Download Capability to earn and save

Economic Inequality and
Development
Barbara Liberda
University of Warsaw, Faculty of Economics
18 October 2011
Disparities of wealth and income
Aversion to inequality
 Philosophical grounds
 Functional level of inequalty
 Personal income distribution
Tunnel effect
Positive aspects of income inequality?
 Savings
 Aspirations
2
Measurement of inequality - criteria





3
Anonymity principle
Population principle
Relative income principle
Dalton transfer principle
Above 4 principles create the Lorenz curve - Lorenz
criterion
Lorenz curve
Lorenz curve – shows how cumulative shares of income
are earned by cumulatively increasing fractions of the
population, ranked from poorest to richest
 Regressive transfers
 Progressive transfers
 When Lorenz curves cross
4
Complete masures of inequality





The range
The Kuznets ratios
The mean absolute deviation (from the mean income)
The coefficient of variation
The Gini coefficient
Inequality between individuals at the world scale and
within countries as well as between countries
5
Branko Milanovic, 2007, Where in the world are you?
6
Income mobility of countries 1980-2000 in Markov
mobility matrix (132 countries, shares of world
average income)
7
1/4
1/2
1
2
>2
1/4
88
8
4
0
0
1/2
48
43
10
0
0
1
0
28
56
14
3
2
0
0
32
42
26
>2
0
3
3
6
88
Kuznets curve

The Kuznets curve — an inverse-U shape relationship
between income inequality and per capita GDP
International data confirm that the Kuznets curve is
relatively stable from the 1960s into the 2000s (Barro,
1991, 2000, 2008)

Latin (America) effect

8
Kuznets Curve estimated by Barro, 2008
9
Effect of income inequality on growth

10
A cross-country-growth equation shows a negative
effect of income inequality on economic growth,
holding fixed a set of other explanatory variables (life
expectancy, investment, openness, school attainment,
etc).
Effect of income inequality on growth, Barro
2008
11
Effect of income inequality on growth and
income level

12
The negative effect of income inequality on growth
diminishes as per capita GDP rises and may be
positive for the richest countries.
Effect of income inequality on growth at income levels
below (left graph) or above (right graph) 12000 $
13
Inequality and savings
Distribution of savings versus distribution of income



14
Marginal saving rates: constant, increasing,
decreasing
Average saving rates rise in higher income groups
Aspirations and savings