Inequality is bad for income growth of the poor (but not for that of the rich)
Branko Milanovic, Roy van der Weide 29 November 2014
A breakthrough in understanding the link between growth and inequality came from ‘unpacking’ inequality – looking at inequality measures for different segments of the population rather than just an aggregate measure. This column presents novel research that also ‘unpacks’ growth, investigating the impact of inequality on growth for different groups across the income distribution. Inequality toward the lower end of the distribution hinders growth for the poor, but not for the rich.
Concerns about income inequality are ethical and political as well as economic. Ethically, rising inequality – particularly that in of favour capital owners who do not labour for their income – is troubling. Politically, conflation of the rich and the powerful undermines democracy and the ‘background institutions’ that Rawls considered essential for a well-ordered liberal society.1 But for economists, it is the economic problems associated with inequality that are of first-order importance. Among those, none is more important than the effect of inequality on growth.
Poverty and income inequality
Inequality, economic growth, unpacking inequality
Growth, inequality, and social welfare: Cross-country evidence
David Dollar, Tatjana Kleineberg, Aart Kraay 19 November 2014
Concerns about inequality are at the forefront of many policy debates. While inequality has increased in many countries over the past few decades, in others it has decreased. This column uses data from 117 countries over the past four decades to investigate the importance of such changes in inequality, as well as of overall economic growth. Whereas inequality changes in most countries have been small, differences in overall growth performance have been large. Policymakers should therefore be careful not to undermine growth in the quest for greater equality.
Concerns about inequality are at the forefront of many policy debates today. From speeches by US President Barack Obama to the bestselling book Capital in the Twenty-First Century by Thomas Piketty, it is hard to escape the view that rising inequality poses major challenges in advanced economies. In the developing world too, much has been written about the adverse effects of high and rising inequality on the pace of poverty reduction.
Poverty and income inequality
Inequality, social welfare, economic growth
Restoring financial stability with economic growth
James Boughton 15 September 2014
The international financial system is not working fine and reforms of regional and global institutions are much needed. This column discusses some of the transformations that the IMF could implement in order to keep pace with the changes in the world economy. One problem for the credibility of the IMF is the G20 in its current design and organisation. Institutional reforms, however, should be combined with advances in economic policy in order to promote economic growth and financial stability.
No one would argue seriously any longer that the international financial system is working just fine. When the politicians and central bankers who govern the International Monetary Fund and the World Bank gather in Washington this October, much of the talk will be about the refusal of the US Congress to pass legislation that would reform the IMF.
Global governance International finance
economic growth, financial stability, institutions, IMF, G20
Determinants of the growth and sovereign debt correlation
Matthijs Lof, Tuomas Malinen 25 May 2014
Public debt and economic growth are historically negatively correlated. This column discusses new evidence that rejects the debt-to-growth causality. After estimating the effects between debt and growth in both directions, there is no evidence that high indebtedness suppresses economic growth. The effect of growth on debt is the main driver of the negative correlation.
Since the outbreak of the financial crisis, the relationship between debt and growth has been an issue of heated debate among both academics and policymakers. Reinhart and Rogoff (2010a) showed a negative correlation between sovereign debt and economic growth, and argued that countries could be confronted with a considerable decline in their growth potential after the debt-to-GDP ratio exceeds 90%.
economic growth, public debt
UK macroeconomists see potential for higher growth: results of the first Centre for Macroeconomics survey
Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan 14 April 2014
Fears that the financial crisis will have a significant negative impact on long-term UK economic growth are unfounded, according to a majority of the UK macroeconomics profession surveyed by the Centre for Macroeconomics (CFM). What’s more, the inaugural CFM survey, summarised in this column, indicates some optimism about the UK’s immediate capacity for higher growth: while roughly half of the respondents share the views of the Office of Budget Responsibility, the other half is substantially more optimistic about the capacity for the economy to recover.
The Centre for Macroeconomics (CFM) – a partnership between the University of Cambridge, the London School of Economics (LSE), University College London (UCL), the Bank of England and the National Institute of Economic and Social Research (NIESR) – is today publishing the results of a new monthly survey to inform the public about the views held by leading UK based macroeconomists on important questions about macroeconomics and public policy.1 The survey will shed light on the extent to which there is agreement or disagreement on these questions among our panel o
Europe's nations and regions Global crisis
economic growth, UK, output gap
Efficient retail payments: An untapped source for reviving growth in Europe?
Iftekhar Hasan, Tuomas Takalo 24 January 2014
Efficient retail payments are associated not only with lower direct costs but also with indirect benefits, and ultimately – with enhanced economic growth. This column presents research on different retail payment habits in the Eurozone. A correlation exists between the forms of payment in a country and its recent economic fortune. There are a number of methods to promote more efficient payments. The biggest challenge to increase the efficiency of retail payments in Europe is the heavy regulation and barriers to entry of new payment methods.
Retail payments are an inherent part of most adults’ daily life in Europe. But promotion of efficient retail payments is seldom an inherent part of European growth agendas. It should be.
Microeconomic regulation Productivity and Innovation
Europe, economic growth, retail, efficiency
Growing out of corruption
Jie Bai, Seema Jayachandran, Edmund J. Malesky, Benjamin Olken 22 November 2013
Eliminating corruption is a central policy goal of policymakers around the globe. It is known that corruption is a barrier to economic development because it increases the costs and risk of business activity, and deters investment. This column discusses a new study analysing the opposite causal relationship – the effect of economic growth on corruption. Both theoretical and empirical evidence show that economic growth causes the amount of corruption to fall.
Eradicating corruption ranks among the central policy concerns of economic development practitioners around the globe. Then-World Bank President James Wolfenson made the case for combatting corruption in a 1996 speech now known as the “Cancer of Corruption” address. In it, he spelled out a theoretical mechanism connecting corruption and poverty:
Development Poverty and income inequality
Corruption, developing countries, economic growth, bribes
Are the golden years for Latin America over?
Ignacio Munyo, Ernesto Talvi 07 November 2013
In recent years, the growth rates of Latin American countries have been cooling-off in comparison to the period of 2004-08. This column argues that the cooling-off is not due to a change in external factors because these have remained favourable. Persistent economic growth can be achieved by internal transformations. It cannot be sustained solely by the external conditions.
Latin American growth is cooling –off sharply. In contrast with the 6.6% average growth rates prevailing between September 2003 and September 2008 – the pre-Lehman-crisis “Golden Years” for the region – LAC-7 GDP growth rates in 2012-13 are decelerating significantly, and reverting back to their mediocre historical average displayed over the last 20 years (see Figure 1).1 Moreover, growth rates are cooling off in almost every country in the region.
Figure 1. GDP growth in Latin America (LAC-7, real GDP growth)
Development Global economy
economic growth, Latin America
Reduced policy uncertainty and the Japanese economy
Masayuki Morikawa 02 November 2013
Reduced policy uncertainty can contribute to a country’s economic growth. This column highlights the negative influence of policy uncertainty and political instability on the growth of Japan. A survey shows that international trade and tax polices pose the greatest uncertainty on Japanese companies. The column concludes with a discussion of the mechanism via which uncertainty affects corporate behavior.
While the effects of the 'three arrows' of the Japanese Abenomics policy mix – bold monetary easing, flexible fiscal policy, and the growth strategy –have attracted worldwide attention, reduced policy uncertainty is also expected to contribute to the country’s economic growth by stimulating long-term investments in the private sector.
Institutions and economics
economic growth, Japan, uncertainty
Finance and growth: Too much of a good thing?
Thorsten Beck 27 October 2013
A well-functioning financial system is critical for economic growth. However, some studies find a negative relationship between the two at high levels of financial development. This column discusses why this is the case and suggests some policy implications. It argues that reforms that refocus the financial system on enterprise credit and on internalising the downside risks can be beneficial.
Over the past 20 years, economists have accumulated a substantial body of empirical evidence that financial sector deepening is a critical part of the economic development process. This shows a well-functioning financial system is a conditio sine qua non for modern market economies to flourish. What started with simple cross-country regressions, as used by King and Levine (1993), has developed into a large literature using an array of different techniques to look beyond correlation and controlling for biases arising from endogeneity and omitted variables.
economic growth, financial development