Income Distribution: Effects on Growth and Development

29 Pages Posted: 30 Jul 2007

Date Written: April 16, 2007

Abstract

I review the literature on the effects of inequality on growth and development in the developing world. Two stylized facts emerge from empirical studies: inequality is more likely to harm growth in countries at low levels of income (below about $3200 per capita in 2000 dollars); and it is at high levels of inequality (at or above a Gini coefficient of .45) that a negative association emerges. Between 15 and 40 percent of the developing world's population lives in countries with these characteristics, depending on the inclusion of China, whose level of inequality has recently been measured at almost .45. Theory and evidence suggest that high inequality affects growth: (1) through interaction with incomplete and underdeveloped markets for capital and information; (2) by discouraging the evolution of the economic and political institutions associated with accountable government (which in turn enable a market environment conducive to investment and growth); and (3) by undermining the civic and social life that sustains effective collective decision-making.

Keywords: Income distribution, inequality, poverty, growth, development, institutions

JEL Classification: O11, O15, O43

Suggested Citation

Birdsall, Nancy, Income Distribution: Effects on Growth and Development (April 16, 2007). Center for Global Development Working Paper No. 118. Available at SSRN: https://ssrn.com/abstract=1003252 or http://dx.doi.org/10.2139/ssrn.1003252

Nancy Birdsall (Contact Author)

Center for Global Development ( email )

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