Growth,%20Equity%20and%20Cumulative%20Causation

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Growth, Equity and Cumulative Causation

• brendan fisher
• Gund Institute for Ecological Economics
• University of Vermont

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Kuznets Curve

• Does inequality in the distribution of income
  increase or decrease in the course of a countrys
  economic growth? (Kuznets, 1955)

Inequality
Economic Development
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Solows Growth Model

• Y Af(K)

LR
Y/N
Poor Nations
Rich Nations
Time
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Textbook Theory

• The conventional textbook approach is that
  inequality is good for incentives and therefore
  good for growth, even though incentive and growth
  considerations might be traded off against equity
  or insurance goals (Aghion et al. 1999).

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Recent Findings
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Growth - Equity Studies
Perotti (1992) Credit Markets Alesina and Rodrik (1994) Tax rate/redist. Denninger and Squire (1996)
Perotti (1996) Marginal tax Partridge (1997) US States Barro (1999) Rich/Poor effect
Glaeser et al (2003) f (legal capacity)
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Our work
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Gini Coefficient
100
Income
A
B
Gini A/(AB)
0
Income recipients
100
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Early Growth and Equity
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Recent Growth and Equity
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A Closer Look
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Long Run Dynamic
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Long Run Dynamic
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Long Run Dynamic
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Another View
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Growth and Gini Change
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Growth and Gini Change
China, Denmark, Italy, Japan, Finland, France, Germany, Norway, Netherlands, Sri Lanka Canada, USA, India, Spain
New Zealand, Sweden Australia, Portugal, United Kingdom
3
gt-.2/yrgt
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Consistent?

• Low tax rate and high government spending show
  weak correlation to growth in cross-country
  analysis (Slemrod, 1995)

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Conclusion I

• T-tests supports other studies positive
  relationship between equity and growth.
• Confidently reject the mindset that equity is
  sought at the cost of growth.

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Conclusion I
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Conclusions II

• Increasing equity can be achieved even in
  economic downturn. (Global Slowdown since 1973,
  national downturns)
• Middle East and North Africa low growth, lowered
  poverty levels over past 20yrs (Adams and
  Page, 2003).

Growth
Equity
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Conclusions III

• Growth can be a force to increase inequity (UK,
  Australia, USA)
• the growth process is unlikely to leave
  inequality unchanged (Aghion, 1999)

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Cumulative Causation

• If things were left to market forces unhampered
  by any policy interferences, industrial
  production, commerce, banking, insurance,
  shipping and indeed almost all of those economic
  activities which in a developing economy tend to
  give a bigger than average return and, in
  addition, science, art, literature, education,
  and higher culture generally would cluster in
  certain localities and regions, leaving the rest
  of the country more or less in a backwater
  (Mrydal, 1957).

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Source Economic Apartheid in America, Collins,
Yeskel, p. 42, 44.
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Conclusions IV

• Policy and Implementation matter, often more than
  economic status.
• Egypt, Sri Lanka, China seeking growth and
  equity.
• USA, UK, Australia poor performance in combating
  inequity.

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Policy Considerations and Implications

• Cross-country data can be helpful, but historical
  analysis, key component to not fall into IMF
  blanket policy trap.
• Enlightened by the process Cumulative Causation.
• Growth and equity as a dynamic relationship.
• Ecological consequences of growth and inequity.