Download I. Measures of income inequality Gini coefficient

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-U-shaped
(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 Bank’s 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
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Martin Ravallion (2007), “Economic Growth is Not an Antipoverty Policy”, Development
Research Group World Bank. Conference: “Taking Action for the World’s 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_semin
ar_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 don’t)” 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?