The Dynamic Relationship between Inequality and Sustainable Economic Growth

Hwan-Joo Seo,Young Soo Lee,Hansung Kim

doi:10.3390/su12145740

Hwan-Joo Seo, Young Soo Lee + Show 1 more

Open Access

https://doi.org/10.3390/su12145740

Copy DOI

Abstract

This study empirically tests the effects of income inequality on growth for 43 countries from 1991 to 2014 based on a cumulative growth model. The results show that, first, the estimation results using a reduced equation reveal a positive correlation between the income inequalities of lagging countries and the respective growth gaps with the frontier country. This confirms that the increase in income inequality negatively affects growth. Secondly, a cumulative growth model using 3SLS estimation shows that income inequality has a negative effect only on investment. However, we fail to find correlations between technological innovation and income inequality and between human capital accumulation and income inequality. Considering that investment has a positive impact on productivity, we conclude that income inequality has a negative impact on investment and that the resulting sluggish investment has a negative impact on productivity, which in turn negatively influences growth. Third, contrary to Kaldor and Barro’s prediction, we find that income inequality in developing countries is negatively correlated with growth, particularly for investment. The effects of income inequality on investment are found to be similar in both developed and developing countries. We also find region-specific differences in the paths through which income inequality affects sustainable economic growth.

Highlights

Studies showing that income inequality plays a constructive role in sustainable economic growth and studies showing a negative role seem to reach mutually contradictory conclusions
The estimation results are similar to Model (2); we fail to find that inequality has an impact on technological innovation and human capital accumulation, which can affect a country’s economic growth, but we do find that unequal income distribution has a negative impact on investment in both developed and developing countries
Combined with the first estimate of productivity, we find that the increase in income inequality in South American countries has a negative impact on technological innovation, which in turn has a negative impact on productivity growth

Summary

Introduction

Studies showing that income inequality plays a constructive role in sustainable economic growth (positive theory) and studies showing a negative role (negative theory) seem to reach mutually contradictory conclusions. Looking at the global financial crisis, the worst since the Great Depression of the 1930s, economists have begun to raise questions about Okun’s trade-off between equality and efficiency and have focused on the linkages among income inequality, increased systemic instability, and low economic growth. As a result, they have reached the following conclusions. The model of income inequality we propose in this paper has been developed to consider the possibility of both positive and negative impacts of income inequality on technological innovation, investment, and the accumulation of human capital.

Literature Review

Model: Relation between Income Inequality and Economic Growth

G G proF

Conclusions and Summary