Inequality and Growth in a Panel of Countries

“We have benefited from comments by Gary Becker, Francesco Caselli, Mark Chaves, Ed Glaeser, Charles Harper, Jason Hwang, Laurence Iannaccone, Greg Mankiw, James Montgomery, Thomas Osang, Robert Woodberry, and participants in several seminars and classes.”

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“…1981); by raising saving and investment if rich people save a higher fraction of their income (Kaldor, 1957); and, perhaps especially relevant for poor countries, by allowing at least a few individuals to accumulate the minimum needed to start businesses and get a good education (Barro, 2000).”

“44 Allowing λ to vary also implies that the causal effects of inequality will vary with financial development (which is how Barro (2000) explains his results). The OLS coefficient is therefore a weighted average of different parameters, where the weights are the country-specific contributions to the overall variance i…”

“Prominent contributions from the empirical side include Alesina and Perotti (1996), Perotti (1996), Barro (2000), Forbes (2000), Piketty (2003), Piketty and Saez (2003), Roine and Waldenström (2008), and Sylwester (2000). segments of the population have increased across all regions and income…”

“Finally, trade openness – as proxied by the ratio of exports and imports to GDP – tends to make the distribution of income more unequal, as found by Barro (2000).”

“First, we contribute to the endogenous growth literature (Romer, 1990; Aghion and Howitt, 1992; Aghion et al ., 2014; Barro, 2000 who studies the link between overall growth and inequality measured by the Gini coefficient, Forbes, 2000 or Banerjee and Duflo, 2003).”

“19. Studies examining shorter periods, such as decades, tend to find weaker relationships between income inequality and growth ( Barro, 2000 ).”

“2 Measures of income inequality in growth regressions have been used by Persson and Tabellini (1994), Clarke (1995), Perotti (1996), Barro (2000), Banerjee and Du¯o (2000) or Forbes (2000).”

“Unobserved time-specific effects are controlled by 1 Islam (1995) and Barro (2000) 6 using time-period fixed effects.”

“…as suggested by Sokoloff and Engerman (2000), resource abundance can lead to increased inequality and this could harm growth through lower savings or investment rates, lower quality of institutions, creditmarket imperfections, distorting redistribution, or socio-political unrest (Barro, 2000).”

“In the analysis of Barro (2000), however, inequality appears to encourage growth only within rich countries, and to slow it down in poorer countries.”

“labor-saving tendency attenuates and more egalitarian forces, such as an increase in education (and so in the supply of skilled labor), are allowed to have their impact (for recent revisitings of Kuznets‟ law, see Aghion and Howitt, 1997; Barro, 2000; Grimalda and Vivarelli, 2004).”

“S. inequalitypanels arenotas sensitive to the use of anFE estimator as international panels (Barro 2000; Li, Squire, andZou1998;Quah 2001).”

“3 Empirical papers tend to justify this ambiguity through the quality of data (Deininger and Squire, 1996), the inconsistent nature of inequality measures (Knowles, 2001), the type of inequality index (Székely, 2003), the econometric method (Forbes, 2000) or the set of countries considered and their degree of developm…”

“On the other hand, estimation methods exploiting the cross-sectional variation in the data tend to find a negative relationship (e.g. Alesina and Rodrik 1994; Persson and Tabellini 1994; Deininger and Squire 1998; Barro 2000).”

“Secondary Education Barro and Lee (2000) Stock of years of secondary education.”

“Our human capital variables are obtained from Barro and Lee’s (2001) dataset. Our measures of human capital (educational) inequality are taken from Castelló and Doménech (2002), and our measure of income inequality, from Deininger and Squire (1996).”

“There is some evidence of a negative interaction effect between openness to trade and initial GDP per capita in regressions for inequality across countries (Barro, 2000; Ravallion, 2001).”

“The paper adds to the recent revival of interest in the factors shaping the distributions income across countries (Bourguignon and Morrisson, 1990, 1998; Li, Squire, and Zou, 1998; Barro, 2000; Alderson and Nielsen, 2002; Breen and García Peñalosa, 2004).”

“However, another potentially serious data problem is that virtually all of the previous empirical work examining the effect of the distribution of income/expenditure on economic growth (e.g. Alesina and Rodrik, 1994; Clarke, 1995; Birdsall, Ross and Sabot, 1995; Perotti, 1996; Deininger and Squire, 1998; Forbes, 2000;…”

“See for the theoretical underpinnings of this view Aghion, Caroli, and Garcia-Penalosa (1999), and Ben- abou (1996); for some empirical refinements, see Barro (2001) and Birdsall et al. (1995).”

“We start by deriving the formal relationship between output and inequality, given that conditions (6) and (7) hold.”

“11 Alessina and Rodrik (1994) and Perotti (1996) find a negative relationship, Li and Zhou (1998) and Forbes (2000) find a positive relationship, and Barro (2000) and Lopez (2004a) find no relationship.”

“…the level of GDP per capita as well as its square, controlling for other variables and special characteristics or conditions in different countries [Barro, 2000] Equation (2) below is a generic model that is used to test the inverted ‘U’ hypothesis. where G stands for Gini coefficient, y for the…”

“Studies include notably Fakin and Crombrugghe (1997) for the public sector, Gupta and Verhoeven (2001) for education and health in Africa, Clements (2002) for education in Europe, St.”

“In line with the results of Barro (2000), openness to trade enters positively and significantly in all equations except column (5).”

“Greater income inequality is associated with higher population growth, which in turn retards the rate of economic progress (Barro, 2000).”

“For example, a number of papers have found that increased openness increases summary measures of inequality, at least in low-income countries (Barro (2000), Lundberg and Squire (2003), Milanovic (2003)).”

“Much-cited papers by Barro (2000) and Forbes (2000) examined this question using the Deninger and Squire (1996) data.”

“The two exceptions where its null can be rejected are Barro (2000) and Lundberg and Squire (2003). Second, there is conflicting evidence regarding the second hypothesis. Calderon and Chong (2001) find that greater openness does reduce inequality in developing countries.”

“For instance, in a panel of countries Barro (2000) finds little association between income inequality and economic growth for a broad number of countries.”

“…that countries with higher income inequality grew more slowly (70 countries, Alesina & Rodrik, 1994; 9 countries, Persson & Tabellini, 1994; 118 countries, Easterly, 2007; but see Forbes, 2000; Barro, 2000; Banerjee & Duflo, 2003 for alternate interpretations of the inequality–growth relationship).”

“However, as discussed at the beginning of this paper, Barro [5] reports a positive correlation between income inequality and growth among rich countries, but a negative correlation for poor countries.”

“3 induce the poor to engage in disruptive activities such as crime and riots, creating social unrest and anxiety [13].”

“If one accepts the findings of Dollar and Kraay (2004) that trade 3 Examples include Bourguignon and Morisson (1990), Edwards (1997), Li et al., (1998), Barro (2000), Dollar and Kraay (2002, 2004), Lundberg and Squire (2003), Milanovic (2004).”

“While finding a positive effect, Barro (2000), correlation at all or find inconclusive evidence of any correlation between inequality and economic growth (see Charles-Coll, 2013).”

“Note , however , that Barro ( 2000 ) obtains a positive coefficient for rich countries only after including an additional explanatory variable for fertility .”

“Barro (2000) argues that in particular less developed countries tend to have a lot of measurement error in national accounts and other data.”

“Source: Robert Barro and Jong-Wha Lee (2000); version of 25 March 2005.”

“Although economists such as Barro (2000) and Easterly (2007) have found statistically that more trade openness indeed leads to more income inequality, other empirical studies have disputed the idea that trade openness causes or exacerbates income inequality (Dollar & Kraay 2004, Lee & Vivarelli…”

“…more democratic countries, better law enforcement, and greater financial development are associated with a more equal distribution of income, while a more segmented labour market is correlated with greater inequality; see Barro (2000), Bourguignon and Morrisson (1998) and Li, Squire and Zou (1998).”

“But some empirical evidence suggests that not all policies have this feature (Barro 2000, Lundberg and Squire 2003, Lopez 2004), and some may force policy makers to face a trade off between faster growth and increasing inequality. 2 Specifically, Ravallion (1997) interacts the growth rate with one minus the initial Gi…”

“Most of the previous studies on income inequality in the development economics literature have focused on country-level income inequality (e.g., Barro, 2000; Castells-Quintana & Larrú, 2015; Gustafsson & Johansson, 1999; Roine, Vlachos, & Waldenstrom, 2009).”

“5 The paper by Barro (1999) is one of the only to follow the earlier literature by estimating the growth elasticity of the income share of the poorest 20%.”

“Barro (2000) considers the effects of different levels of education on income inequality, and finds that secondary education is negatively associated with inequality while tertiary education is positively correlated with inequality.”

“Barro (2000), using the Deininger and Squire data, obtains significant coefficients on log(GDP) and its square, but finds that they explain only a small fraction of the international variation.”

“find that the sign of the effect depends on the choice of openness indicator; and while Higgins and Williamson find that openness is negatively associated with inequality, Barro finds a positive association. The results do not seem to be robust to either equation specification or to the choice of openness indicator. F…”

“4 In Table 3, column (3), we drop the lagged level of the commodity export price index and nd a similar result for the change in the index.”

“Barro (2000) finds inverse correlation between inequality in income and economic growth in the case of poor countries, but a positive relationship for rich economies.”

“Barro (2000) and Li and Zou (2002) investigated the relationship between financial development and income inequality with the battery of other variables.”

“Barro (1991, 2000) has pioneered cross-country regressions of the determinants of aggregate investment.”

“In any case it is desirable to develop a framework which allows for identification of the growth-inequality relationship over all possible time horizons.”