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Saturday, April 09, 2011

Inequality and Economic "Growth Spells"

Reminds me of the inequality curve:

Warning! Inequality May Be Hazardous to Your Growth, by Andrew G. Berg and Jonathan D. Ostry: Many of us have been struck by the huge increase in income inequality in the United States in the past thirty years. ...
Some dismiss inequality and focus instead on overall growth—arguing, in effect, that a rising tide lifts all boats. But assume we have a thousand boats representing all the households in the United States, with boat length proportional to family income. In the late 1970s, the average boat was a 12 foot canoe and the biggest yacht was 250 feet long. Thirty years later, the average boat is a slightly roomier 15 footer, while the biggest yacht, at over 1100 feet, would dwarf the Titanic! When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.
In fact, inequality matters. ... You need look no further than the role it might have played in the historic transformation underway in the Middle East. ...
Some time ago, we became interested in long periods of high growth (“growth spells”) and what keeps them going. The initial thought was that sometimes crises happen when a “growth spell” comes to an end...
We approached the problem ... looking for what might bring long “growth spells” to an end by focusing on factors like political institutions, health and education, macroeconomic instability, debt, trade openness, and so on.
Somewhat to our surprise, income inequality stood out in our analysis as a key driver of the duration of “growth spells”.
We found that high “growth spells” were much more likely to end in countries with less equal income distributions. ... Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a “growth spell”. Inequality is of course not the only thing that matters but, from our analysis, it clearly belongs in the “pantheon” of well-established growth factors...
The upshot? It is a big mistake to separate analyses of growth and income distribution. A rising tide is still critical to lifting all boats. The implication of our analysis is that helping to raise the lowest boats may actually help to keep the tide rising!
The immediate role for policy, however, is less clear. More inequality may shorten growth duration, but poorly designed efforts to reduce inequality could be counterproductive. ... Still, there may be some “win-win” policies...
When there are short-run trade-offs between the effects of policies on growth and income distribution, the evidence in our paper doesn’t in itself say what to do. But our analysis should tilt the balance towards the long-run benefits—including for growth—of reducing inequality. ...

    Posted by on Saturday, April 9, 2011 at 12:42 AM in Economics, Income Distribution | Permalink  Comments (14)

          


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