[OPE] Income distribution and economic growth

Warning! Inequality May Be Hazardous to Your Growth

Andrew G. Berg and Jonathan D. Ostry
Global Macro Econonomonitor Apr 8, 2011

(...) Some time ago, we became interested in long periods of high growth
("growth spells") and what keeps them going. (...) Somewhat to our surprise,
income inequality stood out in our analysis as a key driver of the duration
of "growth spells".

We found that high "growth spells" were much more likely to end in countries
with less equal income distributions. The effect is large. For example, we
estimate that closing, say, half the inequality gap between Latin America
and emerging Asia would more than double the expected duration of a "growth
spell". Inequality seemed to make a big difference almost no matter what
other variables were in the model or exactly how we defined a "growth spell".
Inequality is of course not the only thing that matters but, from our
analysis, it clearly belongs in the "pantheon" of well-established growth
factors such as the quality of political institutions or trade openness.

While income distribution within a given country is pretty stable most of
the time, it sometimes moves a lot. In addition to the United States in
recent decades, we've also seen changes in China and many other countries.
Brazil reduced inequality significantly from the early 1990s through a
focused set of transfer programs that have become a model for many around
the world. A reduction of the magnitude achieved by Brazil could-albeit with
uncertainty about the precise effect-increase the expected length of a
typical "growth spell" by about 50 percent.

The upshot? It is a big mistake to separate analyses of growth and income
distribution. (...) Over longer horizons, reduced inequality and sustained
growth may be two sides of the same coin. (...)

Complete article:
http://www.roubini.com/globalmacro-monitor/260804/warning__inequality_may_be_hazardous_to_your_growth

The IMF research paper by Berg and Ostry:
http://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf

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Received on Fri Apr 8 18:57:56 2011