Inequality and Unsustainable Growth: Two Sides of the Same Coin?

Andrew G. Berg; Jonathan D. Osrty

Berg Andrew - Assistant Director in the IMF’s Research Department, 700 19th Street, N.W., Washington, D.C. 20431; E-mail: Aberg@imf.org

Ostry Jonathan D. - Deputy Director of the IMF’s Research Department, 700 19th Street, N.W., Washington, D.C. 20431; E-mail: Jostry@imf.org

Abstract

The relationship between income inequality and economic growth is complex. Some inequality is integral to the effective functioning of a market economy and the incentives needed for investment and growth. But inequality can also be destructive to growth, for example, by amplifying the risk of crisis or making it difficult for the poor to invest in education. The evidence has also been mixed: some find that average growth over long periods of time is higher with more initial equality; others find that an increase in equality today tends to lower growth in the near term.

The authors find that longer growth spells are robustly associated with more equality in the income distribution. For example, closing, say, half the inequality gap between Latin America and emerging Asia would, according to our central estimates, more than double the expected duration of a growth spell. Inequality typically changes only slowly, but a number of countries in our sample have experienced improvements in income distribution of this magnitude in the course of a growth spell. Inequality still matters, moreover, even when other determinants of growth duration — external shocks, initial income, institutional quality, openness to trade, and macroeconomic stability — are taken into account.

A key implication of these results is that it is difficult to separate analyses of growth and income distribution. The immediate role for policy, however, is less clear. The analysis does perhaps tilt the balance towards the notion that attention to inequality can bring significant longer-run benefits for growth. Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin.

Reference

Aerts J.-J., Cogneau D., Herrera J., de Monchy G., Roubaud F. (2000) L’economie camerounaise: Un espoir évanoui. Paris: Karthala.

Alesina A., Rodrik D. (1994) Distributive Politics and Economic Growth. Quarterly Journal of Economics, vol. 109, no 2, pp. 465–490.

Banerjee A.V., Duflo E., (2003) Inequality and Growth: What Can the Data Say? Journal of Economic Growth,vol. 8, no 3, pp. 267–299.

Barro R.J. (2000) Inequality and Growth in a Panel of Countries. Journal of Economic Growth, vol. 5, no 1, pp. 5–32.

Berg A., Ostry J.D., Zettelmeyer J. (2008) What Makes Growth Sustained? IMF Working Paper 08/59, Washington: International Monetary Fund.

Berg A., Sachs J. (1988) The Debt Crisis: Structural Explanations of Country Performance. Journal of Development Economics, vol. 29, no 3, pp. 271–306.

Carbonnier G. (2002) The Agendas of Economic Reform and Peace Process: A Politico-Economic Model Applied to Guatemala. World Development, vol. 30, pp. 1323–1339.

Cárdenas M. (2007) Economic Growth in Colombia: A Reversal of “Fortune”? Ensayos Sobre Politica Economica, vol. 25, no 53, pp. 220–259.

Chaudhuri S., Ravallion M. (2006) Partially Awakened Giants: Uneven Growth in China and India. Dancing with Giants: China, India and the Global Economy (eds. L.A. Winters, S. Yusuf), Washington: World Bank.

Coady D., Gillingham R., Ossowski R., Piotrowski J., Tareq S., Tyson J. (2010) Petroleum Product Subsidies. IMF Staff Position Note 10/05, Washington: International Monetary Fund.

Deininger K., Squire L. (1998) New Ways of Looking at Old Issues: Inequality and Growth. Journal of Development Economics, vol. 57, no 2, pp. 259–287.

Dell‘Ariccia G., di Giovanni J., Faria A., Kose M.A., Mauro P., Schindler M., Terrones M., Ostry J.D. (2008) Reaping the Benefits of Financial Globalization. IMF Occasional Paper No. 264,Washington: International Monetary Fund.

Dollar D., Kraay A. (2002) Growth Is Good for the Poor. Journal of Economic Growth, vol. 7, no 3, pp. 195–225.

Easterly W. (2007) Inequality Does Cause Underdevelopment: Insights from a New Instrument. Journal of Development Economics, vol. 84, no 2, pp. 755–776.

Easterly W., Levine R. (1997) Africa‘s Growth Tragedy: Policies and Ethnic Divisions. Quarterly Journal of Economics, vol. 112, no. 4, pp. 1203–1250.

Forbes K.J. (2000) A Reassessment of the Relationship between Inequality and Growth. American Economic Review, vol. 90, no 4, pp. 869–887.

Gupta S., Clements B., Gillingham R., Schiller C., Verhoeven M., Alonso-Terme R., Mourmouras A. (1999) Should Equity Be A Goal of Economic Policy? Economic Issues, no 16, Washington: International Monetary Fund.

Hausmann R., Hwang J., Rodrik D. (2007) What You Export Matters. Journal of Economic Growth, vol. 12, no. 1, pp. 1–25.

Hausmann R., Pritchett L., Rodrik D., (2005) Growth Accelerations. Journal of Economic Growth,vol. 10, no 4, pp. 303–29.

Hausmann R., Rodriguez F., Wagner R. (2006) Growth Collapses. Working Paper No. 136, Center for International Development, Kennedy School of Government, Cambridge, Massachusetts: Harvard University.

Heathcote J., Perri F., Violante G. (2010) Unequal We stand: An Empirical Analysis of Economic Inequality in the United States, 1967–2006. Review of Economic Dynamics, vol. 13, pp. 15–51.

International Institute for Labour Studies (IILS) (2010) World of Work Report. Geneva: International Labour Oranization.

International Labour Organization (ILO) (2011) Global Employment Trends 2011. Geneva.

Jácome L., Larrea C., Vos R. (1998) Políticas macroeconómicas, distribución y pobreza en el Ecuador.Política macroeconómica y pobreza en América Latina y el Caribe (eds. E. Ganuza, L. Taylor, S. Morley), Madrid: Mundi-Prensa.

Johnson S., Ostry J.D., Subramanian A. (2007) The Prospects for Sustained Growth in Africa. IMF Working Paper No. 07/52, Washington: International Monetary Fund.

Kumhof M., Rancière R. (2010) Inequality, Leverage and Crises. IMF Working Paper 10/268, Washington: International Monetary Fund.

Lewis P. (2007) Growing Apart: Oil, Politics, and Economic Change in Indonesia and Nigeria. Ann Arbor: University of Michigan Press.

Mbaku J.M., Takougang J. (eds.) (2003) The Leadership Challenge in Africa: Cameroon under Paul Biya, Trenton, New Jersey: Africa World Press.

Piketty T., Saez E. (2003) Income Inequality in the United States, 1913–1998. Quarterly Journal of Economics, vol. 118, no 1, pp. 1–39.

Pritchett L. (2000) Understanding Patterns of Economic Growth. World Bank Economic Review, vol. 14, no 2, pp. 221–50.

Rajan R. (2010) Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton: Princeton University Press.

Ravallion M. (2009) A Comparative Perspective on Poverty Reduction in Brazil, India and China. The World Bank Policy Research Paper No. 5080, Washington: World Bank.

Rodrik D. (1999) Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses. Journal of Economic Growth, vol. 4, no 4, pp. 385–412.

Ropp S. C. (1992) Explaining the Long-Term Maintenance of a Military Regime: Panama before the U.S. Invasion. World Politics, vol. 44, no 2, pp. 210–234.

Taylor L. (1991) Income Distribution, Inflation, and Growth: Lectures on Structuralist Macroeconomic Theory, Cambridge, Massachusetts: MIT Press.

Thorp R., Caumartin C., Gray-Molina G. (2006) Inequality, Ethnicity, Political Mobilisation and Political Violence in Latin America: The Cases of Bolivia, Guatemala and Peru. Bulletin of Latin American Research,vol. 25, pp. 453–480.

Wacziarg R., Welch K.H. (2008) Trade Liberalization and Growth: New Evidence. World Bank Economic Review,vol. 22, no 2, pp. 187–231.

Welch F. (1999) In Defense of Inequality. American Economic Review,vol. 89, pp. 1–17.

Wilkinson R., Pickett K. (2009) The Spirit Level: Why Greater Equality Makes Societies Stronger, New York: Bloomsbury Press.

World Bank (2005) World Development Report 2006: Equity and Development, Washington: WB.

Contacts

Andrew G. Berg, Jonathan D. Osrty (Translation ed. by: Marina Larionova¹)
¹ RANEPA, 11 Prechistenskaya naberezhnaya, Moscow, 119034, Russia