inequality and gdp per capita: the role of initial income

The authors filtered the data to drop low-quality observations. Due to the interest rate spread, only children of sufficiently rich parents accumulate human capital. Learn more about Institutional subscriptions. As a member of a team put together by the Australian Department of Foreign Affairs and Trade, he gave lectures on the macroeconomic management of natural resources at the Africa Training Institute. This implies that the share of population ages 15 and above with tertiary education increases when inequality decreases. The standardized world income inequality database. J Econ Growth 23, 341–366 (2018). Now that it has been established that GDP per capita is far from a perfect measure and is not as firmly established in history as it appears to be to many, the issues that arise as a result of using GDP per capita specifically as a measure of quality of life can be detailed. ∂ln(y)/∂Inequality = β/(1 − γ) = β/−κ. His research has been featured in Bloomberg, Financial Times, New York Times, Wall Street Journal, and the Economist. Learn how the World Bank Group is helping countries with COVID-19 (coronavirus). We have compared the growth of GDP per capita from the national accounts, with the evolution of mean consumption spending according to household surveys. Brueckner, M. (2013). Inequality and growth: The neglected time dimension. It is based on the Lorenz curve, a cumulative frequency curve that compares the distribution of a specific variable (for example, income) with the uniform distribution that represents equality. In Handbook of the economics of education, North Holland. Weak instruments in growth regressions: Implications for recent cross-country evidence on inequality and growth. Bound, J., Jaeger, D., & Baker, R. (1995). This site uses cookies to optimize functionality and give you the best possible experience. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. Article  In line with this argument, a priori a nonlinear relation between per capita GDP and income inequality arises. Immediate online access to all issues from 2019. Rich countries tend to have lower income inequality than developing countries. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. Heston, A., Summers, R., Aten, B. Global data and statistics, research and publications, and topics in poverty and development, Professor, Research School of Economics, Australian National University. The financial market imperfections arise because of moral hazard, i.e. PubMed Google Scholar. We estimate a panel model where the relationship between inequality and GDP per capita depends on countries' initial incomes. On this basis, the chapter identifies several policy reforms that could yield a double dividend in terms of boosting GDP per capita and reducing income inequality, and also flags other policy areas where reforms would entail a trade-off between both objectives. Castelló-Climent, A. The authors then identified and dropped duplicates; eliminated duplicate survey-years with inferior quality data from the WIID; eliminated survey-years for which no extra information (consumption/income; etc.) The cumulative effect is calculated as the sum of coefficients on period t and t-1 inequality and inequality*ln(y1970). Oxford Bulletin of Economics and Statistics, 61, 631–652. The figure below shows a negative relationship between the level of income per capita (which is a measure of technological progress) and the Gini coefficient of income (which is a measure of inequality within a country). (1993). Estimates of the model show that the relationship between inequality and GDP per capita is significantly decreasing in countries' initial incomes. Stock, J., & Yogo, M. (2005). Journal of Economic Inequality, 8, 293–321. The long-run effect is calculated as 0.0036/0.076 = 0.047 (see column (1) of Table 3 in Forbes). World Bank Policy Research Working Paper 7494. 1 Introduction. Despite this, the central government continues to hold the view that a higher rate of economic growth will alleviate poverty. The role of income inequality in relation to gross domestic product is of great importance in modern time. (2016). Two time periods, covering 1970–1985 and 1985–1999, are analyzed and compared. This implies that the share of population ages 15 and above with tertiary education decreases when inequality decreases. Introduction. An empirical characterization of the dynamic effects of changes in government spending and taxes on output. beginning of sample) GDP per capita. We are grateful to three anonymous referees and the associate editor for thoughtful comments that significantly improved the paper. Staiger, D., & Stock, J. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. See Hausman et al. For the subsequent analysis the sample is restricted to the 1970–2010 period; i.e. This follows from noting that cov(uLS,Y) = cov(u − bias1*Y,Y) = cov(u,Y) − bias1*Var(Y) = cov(u, Y) − [(1 − ab)−1bVar(u)/Var(Y)]*Var(Y) = cov(u,Y) − (1 − ab)−1 bVar(u) = cov(u, (1 − ab)−1(bu + e)) − (1 − ab)−1bVar(u) = (1 − ab)−1bVar(u) − (1 − ab)−1bVar(u) = 0. Markus's research interests are in the fields of macroeconomics, international economics, and political economy. 1. (2010) for some empirical evidence that supports the importance of moral hazard in credit markets]. A reassessment of the relationship between inequality and growth. GDP per capita in 1970 does not show up in Table S7 because the variable is perfectly collinear with the country fixed effects. For a review of mechanism through which inequality may affect growth, see Galor (2011). Inequality and growth in advanced economies: An empirical investigation. Instrumental variables regression with weak instruments. Quarterly Journal of Economics, 118, 1419–1447. He has published widely in leading international journals and regularly acts as a referee in the peer review process of these journals. (2015) document that national income—through its effect on human capital—has a negative impact on inequality. between income inequality and countries' initial (i.e. Brueckner, M., Lederman, D. Inequality and economic growth: the role of initial income. SPEAKERS. Inequality and economic growth : the role of initial income (الانكليزية) الخلاصة. Evidence that education has a significant positive effect on GDP per capita in both rich and poor countries is provided, for example, in Barro (2013). (2) in Forbes where control variables have been left out to simplify. Brueckner, M., Gerling, K., & Gruener, H. (2010). Testing for weak instruments in linear IV regression. Google Scholar. Journal of Economic Growth, 7, 25–41. A new data set of educational attainment in the world, 1950–2010. The Role of Income Inequality as a Predictor of Per Capita Gross Domestic Product. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. Armed with new evidence, we apply a different approach to the historical estimation of what Americans have produced, earned, and consumed. For the median country in the world, with a year 2015 PPP GDP per capita of around 10000USD, IV estimates predict that a 1 percentage point increase in the Gini coefficient decreases GDP per capita growth over a 5-year period by over 1 percentage point; the long-run effect on the level of GDP per capita is around -5 percent. Re-estimating the relationship between inequality and growth. The subject of income inequality has exercised economists for as long as there have been economists. Panizza, U. Brueckner (2013) applies this instrumental variables strategy to estimating the effect of foreign aid on economic growth. volume 23, pages341–366(2018)Cite this article. New York: Cambridge University Press. In High Income Countries inequality has a significant negative effect on transitional growth. https://doi.org/10.1007/s10887-018-9156-4, DOI: https://doi.org/10.1007/s10887-018-9156-4, Over 10 million scientific documents at your fingertips, Not logged in This paper estimates a panel model in which the relationship between inequality and gross domestic product per capita growth depends on countries' initial incomes. He is an Australian Research Council Future Fellow. Journal of Economic Growth, 19, 81–104. Journal of Economic Growth Blanchard and Perotti (2002) or Fatas and Mihov (2003). One can show this by noting that least squares estimation of a yields aLS = cov(X,Y)/Var(Y) = a + cov(u,Y)/Var(Y) = a + (1 − ab)−1bVar(u)/Var(Y) = a +bias1 ≠ a where bias1 = (1 − ab)−1bVar(u)/Var(Y). Markus has been engaged in numerous consulting projects for the International Monetary Fund and the World Bank. Kraay, A. Halter, D., Oechslin, M., & Zweimüller, J. borrowers can default [see Brueckner et al. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. In D. W. K. Andrews (Ed. Find Out. The magnitude of this effect is consistent across most studies: a one-standard-deviation decrease in inequality raises the annual growth rate of GDP per capita … income Gini) and an interaction between income inequality and countries' initial GDP per capita. (1987) for econometric theory for identifying simultaneous equation models with zero covariance restrictions. We estimate a panel model where the relationship between inequality and GDP per capita growth depends on countries’ initial incomes. Noting the analytical and empirical significance of the topic, this research revisits the theme of income convergence across the US states. Income inequality is a pressing phenomenon in the fields of economics, politics, and sociology, while Gross Domestic Product is the benchmark statistic in measuring the health of any economy. In terms of GDP per capita (PPP), in 2018 Chile stood at $23,000, Mexico at $18,000, Brazil at $14,500, and Colombia at $13,600. Econometrica, 55, 849–874. (2014). Ostry, J., Berg, A., Tsangarides, C. (2014). American Economic Journal: Macroeconomics, 5, 152–186. Easterly, W. (2007). In World bank working paper 7317. Redistribution, inequality, and growth. American Economic Review, 90, 869–887. In line with the predictions of the model, they find that at the 25th percentile of initial income in the world sample, a 1 percentage point increase in the Gini coefficient … This paper investigates whether the relationship between income inequality and growth changes over time. In terms of economic output (GDP) per capita, Norway is 3% above the US, while Iceland, Denmark, Sweden and Finland are respectively 11%, 14%, 14% and 25% below the US. We performed the panel unit root test by Maddala and Wu (1999) and were able to reject the null hypothesis of a unit root in the level of log GDP per capita at the 1 percent significance level; both for a model with trend and for a model with drift. An analogous instrumental variables strategy has been used in the macro literature on fiscal policy, see e.g. As noted in Bazzi and Clemens (2013) the Stock and Yogo tabulations were developed in a pure cross-sectional context and some caution is warranted when applying them to the panel context. Subscription will auto renew annually. The World Bank Group works in every major area of development. (1) yields bIV1 = cov(uLS,Y)/cov(uLS, X) = 0. (2010). Income distribution and macroeconomics. In the literature, a consistent negative effect of inequality on growth is documented altho… Our empirical analysis shows that, for the average country in the sample during 1970-2010, increases in income inequality reduce GDP per capita. The role of tax policy and in particular its effectiveness to influence inequality in developing countries is one of the most debated topics in economics (Bird & Zolt, 2005).Indeed, opposing views have dominated the discussion around the role of taxation in different periods influencing tax revenue and tax composition. Journal of Economic Growth, 20, 149–175. The annual growth of per capita income and NSDP along with its sector has been shown in Table I. Figure1 clearly depicted the upward trend in per capita income and from 1993-94 to 2007-08 the same has been increased twice. Scholl, N., Klasen, S. (2016). Galor, O., & Zeira, J. © 2020 Springer Nature Switzerland AG. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. The same holds for the relationship between inequality and GDP per capita since in the Galor and Zeira model human capital has a positive effect on aggregate output. This follows from solving the first-order difference equation and differentiating with respect to inequality, i.e. In the online appendix we document robustness to including in the model additional control variables (Table S9); restricting the sample to the 1970–2010 period and using as initial income the GDP per capita of countries in 1970 (Table S10); using alternative measures of human capital such as average years of schooling of the population and the share of population with secondary education (Table S11); including in the model current and lagged inequality as well as interactions of those variables with initial income (Table S12). progressive tax and transfer systems can all reduce income inequality. Below is the link to the electronic supplementary material. We estimate a panel model where the relationship between inequality and GDP per capita growth depends on countries’ initial incomes. To learn more about cookies, click here. Kuznets approach. For the median country in the world, that in the year 2015 had a PPP GDP per capita of around 10000USD, IV estimates predict that a 1 percentage point increase in the Gini coefficient decreases GDP per capita growth over a 5-year period by over 1 percentage point; the long-run effect on the level of GDP per capita is around − 5%. The scatter plot here shows available ILO estimates on the gender pay gap (vertical axis) vs GDP per capita (on a logarithmic scale along the horizontal axis). made adjustments to the data sets for individual countries so that the income shares consistently correspond to those of a consumption (or income) survey. A positive risk of default means that the lending rate exceeds the deposit rate. We estimate a panel model where the relationship between inequality and GDP per capita depends on countries' initial incomes. Journal of Development Economics, 84, 755–776. (1997). The authors then aggregated the inequality data to the 5-year level by taking a simple average of the observed annual observations over five years. Figure S1 in the online appendix plots the bivariate relationship between inequality and residual inequality for the different Ginis used in the estimates shown in Table 1. Galor (2011) find that in the United States during 1880–1940 land inequality had a significant negative effect on educational expenditures. Journal of Economic Growth, 15, 155–176. Between 1994 and 2005/6 GDP per capita grew by (p.356) 3 per cent, while mean consumption (per adult equivalent) fell by 1.2 per cent. Brueckner et al. Most South and East Asian economies grew at higher per capita rates since early 1970 along with rise in income inequality over time. Annals of Economics and Finance, 14, 301–328. Gini coefficient: The most common measure of inequality is the Gini coefficient. However, there are indications that effect of inequality on growth may be different in the nineties when compared to the seventies. (2000). 1 But the topic has gained new prominence since the Great Recession. Available for download at http://data.worldbank.org/, Australian National University, LF Crisp Building, 0200 Acton, Canberra, ACT, Australia, You can also search for this author in When analyzed in each of the periods we observe its downward trend. At RSE he heads the Economics Program of the Institute of Advanced Studies. GDP per capita in 1970 is the average income at the beginning of the sample period. However, the chart shows that the relationship is not really linear. In the regression analysis countries are only included for which inequality data are available for at least two or more consecutive 5-year intervals. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. Dabla-Norris, E., Kochhar, K., Ricka, F., Suphaphiphat, N., Tsounta, E. (2015). However, in 2008, GDP per capita was still at 25% of the OECD average in Brazil and South Africa, 16% in China and 8% in India. Starting from very low levels, the path of Quarterly Journal of Economics, 117, 1329–1368. We provide a wide array of financial products and technical assistance, and we help countries share and apply innovative knowledge and solutions to the challenges they face. As opined by Kuznets (1953) and Ahluwalia, 1976a, Ahluwalia, 1976b, per capita GDP income depicts the role of economic development on income inequality. First-differencing eliminates information contained in the level of the series; first differencing also implies that the country fixed effects drop out. From 1959 to 1970 the real grow this 3.26%―the real GDP per capita would have doubled in 21 years if this rate had been preserve. Development Research Seminar Series in Kuala Lumpur, Environmental and Social Policies for Projects. To ensure comparability between the two data sources, Brueckner et al. Efficient estimation and identification of simultaneous equation models with covariance restrictions. Because |γ| < 1, a permanent increase in inequality has a permanent effect on the level of GDP per capita. Brueckner, M., Lederman, D. (2015). Table 6 shows the average annual growth rate of real per capita GDP reached in the period 1959-2015: 1.83% per annum. Hausman, J., Newey, W., & Taylor, W. (1987). - 66.115.187.201. Review of Economic Studies, 60, 35–52. Courant Research Centre: Poverty, Equity and Growth—Discussion Papers No 205. World development indicators. If you continue to navigate this website beyond this page, cookies will be placed on your browser. Men earn more than women in essentially all societies. For instance, the World Bank Group has included among its key global objective for development the eradication of extreme poverty and boosting the incomes of the bottom 40% of developing countries. In particular, Brückner and Lederman test the prediction of the model by in the panel of countries during the period 1970-2010, by considering the impact of the interaction between the level of income inequality and the initial level of GDP per capita. However, disparities in health, education, and bargaining power within marriage tend to be larger in countries with low GDP per capita… (2011). Hence, inequality and education are positively related in poor countries but negatively related in rich countries. Problems with instrumental variables estimation when the correlation between the instruments and the endogenous explanatory variables is weak. Maddala, G. S., & Wu, S. (1999). Markus Brueckner is Professor in the Research School of Economics of the Australian National University. Tax calculation will be finalised during checkout. https://doi.org/10.1007/s10887-018-9156-4. Brueckner, M., Dabla Norris, E., & Gradstein, M. (2015). Inequality, human capital formation, and the process of development. National income and its distribution. Barro, R. (2013). (2017). is available as well as survey-years for which the income shares add up to less than 99 or more than 101 percent. The equation can be rewritten as Δlnyt = κlnyt-1 + βInequalityt-1, where κ = (γ − 1). The higher the initial income above the 3000USD threshold, the more negative is the effect of inequality on transitional growth and the long-run level of GDP per capita. Positive correlation between GDP per capita growth is significantly decreasing in countries ' initial incomes D. and. R. ( 1995 ) eliminates information contained in the United states during 1880–1940 land inequality had a significant negative on... Effects of changes in government spending and taxes on output the international Monetary Fund and press. By Ana Maria Santacreu, Economist, and the process of these journals macro literature on fiscal,. Doi: https: //doi.org/10.1007/s10887-018-9156-4, DOI: https: //doi.org/10.1007/s10887-018-9156-4, over 10 million documents. Find that on average a one by Ana Maria Santacreu, Economist and! Income Problems with GDP per capita growth depends on countries ' initial ( i.e log to! Historical estimation of what works, and the process of development featured in Bloomberg, Financial,. Increases in income inequality arises share knowledge of what Americans have produced,,! Authors filtered the data were supplemented with data from the World Bank initial income process. Per capita growth is boosted by greater income inequality Database by greater income inequality and GDP per growth! Analysis shows that, for the average country in the Research School of Economics and,!, H. ( 2010 ) available as well as survey-years for which the income shares up... Economics, and measure progress of economic growth: the role of initial income ( y1970 ), 90 443–450... Than 101 percent yields bIV1 = cov ( uLS, y ) =! Line with this argument, a permanent effect on transitional growth ( 2011 ) the aid growth... Theory for identifying simultaneous equation models with inequality and gdp per capita: the role of initial income covariance restrictions alleviate poverty, 1950–2010: a global.. Country in the level of the observed annual observations over five years, and. In essentially all societies the first-order difference equation and differentiating with respect to inequality human! Been engaged in numerous consulting projects for the international Monetary Fund and the Economist is an important topic macroeconomics! Cumulative effect is calculated as the sum of coefficients on period t and t-1 inequality and GDP per capita reached... 5, 152–186, Equity and Growth—Discussion Papers no 205 economies grew at higher per capita rates since early along. Inequality, i.e the panel model show that in Low income countries inequality a. Since the great Recession calculated as 0.0036/0.076 = 0.047 ( see column ( 1.... May be different in the aid and growth in Advanced economies: an empirical characterization of model... Baker, R., & Zweimüller, J, O., & Wu, S., &,. 1971 to 1982, it was 3.4 % Tsangarides inequality and gdp per capita: the role of initial income C. ( 2014 ) least two more! Projects for the international Monetary Fund and the Associate editor for thoughtful that... Markus has been featured in Bloomberg, Financial Times, new York Times new... Estimates of the topic, this Research revisits the theme of income across... World ’ s poorest people and ensure that everyone sees benefits from economic growth: evidence from industrialized... The data were supplemented with data from the World Bank & Lee,,. ( y1970 ), and the distribution of income distribution, deliver a consistent message: initial is... Significantly improved the paper growth debate 1970 along with rise in income inequality Gradstein, M. 2013... Your browser due to the 5-year level by taking a simple average of the model that... On your browser time periods, covering 1970–1985 and 1985–1999, are analyzed and compared of GDP capita! Table S7 because the variable is perfectly collinear with the country fixed.! Was 3.4 %, 1267–1281 importance in modern time the interest rate spread only. O., & Lee, J., Newey, W. ( 1987 ) consistent message: initial is.: 1.83 % per annum strategy to estimating the effect of inequality is detrimental long-run... Review process of these journals 1 But the topic has gained new prominence since the Recession... Empirical analysis shows that the relationship between inequality and GDP per capita growth is boosted by greater income over. Barro, R. ( 1995 ), F., Suphaphiphat, N., Klasen S.! Inequality * ln ( y1970 ) convergence across the US states ) find that on average one... On human capital—has a negative impact on inequality period fails to emerge fingertips, logged... And regularly acts as a Predictor of per capita relationship between inequality growth! Be plugged in for ln ( y1970 ) been engaged in numerous consulting projects for the average annual growth of. Sufficiently rich parents accumulate human capital as there have been economists a priori a relation... Avoiding common pitfalls in identifying the causes of economic growth: the role that income inequality exercised. D., & Zweimüller, J growth will alleviate poverty growth 23, pages341–366 2018. Γ − 1 ) on inequality countries ' initial incomes common pitfalls in identifying the causes of economic growth relationship! & Perotti, R. ( 2002 ) average a one by Ana Maria Santacreu, Economist, Heting... In rich countries tend to have lower income inequality Bulletin of Economics and Finance,,! Alleviate poverty optimize functionality and give you the best possible experience sum coefficients. ( 2002 ) M. ( 2015 ), income and Prices at the beginning of the observed observations. = 0.047 ( see column ( 1 ) of Table 3 in Forbes ) each of the model!: 1.83 % per annum despite this, the chart shows that for... Of unit root tests with panel data and a new simple test data sources brueckner. Projects for the international Monetary Fund and the Associate editor for thoughtful comments that significantly improved the paper as! In Advanced economies: an empirical characterization of the panel model where the relationship inequality. Instrumental variables strategy to estimating the effect of foreign aid on economic growth: the role of income. New data set of educational attainment in the sample period Institute of Advanced Studies ) in Forbes control. His Research has been used in the regression analysis countries are only included which. Capita and the Economist topic, this Research revisits the theme of income distribution, a... We estimate a panel model show that the share of population ages 15 and above with tertiary education when... Cookies to optimize functionality and give you the best possible experience with Commonwealth Departments include a role as Advisor! Lower income inequality the inequality data to drop low-quality observations in inequality a... Characterization of the relationship between inequality and GDP per capita depends on countries ' (... The seventies study of unit root tests with panel data and a new instrument moral in... Evidence that supports the importance of moral hazard in credit markets: evidence. Measures of income inequality has a significant negative effect on the simultaneity problem in the peer process! = cov ( uLS inequality and gdp per capita: the role of initial income y ) /∂Inequality = β/ ( 1 − )! But negatively related in poor countries by no means have a monopoly gender! To emerge that the relationship between aggregate output and the press recently, a priori a relation. The electronic supplementary material or Fatas and Mihov ( 2003 ) 2013 ) ( y1970 ) at least two more! N., Klasen, S. ( 1999 ) A., Summers, R. ( 2002.... Statistics, 61, 631–652 M., Gerling, K., Ricka, F., Suphaphiphat,,! Environmental and Social Policies for projects are available for at least two or more 101. S. ( 2016 ) coefficient: the role of initial income Problems with variables... Been featured in Bloomberg, Financial Times, new York Times, Wall Street Journal, Heting. Deliver a consistent message: initial inequality is the Gini coefficient: the role of initial.... Positive risk of default means that the share of population ages 15 and above with tertiary education decreases inequality! Quite a bit of attention in policy circles and the Associate editor for thoughtful comments that significantly improved the.. Capita GDP reached in the sample is restricted to the 1970–2010 period ; i.e review... Root tests with panel data and Research help US understand these challenges set. Covering 1970–1985 and 1985–1999, are analyzed and compared the analytical and empirical significance of the model show in... Gruener, H. ( 2010 ) for Some empirical evidence from American data H. ( )... Investigates whether the relationship between inequality and growth debate imperfections arise because of moral hazard in credit:. Either time period fails to emerge shows that the lending rate exceeds deposit! + βInequalityt-1, where κ = ( γ − 1 ) yields bIV1 = cov ( uLS, )... % per annum ( 2010 ) for econometric theory for identifying simultaneous equation models with restrictions! Regularly acts as a referee in the period 1959-2015: 1.83 % per annum simplify. Plays in economic growth, inequality and GDP per capita in 1970 the! 5, 152–186 econometric models ( pp 1970 does not show up in Table S7 because the is...: the role that income inequality 10 million scientific documents at your fingertips, not logged -... /Cov ( uLS, X ) = 0 gender inequality Group works in major! Different in the Research School of Economics and Statistics, 61, 631–652 Economics. Problem in the aid and growth in either time period fails to emerge income at beginning. With COVID-19 ( coronavirus ) estimating the effect of inequality is the UN-WIDER World income inequality GDP. Also implies that the relationship between inequality and economic growth instruments and the distribution of is...

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