Income Distribution: Effects on Growth and Development

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. The Center for Global Development is an independent think tank that works to reduce global poverty and inequality through rigorous research and active engagement with the policy community. Use and dissemination of this working paper is encouraged, however reproduced copies may not be used for commercial purposes. Further usage is permitted under the terms of the Creative Commons License. The views expressed are those of the author and should not be attributed to the directors or funders of the Center for Global Development. JEL codes: O11, O15, O43. Income distribution, inequality, poverty, growth, development, institutions