Inequality and Growth

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

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?

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

Gini Map 2008

source: www.wikimedia.org

II. Kuznets hypothesis

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

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

Why?

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.

III. Previous Study(Barro

2000)
Inequality and Growth

The effect of GDP on inequality inverse-Ushaped (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)

IV. The present analysis

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

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

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.

VI. Estimated Kuznets

Curves

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)

VII. Inequality as a
Determinant of Economic
Growth
Cross-country growth regressions

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

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

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

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.

IX. Is Inequality Harmful

for Growth?

Why do we care about

inequality?
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

Sociopolitical Instability

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

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/presentations/B-2_MRavallion.ppt
Lina Tolvaisaite, Katharina Maier, Tamara Tschentscher, Income Inequality and
Development lehre.wiwi.huberlin.de/Professuren/vwl/fw/lehre/ws0607/.../income_inequality_and_development_
seminar_20_11_2006.p
Maria Ana Lugo, Inequality and Human Development University of Oxford
hdr.undp.org/en/media/Inequality%20and%20Human%20Development,%20
Inequality & Growth
personal.rhul.ac.uk/ulte/108/EC1111/inequality&Growthlecture9.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%2012%20E112%20and%20212%20Income%20I... Gini Map - source: www.wikimedia.org
Photos sources: www.fotosearch.com/photos-images

Questions?