20_11_2006.p
• Maria Ana Lugo, Inequality and Human
  Development University of Oxford
• hdr.undp.org/en/media/Inequality20and20H
  uman20Development,20
• Inequality Growth
• personal.rhul.ac.uk/ulte/108/EC1111/inequa
  lityGrowthlecture9.ppt
• Humberto Lopez Pro poor growth A review of what
  we know (and of what we dont) The World Bank,
  PRMPR - www.nadel.ethz.ch/lehre/ppg_review.pdf
• Dr. Haight - F2008. Income Inequality. Econ
  112/212. Economic Development. www.chaight.com/Wk
  201220E11220and2021220Income20I... -
• Gini Map - source www.wikimedia.org
• Photos sources www.fotosearch.com/photos-images

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Questions?