Income inequality and growth—does the relationship vary with the income level?

doi:10.1016/j.econlet.2004.03.004

Economics Letters

Volume 84, Issue 3, September 2004, Pages 349-355

https://doi.org/10.1016/j.econlet.2004.03.004 Get rights and content

Abstract

For three different specifications of a cross-country growth model, the coefficient of initial income inequality is remarkably similar for high- and low-income countries, contrary to some recent suggestions in the literature, but varies markedly across models.

Introduction

Does the relationship between income inequality and growth vary according to the level of development? Barro (2000) has provided evidence that inequality is bad for growth in poor countries but good for growth in rich countries. We test this hypothesis in the cross-country growth models of Bleaney and Nishiyama (2002), Sachs and Warner (1997) and Barro (1997).

The paper is organised as follows. Theoretical and data issues are discussed in Section 2. Empirical results appear in Section 3. Section 4 concludes.

Section snippets

Data issues

The most popular single measure of income inequality is the Gini coefficient, which represents the entire distribution of income. The most comprehensive cross-country data on Gini coefficients of which we are aware is WIID (2000). We use version 1.0, the latest version of the database, which was last updated on 12 September 2000. This database incorporates Deininger and Squire's (1996) dataset on income inequality (the Gini coefficients of income distribution). Although the country coverage in

Results

The majority of existing cross-sectional studies of the growth–inequality relationship report negative and significant coefficients for initial income inequality Alesina and Perotti, 1996, Chang and Ram, 2000, Deininger and Squire, 1998, Persson and Tabellini, 1994, but Castelló and Doménech (2002) find a more robust negative relationship using human capital inequality rather than income inequality. Forbes (2000) reports a significant positive coefficient in panel data using fixed effects

Conclusions

Using three recent growth model specifications, we have found no evidence that the sign of the initial income inequality coefficient differs between rich and poor countries in cross-country regressions. This result holds whether growth is measured using international or domestic relative prices, and also when statistically significant variation in other coefficients between rich and poor countries is allowed for. The coefficient does, however, differ significantly between models, which suggests

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Income inequality and growth—does the relationship vary with the income level?

Abstract

Introduction

Section snippets

Data issues

Results

Conclusions

European Economic Review

Journal of Development Economics

Determinants of economic growth: a cross-country empirical study

Inequality and growth in a panel of countries

Journal of Economic Growth

Explaining growth: a contest between models

Journal of Economic Growth

Human capital inequality and economic growth: some new evidence

Economic Journal