The world has become healthier and wealthier since 1960, as measured by life expectancy and GDP per capita. In this column Angus Deaton introduces his new book and argues that the world is indeed a better place than it used to be, albeit with big setbacks, and that progress opens up vast inequalities.
Inequality has the potential to undermine growth. However, greater redistribution requires higher tax rates, which reduce incentives to work and save. Moreover, the evidence that inequality is bad for growth might simply reflect the fact that more unequal societies choose to redistribute more, and those efforts are antithetical to growth. This column presents evidence from a new dataset on pre- and post-tax inequality. The authors find that income equality is protective of growth, and that redistributive transfers on average have little if any direct adverse impact on growth.
The GNI is often regarded as the best indicator of a country’s living standards, but it does not record unilateral transfers – most importantly remittances – which are amongst the largest types of income inflows to developing countries. For many developing countries GNDI is significantly larger than GNI, from 3% for India to 75% for Liberia. This column argues that GNDI is preferable, since GNI masks heterogeneity in purchasing power.
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Claessens, 18 April 2014