Polarization, Politics, and Property Rights: Links between Inequality and Growth

Abstract

One strand of research argues that polarized societies find it difficult to reach political consensus on appropriate responses to crises. Another strand focuses on redistribution, asking whether income inequality stifles growth by increasing political incentives to redistribute. Which is right?

Most efforts to trace the effects of income inequality on growth have focused on redistribution. However, empirical investigation has not substantiated either the positive association of income inequality with redistribution or the negative association of redistribution with economic growth.

Keefer and Knack analyze the effects of inequality in the broader context of social polarization. They argue that social polarization, whether rooted in income inequality or in ethnic tension, makes large changes in current policies (including those guaranteeing the security of contract and property rights) more likely under a wide range of institutional arrangements. The resulting uncertainties in the policy and contractual environment hinder growth.

They find strong empirical support for both parts of this argument.

The policy implications of their argument are quite distinct from those of arguments that inequality reduces growth by increasing pressures for redistribution.

If redistributive policies per se were to blame for the low growth resulting from inequality, governments that seek to mitigate income inequality must inevitably confront a tradeoff between equity and growth.

If, on the other hand, the insecurity of property rights slows growth in unequal or otherwise polarized societies, governments that commit over the long run to particular redistributive policies incur less risk of slowing economic growth. Fiscal redistribution that reduces inequality may actually increase growth by reducing the risks of political uncertainty.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to understand the interplay of institutions and economic development. The authors may be contacted at [e-mail] or [e-mail].