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Does greater inequality lead
to slower economic growth?
Mike Palmedo
[email protected]
American University
School of International Service
Is there a relationship between
inequality and growth?
And which way does it run?
• A negative relationship will support redistributive
policies such progressive taxation and
expanding social safety net programs.
• A positive relationship will support laissez faire
fiscal policies
Lit Review Yields No Consensus
•
Kuznets (1955) – Positive correlation at early stages of
development, negative correlation at late stages of development.
•
Barro (2000) – Negative correlation at early stages of
development, positive correlation at late stages of development.
•
Alesina and Rodrick (1994) – Negative, statistically significant
correlation.
•
Li and Zou (1998) – Positive, statistically significant correlation.
•
Bleaney and Nishiyama (2004) – no statistically significant
relationship.
Deininger and Squire (1996):
The Least-Bad Data Available
•
Collected all the data from government sources and previous
studies that relied on government sources they could. Rejected
all that did not meet the following standards:
• Data must be collected from feet-on-the-ground surveys
• Must be representative of entire population – no biased
subsets based on rural or urban populations
• Must be the most complete measurement of income or
expenditure available – no reliance on wages on income tax
data
• The primary source must be independently confirmed
•
Discarded over 74% of their initial data. Wound up with 682
observations.
Regression Model
growth = a(const.) + b(gini) + c(igdp) + d(edu)
Variable
Description
growth
Average GDP growth over 20 year period
gini
Gini coefficient from Deininger/Squire
Dataset
Initial per capita GDP, adjusted for
purchasing power parity and measured in
constant international dollars
UN educational index
igdp
edu
Descriptive Statistics
Obs.
Mean
Median
Standard
Deviation
growth
72
2.05
3.38
1.86
gini
72
40.39
45.8
7.35
igdp
68
9,175
10,831
13,354
edu
71
0.79
.083
0.23
Regression Results
F-stat = 4.00, Prob > F = 0.01, R2 = 0.16, Adj. R = 0.12
Variable
Coefficient
Standard
Error
T-Statistic
Prob > |t|
-0.07
0.03
-2.58
0.01
igdp
-.0001
.00004
-2.46
0.02
edu
4.34
1.81
2.39
0.02
constant
2.24
1.31
1.36
0.18
gini
Next Steps
•
Add relevant variables to raise R2
•
•
•
Find good data for investment and supply of
labor relative to population
Find good data measuring technological
capacity (data from 1980s needed)
Address issue of geographic dummy
variables
Tentative Conclusion
Cross-sectional data shows there has
been a statistically significant negative
correlation between inequality and the rate
of economic growth in the last quartercentury.