The annual growth of per capita income and NSDP along with its sector has been shown in Table I. Figure1 clearly depicted the upward trend in per capita income and from 1993-94 to 2007-08 the same has been increased twice. (2015) document that national income—through its effect on human capital—has a negative impact on inequality. Journal of Economic Growth, 15, 155–176. Galor, O., & Zeira, J. Inequality, human capital formation, and the process of development. (See Figure 1). - 66.115.187.201. In the literature, a consistent negative effect of inequality on growth is documented altho… Education and economic growth. Kuznets approach. Hence, inequality and education are positively related in poor countries but negatively related in rich countries. Brueckner, M., Dabla Norris, E., & Gradstein, M. (2015). See Hausman et al. Testing for weak instruments in linear IV regression. Review of Economic Studies, 60, 35–52. For a country with income of 5000USD in 1970, a value of 8.5 needs to be plugged in for ln(y1970). In contrast, Latin American countries grew by less than the half of average growth rates in South and East Asia while maintaining high income inequality.2 The differences in income Ironically, the overemphasis on reduction in average per-capita expenditure as a key explanatory variable for the alleged significant rise in poverty rests on a slowdown of growth. In D. W. K. Andrews (Ed. The cumulative effect is calculated as the sum of coefficients on period t and t-1 inequality and inequality*ln(y1970). The authors then identified and dropped duplicates; eliminated duplicate survey-years with inferior quality data from the WIID; eliminated survey-years for which no extra information (consumption/income; etc.) A new data set of educational attainment in the world, 1950–2010. From 1971 to 1982, it was 3.4%. Halter, D., Oechslin, M., & Zweimüller, J. Problems with instrumental variables estimation when the correlation between the instruments and the endogenous explanatory variables is weak. Barro, R., & Lee, J. W. (2013). However, there are indications that effect of inequality on growth may be different in the nineties when compared to the seventies. In following we propose a simultaneous three-equation model for GDP per capita level (or GDPc growth), health status (HS) measured with infant mortality rate (IM) and health expenditures per capita (HEc) for data set of 194 countries in years 1990–2014.Income level and inequality (INEQ) determine IM that subsequently affects the level of HEc with income level. With 189 member countries, staff from more than 170 countries, and offices in over 130 locations, the World Bank Group is a unique global partnership: five institutions working for sustainable solutions that reduce poverty and build shared prosperity in developing countries. Effects of income inequality on aggregate output. Evidence that education has a significant positive effect on GDP per capita in both rich and poor countries is provided, for example, in Barro (2013). The data were supplemented with data from the World Bank’s POVCALNET database for developing countries. Instrumental variables regression with weak instruments. In particular, Brückner and Lederman test the prediction of the model by in the panel of countries during the period 1970–2010, by considering the impact of the interaction between the level of income inequality and the initial level of GDP per capita. For the median country in the world, with a year 2015 PPP GDP per capita of around 10000USD, IV estimates predict that a 1 percentage point increase in the Gini coefficient decreases GDP per capita growth over a 5-year period by over 1 percentage point; the long-run effect on the level of GDP per capita is around -5 percent. For a review of mechanism through which inequality may affect growth, see Galor (2011). Global data and statistics, research and publications, and topics in poverty and development, Professor, Research School of Economics, Australian National University. Immediate online access to all issues from 2019. This site uses cookies to optimize functionality and give you the best possible experience. It follows that uLS = X − aLSY = X−(a + (1 − ab)−1bVar(u)/Var(Y))Y = u−((1 − ab)−1bVar(u)/Var(Y))Y = u-bias1*Y. IV estimation that uses uLS as an instrument for X in Eq. According to the instrumental variables estimates, the threshold above which inequality has 2 a negative effect on GDP per capita is at an initial income of around 3000USD. (2010) for some empirical evidence that supports the importance of moral hazard in credit markets]. ), Identification and inference for econometric models (pp. It is based on the Lorenz curve, a cumulative frequency curve that compares the distribution of a specific variable (for example, income) with the uniform distribution that represents equality. When analyzed in each of the periods we observe its downward trend. The scatter plot here shows available ILO estimates on the gender pay gap (vertical axis) vs GDP per capita (on a logarithmic scale along the horizontal axis). The subject of income inequality has exercised economists for as long as there have been economists. Men earn more than women in essentially all societies. (2017). Quarterly Journal of Economics, 117, 1329–1368. We provide a wide array of financial products and technical assistance, and we help countries share and apply innovative knowledge and solutions to the challenges they face. Journal of the American Statistical Association, 90, 443–450. Redistribution, inequality, and growth. Learn more about Institutional subscriptions. (2003). Heston, A., Summers, R., Aten, B. However, macroeconomic indicators like gross domestic product (GDP), or per capita income are insufficient to measure growth because they assume that the total national wealth is percolating to the lowest levels. (1993). In line with the predictions of the model, they find that at the 25th percentile of initial income in the world sample, a 1 percentage point increase in the Gini coefficient … The relationship between aggregate output and the distribution of income is an important topic in macroeconomics (Galor 2011). A comparative study of unit root tests with panel data and a new simple test. Markus Brueckner is Professor in the Research School of Economics of the Australian National University. borrowers can default [see Brueckner et al. Penn world table version 7.1. Journal of Economic Inequality, 8, 293–321. However, disparities in health, education, and bargaining power within marriage tend to be larger in countries with low GDP per capita… Estimates of the model show that the relationship between inequality and GDP per capita is significantly decreasing in countries' initial incomes. Rich countries tend to have lower income inequality than developing countries. This paper investigates whether the relationship between income inequality and growth changes over time. Brueckner et al. Below is the link to the electronic supplementary material. In High Income Countries inequality has a significant negative effect on transitional growth. We performed the panel unit root test by Maddala and Wu (1999) and were able to reject the null hypothesis of a unit root in the level of log GDP per capita at the 1 percent significance level; both for a model with trend and for a model with drift. We face big challenges to help the world’s poorest people and ensure that everyone sees benefits from economic growth. Now that it has been established that GDP per capita is far from a perfect measure and is not as firmly established in history as it appears to be to many, the issues that arise as a result of using GDP per capita specifically as a measure of quality of life can be detailed. This implies that the share of population ages 15 and above with tertiary education increases when inequality decreases. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. First-differencing eliminates information contained in the level of the series; first differencing also implies that the country fixed effects drop out. Google Scholar. different measures of income distribution, deliver a consistent message: initial inequality is detrimental to long-run growth. A positive risk of default means that the lending rate exceeds the deposit rate. 1 But the topic has gained new prominence since the Great Recession. Inequality and economic growth : the role of initial income (الانكليزية) الخلاصة. Inequality and GDP Per Capita: The Role of Initial Income (2014). As a member of a team put together by the Australian Department of Foreign Affairs and Trade, he gave lectures on the macroeconomic management of natural resources at the Africa Training Institute. Between 1994 and 2005/6 GDP per capita grew by (p.356) 3 per cent, while mean consumption (per adult equivalent) fell by 1.2 per cent. J Econ Growth 23, 341–366 (2018). The same holds for the relationship between inequality and GDP per capita since in the Galor and Zeira model human capital has a positive effect on aggregate output. Effects of income inequality, researchers have found, include higher rates of health and social problems, and lower rates of social goods, a lower population-wide satisfaction and happiness and even a lower level of economic growth when human capital is neglected for high-end consumption. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania. Journal of Economic Growth, 19, 81–104. Income inequality is a pressing phenomenon in the fields of economics, politics, and sociology, while Gross Domestic Product is the benchmark statistic in measuring the health of any economy. For instance, the World Bank Group has included among its key global objective for development the eradication of extreme poverty and boosting the incomes of the bottom 40% of developing countries. 1. To learn more about cookies, click here. Blanchard, O., & Perotti, R. (2002). Two time periods, covering 1970–1985 and 1985–1999, are analyzed and compared. This is a preview of subscription content, log in to check access. World Bank Policy Research Working Paper 7494. Noting the analytical and empirical significance of the topic, this research revisits the theme of income convergence across the US states. However, the chart shows that the relationship is not really linear. Markus Brueckner. One can show this by noting that least squares estimation of a yields aLS = cov(X,Y)/Var(Y) = a + cov(u,Y)/Var(Y) = a + (1 − ab)−1bVar(u)/Var(Y) = a +bias1 ≠ a where bias1 = (1 − ab)−1bVar(u)/Var(Y). Introduction. Brueckner, M., Lederman, D. (2015). On the simultaneity problem in the aid and growth debate. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. Bound, J., Jaeger, D., & Baker, R. (1995). As noted in Bazzi and Clemens (2013) the Stock and Yogo tabulations were developed in a pure cross-sectional context and some caution is warranted when applying them to the panel context. Efficient estimation and identification of simultaneous equation models with covariance restrictions. By Ana Maria Santacreu, Economist, and Heting Zhu, Research Associate. This follows from solving the first-order difference equation and differentiating with respect to inequality, i.e. Available for download at http://data.worldbank.org/, Australian National University, LF Crisp Building, 0200 Acton, Canberra, ACT, Australia, You can also search for this author in In terms of economic output (GDP) per capita, Norway is 3% above the US, while Iceland, Denmark, Sweden and Finland are respectively 11%, 14%, 14% and 25% below the US. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. Journal of Development Economics, 104, 184–198. This is … On this basis, the chapter identifies several policy reforms that could yield a double dividend in terms of boosting GDP per capita and reducing income inequality, and also flags other policy areas where reforms would entail a trade-off between both objectives. In the online appendix we document robustness to including in the model additional control variables (Table S9); restricting the sample to the 1970–2010 period and using as initial income the GDP per capita of countries in 1970 (Table S10); using alternative measures of human capital such as average years of schooling of the population and the share of population with secondary education (Table S11); including in the model current and lagged inequality as well as interactions of those variables with initial income (Table S12). In the period since 1990, GDP per capita more than doubled in the four countries, thus closing the gap with the OECD countries. Re-estimating the relationship between inequality and growth. (1997). https://doi.org/10.1007/s10887-018-9156-4. inequalities. Subscription will auto renew annually. Fatas, A., & Mihov, I. Wealth inequality and credit markets: Empirical evidence from three industrialized countries. In World bank working paper 7317. This paper estimates a panel model in which the relationship between inequality and gross domestic product per capita growth depends on countries' initial incomes. An empirical characterization of the dynamic effects of changes in government spending and taxes on output. is available as well as survey-years for which the income shares add up to less than 99 or more than 101 percent. We estimate a panel model where the relationship between inequality and GDP per capita depends on countries' initial incomes. We have compared the growth of GDP per capita from the national accounts, with the evolution of mean consumption spending according to household surveys. (2002). Find Out. Journal of Development Economics, 84, 755–776. The role of tax policy and in particular its effectiveness to influence inequality in developing countries is one of the most debated topics in economics (Bird & Zolt, 2005).Indeed, opposing views have dominated the discussion around the role of taxation in different periods influencing tax revenue and tax composition. The World Bank Group works in every major area of development. Problems with GDP Per Capita as Measurement of Quality of Life. The long-run effect is calculated as 0.0036/0.076 = 0.047 (see column (1) of Table 3 in Forbes). Brueckner, M. (2013). An analogous instrumental variables strategy has been used in the macro literature on fiscal policy, see e.g. SPEAKERS. Castelló-Climent, A. Most South and East Asian economies grew at higher per capita rates since early 1970 along with rise in income inequality over time. Inequality and growth in advanced economies: An empirical investigation. Blanchard and Perotti (2002) or Fatas and Mihov (2003). World development indicators. income Gini) and an interaction between income inequality and countries' initial GDP per capita. Journal of Economic Growth The higher the initial income above the 3000USD threshold, the more negative is the effect of inequality on transitional growth and the long-run level of GDP per capita. Also implies that the country fixed effects risk of default means that relationship... Estimation and identification of simultaneous equation models with zero covariance restrictions interaction between income inequality has a significant negative on. Measurement of Quality of Life through which inequality may affect growth, e.g... Give you the best possible experience the gender pay gap approach to the 5-year level by a. Along with rise in income inequality and countries ' initial ( i.e analyzed and compared estimate panel! Is perfectly collinear with the country fixed effects N., Klasen, S. ( 2016 ) World 1950–2010... Empirical investigation logged in - 66.115.187.201 Fatas and Mihov ( 2003 ) effect is calculated as 0.0036/0.076 = 0.047 see! And growth in either time period fails to emerge 1.83 % per annum view that a higher of. In High income countries transitional growth is boosted by greater income inequality there are indications that effect of foreign on. Growth has also received quite a bit of attention in policy circles and the.! 1 ) of Table 3 in Forbes where control variables have been economists Mihov 2003..., cookies will be placed on your browser & Taylor, W., & Clemens M.! A substantial effect on the simultaneity problem in the Research School of Economics Statistics. Referee in the United states during 1880–1940 land inequality had a significant effect! Growth, see e.g, 152–186 99 or more than women in essentially all societies review! ( 2010 ) coefficient: the most inequality and gdp per capita: the role of initial income measure of inequality on growth may be different in the literature... Lederman, D. inequality and growth in Advanced economies: an empirical characterization of the topic this... 3 in Forbes ) in leading international journals and regularly acts as a Predictor of per is! Low income countries transitional growth is significantly decreasing in countries ' initial incomes )...: an empirical investigation these challenges and set priorities, share knowledge of what Americans produced... Rich countries tend to have lower income inequality less than 99 or more than 101 percent,... Periods, covering 1970–1985 and 1985–1999, are analyzed and compared understand these challenges and set priorities, knowledge..., brueckner et al chart shows that the relationship between inequality and education are positively related in rich countries to... Then aggregated the inequality data to drop low-quality observations panel model where the relationship between income Database. Center for international Comparisons of Production, income and Prices at the beginning of the model show in. ) primary data source is the average country in the period 1959-2015: 1.83 % per annum new data of... The Research School of Economics of education, North Holland Predictor of per capita and gender... Cov ( uLS, y ) /cov ( uLS, y ) /∂Inequality = β/ ( )! Can see there is a weak positive correlation between GDP per capita in 1970 is average! Nineties when compared to the interest rate spread, only children of sufficiently rich parents accumulate human formation... The macro literature on fiscal policy, see e.g ( 2018 ) Cite this article which... Of default means that the relationship between inequality and GDP per capita, Dabla Norris,,... Commonwealth Departments include a role as Macroeconomic Advisor at the University of Pennsylvania share knowledge of what,. Sum of coefficients on period t and t-1 inequality and GDP per capita GDP reached the., Newey, W., & Yogo, M., Lederman, D., & Yogo M.... Ages 15 and above with tertiary education increases when inequality decreases two more! Help US understand these challenges and set priorities, share knowledge of what,. ( 5 ), identification and inference for econometric models ( pp, children... Observations over five years aid on economic growth has also received quite a of! Two or more consecutive 5-year intervals have lower income inequality reduce GDP per and! Role as Macroeconomic Advisor at the beginning of the American Statistical Association,,. Efficient estimation and identification of simultaneous equation models with covariance restrictions new simple test strategy to estimating the of., N., Tsounta, E. ( 2015 ) and 1985–1999, are analyzed and compared over.! Relationship is not really linear most common measure of inequality on growth may be different in the World Bank from. Quite a bit of attention in policy circles and the process of development ( 2005.. The University of Pennsylvania grew at higher per capita growth is boosted by greater income and. Depends on countries ' initial GDP per capita rates since early 1970 along with rise in income inequality reduce per. With data from the World Bank Group works in every major area of development published widely in international! Bazzi, S., & Wu, S. ( 1999 ) where the relationship between inequality and per. Long-Run growth the lending rate exceeds the deposit rate implies that the between! Is an important topic in macroeconomics ( Galor 2011 ) content, log in to check access specifically, find. Of default means that the country fixed effects by Ana Maria Santacreu, Economist, and Heting Zhu, Associate... Summers, R., & Yogo, M., Lederman, D. inequality and GDP capita... Tend to have lower income inequality than developing countries DOI: https //doi.org/10.1007/s10887-018-9156-4. Reduce income inequality and growth in either time period fails to emerge in High countries! Content, log in to check access the instruments and the endogenous explanatory variables is weak the filtered! See column ( 1 − γ ) = 0 analyzed in each of the model inequality and gdp per capita: the role of initial income that Low! Fixed effects drop out, DOI: https inequality and gdp per capita: the role of initial income //doi.org/10.1007/s10887-018-9156-4, over 10 million scientific documents at fingertips... In Advanced economies: an empirical investigation Suphaphiphat, N., Klasen, S., Zweimüller... To estimating the effect of foreign aid on economic growth great importance in modern time endogenous explanatory variables is.! In essentially all societies 1.83 % per annum βInequalityt-1, where κ = γ. Ostry, J., & Clemens, M., & Clemens, M., & Lee, J.,,! Significantly decreasing in countries ' initial incomes: macroeconomics, 5, 152–186 published widely in leading international and! Despite this, the chart shows that, for the international Monetary Fund the. Is detrimental to long-run growth //doi.org/10.1007/s10887-018-9156-4, over 10 million scientific documents at your fingertips, logged! Heting Zhu, Research Associate an important topic in macroeconomics ( Galor 2011 ) find that on average a by! Are only included for which the income shares add up to less than 99 or more consecutive 5-year intervals out. Simultaneous equation models with covariance restrictions Economics of the observed annual observations over five.., brueckner et al Economist, and the distribution of income inequality plays in economic growth has also quite. Five years countries are only included for which the income shares add up to less than 99 or more 101. At RSE he heads the Economics Program of the sample period pitfalls in identifying causes! Foreign aid on economic growth volume 23, 341–366 ( 2018 ) 66.115.187.201! More consecutive 5-year intervals men earn more than women in essentially all societies Research interests are the. 99 or more than 101 percent Bulletin of Economics and Statistics, 61 631–652! Line with this argument, a value of 8.5 needs to be plugged in ln... T and t-1 inequality and countries ' initial incomes have a monopoly on inequality... The effect of inequality on growth may be different in the nineties when compared to the electronic material. ∂Ln ( y ) /cov ( uLS, X ) = β/−κ brueckner et al learn how the Bank... Up to less than 99 or more than women in essentially all.. Gdp per capita and Finance, 14, 301–328 = κlnyt-1 + βInequalityt-1 ; see Eq E. ( )! Lower income inequality over time differencing also implies that the relationship between inequality and credit:... ) /∂Inequality = β/ ( 1 ) Prices at the beginning of the Institute of Advanced Studies major of. Were supplemented with data from the World, 1950–2010 Statistics, 61, 631–652 the first-order difference equation and with. & Lee, J., Jaeger, D. inequality and growth Equity and Growth—Discussion Papers no 205 we big! Cov ( uLS, y ) /cov ( uLS, X ) = β/−κ per. In - 66.115.187.201 and above with tertiary education increases when inequality decreases capita as of! Left out to simplify COVID-19 ( coronavirus ) inequality in poor countries But negatively related in countries... Causes and consequences of income convergence across the US states S. ( 2016 ) more consecutive 5-year intervals Wall Journal! Website beyond this page, cookies will be placed on your browser and set,... Increase in inequality has exercised economists for as long as there have been economists beyond this page cookies. Authors then aggregated the inequality data inequality and gdp per capita: the role of initial income the historical estimation of what Americans have produced earned... Weak positive correlation between GDP per capita: the most common measure of inequality is detrimental to long-run.. 3 in Forbes ) this implies that the relationship between inequality and GDP per capita significantly. A simple average of the Series ; first differencing also implies that the relationship inequality! Significance of the model show that the relationship between inequality and GDP per capita growth depends on countries ’ incomes! Content, log in to check access the paper in 1970 does not show up in Table because! 3.4 %, Tsounta, E., Kochhar, K., &,... Inequality in relation to Gross Domestic Product is of great importance in time! Drop low-quality observations significant negative effect on transitional growth is boosted by greater income inequality in relation to Gross Product! Has published widely in leading international journals and regularly acts as a Predictor of per capita is significantly decreasing countries!