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. (2003). In High Income Countries inequality has a significant negative effect on transitional growth. (2017). Problems with GDP Per Capita as Measurement of Quality of Life. 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. (2012). World development indicators. Journal of Development Economics, 104, 184–198. Subscription will auto renew annually. 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. In economies where average income is high, a reduction in inequality (such that rich families are made poorer but can still pay the cost of education) makes some of the relatively poorer families (that before redistribution were unable to pay the cost of education) send their children to university. When analyzed in each of the periods we observe its downward trend. - 66.115.187.201. Inequality and growth: The neglected time dimension. This follows from solving the first-order difference equation and differentiating with respect to inequality, i.e. Introduction. Google Scholar. 1 Introduction. Kuznets approach. Galor, O., & Zeira, J. Brueckner, M., Lederman, D. Inequality and economic growth: the role of initial income. On the simultaneity problem in the aid and growth debate. Correspondence to In D. W. K. Andrews (Ed. The financial market imperfections arise because of moral hazard, i.e. Learn how the World Bank Group is helping countries with COVID-19 (coronavirus). From 1971 to 1982, it was 3.4%. Brueckner, M. (2013). Development Research Seminar Series in Kuala Lumpur, Environmental and Social Policies for Projects. However, disparities in health, education, and bargaining power within marriage tend to be larger in countries with low GDP per capita… Figure S1 in the online appendix plots the bivariate relationship between inequality and residual inequality for the different Ginis used in the estimates shown in Table 1. Most South and East Asian economies grew at higher per capita rates since early 1970 along with rise in income inequality over time. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. However, there are indications that effect of inequality on growth may be different in the nineties when compared to the seventies. We estimate a panel model where the relationship between inequality and GDP per capita depends on countries' initial incomes. This paper estimates a panel model in which the relationship between inequality and gross domestic product per capita growth depends on countries' initial incomes. Penn world table version 7.1. A comparative study of unit root tests with panel data and a new simple test. This paper investigates whether the relationship between income inequality and growth changes over time. Annals of Economics and Finance, 14, 301–328. The relevant equation is lnyt = γlnyt-1 + βInequalityt-1; see Eq. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. 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 Castelló-Climent, A. For the median country in the world, that in the year 2015 had a 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%. World Bank Policy Research Working Paper 7494. 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. Immediate online access to all issues from 2019. 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. If you continue to navigate this website beyond this page, cookies will be placed on your browser. The findings, interpretations, and conclusions of this paper do not necessarily reflect the views of the World Bank, the Executive Directors of the World Bank or the governments they represent. Brueckner et al. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. Galor (2011) find that in the United States during 1880–1940 land inequality had a significant negative effect on educational expenditures. By Ana Maria Santacreu, Economist, and Heting Zhu, Research Associate. 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). (2) in Forbes where control variables have been left out to simplify. 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. The role that income inequality plays in economic growth has also received quite a bit of attention in policy circles and the press recently. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. Econometrica, 65, 557–586. Rich countries tend to have lower income inequality than developing countries. different measures of income distribution, deliver a consistent message: initial inequality is detrimental to long-run growth. Easterly, W. (2007). Article Despite this, the central government continues to hold the view that a higher rate of economic growth will alleviate poverty. The Role of Income Inequality as a Predictor of Per Capita Gross Domestic Product. (2002). Wealth inequality and credit markets: Empirical evidence from three industrialized countries. is available as well as survey-years for which the income shares add up to less than 99 or more than 101 percent. For a country with income of 5000USD in 1970, a value of 8.5 needs to be plugged in for ln(y1970). Learn how the World Bank Group is helping countries with COVID-19 (coronavirus). Estimates of the panel model show that differences in initial incomes have a substantial effect on the relationship between income inequality and economic growth. 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. The subject of income inequality has exercised economists for as long as there have been economists. The case for restricting fiscal policy discretion. Because |γ| < 1, a permanent increase in inequality has a permanent effect on the level of GDP per capita. Inequality and GDP Per Capita: The Role of Initial Income In the Galor and Zeira model there are: (1) fixed costs to human capital accumulation; (2) financial market imperfections. 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). Learn more about Institutional subscriptions. PubMed Google Scholar. Journal of Economic Growth From 1959 to 1970 the real grow this 3.26%―the real GDP per capita would have doubled in 21 years if this rate had been preserve. (2015) document that national income—through its effect on human capital—has a negative impact on inequality. Education and economic growth. 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. 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. Each of the Institute of Advanced Studies effect is calculated as the sum of coefficients on t. Inference for econometric models ( pp income at the University of Pennsylvania econometric theory for identifying simultaneous equation models zero! ( 1987 ) and Statistics, 61, 631–652 to help the World Bank Group helping. 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