An inverted-U relationship between inequality and long-run growth

Tracking positive and negative effects of inequality on long-run growth

“…These results are based on cross-section analyses, an approach that, to the best of our knowledge, has never provided evidence of a positive effect. On the other hand, other authors have found a positive impact of inequality (Forbes 2000;Barro 2000;Chen 2003 andVoitchovsky 2005, among others). However, this positive impact relies on panel data analysis and is either associated with short-term economic growth (Forbes 2000) or is dependent on countries' income (Barro 2000), on the initial income distribution itself (Chen 2003), on the profile of inequality (Voitchovsky 2005), or on the process of urbanization (Castells-Quintana and Royuela 2011).…”

“…1 Along these lines, there is seemingly conflicting evidence in the literature. On the one hand, several authors support the idea of a negative effect of inequality on long-run growth (Alesina and Rodrik 1994;Persson and Tabellini 1994;Clarke 1995;Perotti1994, 1996and Easterly 2007, among others). These results are based on cross-section analyses, an approach that, to the best of our knowledge, has never provided evidence of a positive effect.…”

“…Inequality is growth enhancing in early stages of development, adverse afterwards in that process, and irrelevant in developed economies. 6 Papers such as Barro (2000), Chen (2003), Voitchovsky (2005), and Castells-Quintana and Royuela (2011) provide evidence that inequality can have both negative and positive effects on economic growth, depending on the circumstances of the country.…”

Agglomeration, inequality and economic growth

“…In fact, classical economic theories suggest a positive inequality-growth relationship (Galor 2009). However, in the second half of the twentieth century the economic performance of several countries seems to indicate that low initial levels of inequality result in higher and more sustained long-run growth (Alesina and Rodrik 1994;Persson and Tabellini 1994;Clarke 1995;Perotti 1996;Temple 1999;Chen 2003;Easterly 2007). 2 Along these lines, various transmission channels have been identified via which income distribution might influence economic growth, mainly operating through education (human capital accumulation), investment (physical capital accumulation) and fertility.…”

“…4 The effect varies depending on their level of development (Partridge 1997;Barro 2000); when the Gini coefficient is allowed to interact with the level of GDP (in log scale) inequality is negatively correlated with growth in low-income countries -per capita GDP below $2,070 (1985 US dollars) -but positively correlated with growth in high-income countries (Barro 2000). However, the effect also varies depending on the initial level of inequality (Chen 2003); the effect of inequality is positive when initial inequality is low, and negative when initial inequality is high. In fact, the level of inequality that maximizes growth corresponds to a Gini coefficient of 0.37, the average level for East Asia and West Europe in 1970.…”