Inequality

1
Inequality Growth

• Moritz Nagel
• Lois Hales
• Charles Leury
• Oleksandr Bevz

2
Outline

• Hypotheses
• Context
• Setting
• Measures
• Causes Mitigating Factors
• Snapshot 2009
• Conceptualization
• Debate
• Conclusion

3
Hypotheses
4
What are we talking about?
Context

• Inequality all disparities in the distribution
  of
• Income assets
• Consumption
• Opportunity
• Social welfare (TRD)
• Between who?
• Countries
• Individuals groups within countries

5
How do we measure inequality?
Context

• 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

6
What causes inequality?
Context

• Labour market
• Education
• Computerization/growing technology
• Globalization
• Sexism
• Racism
• Culture
• Wealth condensation
• Development patterns
• Personal preference for work and leisure
• Etc.

7
Mitigating factors
Context

• Market driven
• Propensity to spend
• Unionization
• Etc.
• Government sponsored
• Public education
• Progressive taxation
• Minimum wage legislation
• Nationalization of products

8
Snapshot 2009
Context
9
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)
10
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)
11
Conceptualization
What about Total Relative Deprivation?
12
Conceptualization
What about Total Relative Deprivation?
TRD (income per capita SW) population
13

Conceptualization

• When we discuss income inequality as Development
  Economists, we implicitly talk about poverty
  reduction.
• Lets 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)

14
Source Barro and Lee 2010, p. 43.
Conceptualization
Rates of Return to an Additional Year of Schooling
15
Sustainable Growth vs. Equitable Growth?
Conceptualization

• ? 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.

16
Preliminary conclusions?
Conceptualization

• ? 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.

17
Simon Kuznets (1955)
Conceptualization

• "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?"

18
Historical Trajectory of Income Inequality
Conceptualization

• 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

19
Conceptualization
Historical Trajectory of Income Inequality

• ? 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.
Source Bourguignon and Morrisson 2002, p. 741.
20
Inequality has a negative impact on growth...

• How? Why?

21
We begin with some theoretical findings
Negative Impact

• 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

22
More hypotheses
Negative Impact

• 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

23
Moreover
Negative Impact

• 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

24
Empirical evidence
Negative Impact
Some 20 papers report that inequality leads to
higher mortality, and 2 report the opposite
(both of them use the same data)

• Cramer (2003)
• inequality promotes conflicts
• Kawachi (2009)
• the greater the dispersion of income within a
  given society, the lower the life expectancy

25
More evidence
Negative Impact

• 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

26
Inequality has a positive impact on growth...

• How? Why?

27
Propensity to Save/Stimulates Savings
Positive Impact

• 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

28
Propensity to Invest/Stimulates Investment
Positive Impact

• Inequality enhances growth due to Investment
  Indivisibilities (Aghion, Caroli
  García-Peñalosa, 1999)
• A rise in inequality tends to raise investment
  Barro (2000)

29
Incentives
Positive Impact

• 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

30
Empirical Evidence
Positive Impact

• Forbes, 2000 an increase in a countrys 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.

31
The Efficient Inequality Range
Positive Impact
32
Conclusion

• Is inequality a catalyst for growth?
• What is governments role, if any, in the
  reduction of inequality?
• Thank you for your
• time and attention!

33
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.

34
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
  Worlds 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
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• Kuznets, S. (1955) Economic Growth and Income
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• Li, Hongyi, and Heng-Fu Zou. (1998) Income
  inequality is not harmful for growth Theory and
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35
Bibliography

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36
Bibliography

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