Much of the current debate over the relationship between growth and income
distribution misses the point, argue Mattias Lundberg and Lyn Squire
writing in the latest issue of the Economic Journal. The search for a
mechanistic relationship between inequality and income ignores the possibility
that some policies affect both outcomes.
Lundberg and Squire’s research examines the joint determinants of economic
growth and income distribution, and finds that they are not mutually exclusive.
Some policies involve trade-offs between growth and inequality.
Thus, a policy-maker who uses the results from the independent examination
of growth to drive policy runs the risk of adversely affecting income
distribution. Conversely, policies that are intended to promote equality may
have deleterious consequences for growth. For example, the researchers find
evidence that increasing openness promotes growth while increasing
inequality; and that greater civil liberties lead to greater equity, but slower
growth.
This still gives policy-makers ample tools to use to pursue both goals of faster
growth and greater equality. Using combinations of policies, one can achieve
almost any desired combination of growth and income distribution.
For example, expanded education and more equitable land distribution will at
least improve income distribution and may also enhance growth. Thus, growth
could be improved without worsening income distribution by increasing
openness and simultaneously making land distribution more equitable. This
combination could nearly double the mean growth rate as well as improving
income distribution by 4%. These are of course very large policy shifts, but
more modest policy changes could also yield improvements in both growth
and distribution.
The researchers find no variable that has a unique impact on either growth or
income distribution. This implies that conventional analysis, which looks at
each outcome independently, fails in two respects.
First, it ignores the evidence that policies designed to improve one outcome
will probably also influence the other; and second, to the extent that
independent analyses are under-identified, they can't even be entirely certain
what they are estimating.
Future research on growth and inequality should focus on the joint
determinants of growth and income distribution, and especially those that are
amenable to policy, the researchers conclude.
ENDS
Notes for Editors: ‘The Simultaneous Evolution of Growth and Inequality’ by
Mattias Lundberg and Lyn Squire is published in the April 2003 issue of the
Economic Journal.
The authors are in the Development Economics Research Group at the World
Bank (http://www.worldbank.org/aids-econ/; http://www.iaen.org/;
http://www.econ.worldbank.org/).
For Further Information: contact Mattias Lundberg on +1-202-473-2442
(email: mlundberg@worldbank.org); or RES Media Consultant Romesh
Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).