TI  Vol.3 No.1 , February 2012
Inequality and Growth Re-Examined
Abstract: This paper examines the relationship between income inequality and subsequent economic growth. It builds on the model suggested by Alesina and Rodrik (1994) in which inequality works through greater demands for redistribution to slow down growth, and the idea by Ray (1998) that inequality negatively affects savings, work capacity, economic incentives, and access to and efficiency of credit and financial markets. Using an updated dataset and seven model variants, both OLS and 2SLS regressions find a strong negative effect of income inequality on future growth. The effect is considerably stronger for developing countries, but the existence or absence of democracy has no effect on either the relationship between inequality and growth or on the rate of growth itself. There is also no support for Barro’s (2008) claim that inequality impacts growth positively in developed countries.
Cite this paper: J. Assa, "Inequality and Growth Re-Examined," Technology and Investment, Vol. 3 No. 1, 2012, pp. 1-6. doi: 10.4236/ti.2012.31001.

[1]   D. Ray, “Development Economics,” Princeton University Press, Princeton, 1998.

[2]   R. J. Barro, “Inequality and Growth in a Panel of Countries,” Journal of Economic Growth, Vol. 5, No. 1, 2000, pp. 5-32. doi:10.1023/A:1009850119329

[3]   A. K. Fosu, “Inequality and the Impact of Growth on Poverty: Comparative Evidence for Sub-Saharan Africa,” Journal of Development Studies, Vol. 45, No. 5, 2009, pp. 726-745.

[4]   D. Qin, M. A. Cagas, G. Ducanes, X.-H. He, R. Liu and S.-G. Liu, “Effects of Income Inequality on China’s Economic Growth,” Journal of Policy Modeling, Vol. 31, No. 1, 2009, pp. 69-86. doi:10.1016/j.jpolmod.2008.08.003

[5]   A. Castelló-Climent, “Inequality and Growth in Advanced Economies: An Empirical Investigation,” Journal of Economic Inequality, Vol. 8, No. 3, pp. 293-321. doi:10.1007/s10888-010-9133-4

[6]   A. Alesina and D. Rodrik, “Distributive Politics and Economic Growth,” The Quarterly Journal of Economics, Vol. 109, No. 2, 1994, pp. 465-490. doi:10.2307/2118470

[7]   R. J. Barro, “Inequality and Growth Revisited,” ADB Working Paper Series on Regional Economic Integration, No. 11, January 2008.

[8]   Economist Intelligence Unit, “Democracy Index 2010: Democracy in Retreat,” London, 2010.