Revisiting the debate on inequality and economic

croissance – redistribution

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Revisiting the debate on inequality and development

croissance – redistribution
Classification JEL : II, O, O, O15
1. Introduction
There are two sides to the issue of the relationship between inequality and development. One side focuses on the distribution of the benefits of development and the capacity of development to effectively reduce poverty. The other side focuses on how the distribution of economic resources may affect the pace and structure of development.
The first side of the issue, namely who benefits from development, centers around Simon Kuznets famous hypothesis, according to which income inequality tends to increase in the first stage of development, and then decreases beyond some threshold. This hypothesis motivated many studies in the sand the s. On the one hand, it provided an explanation for the mechanisms that determine the distributional consequences of economic growth. On the other hand, it allowed us to test whether the hypothesis of an inverted-U, or Kuznets curve between inequality and average income per capita could be justified empirically. As it turns out, there seems to be no empirical evidence of a systematic relationship between the level of development (e.g., as measured by GDP per capita) and income inequality
(e.g., as measured by the Gini coefficient. The recent increase in inequality in developed countries may support this conclusion, as well as demonstrate the complexity of the multiple mechanisms and policies that determine the evolution of inequality.
The other side of the issue of the inequality-development relationship has attracted much attention over the last 20 years or so, even though the modern discussion on the topic dates back to Kaldor [1955]. He observed that if capitalists saved more than the workers, a faster rate of growth was associated with a higher share of profit. In the s, renewed interest in the theory and empirics of economic growth led to various alternative views on whether and how inequality could affect the rate of economic growth. These views departed somewhat from the pure macroeconomic functional distri-
634 ——— Revisiting the Debate on Inequality and Economic Development
REP 125 (5) septembre-octobre 2015
Document téléchargé depuis - Biblio SHS - - - 26/04/2016 h. © Dalloz

bution framework in classical, neoclassical, and Keynesian (i.e., Kaldor’s contribution) economics. From a theoretical perspective, the prevailing belief included the existence of a tradeoff between the equality of the distribution of economic resources and economic efficiency. However, many authors showed that inequality could actually cause inefficiency and slower growth through various channels, including market imperfections, endogenous redistribution, and political economy mechanisms. From an empirical perspective, the growth regression wave of the s generated a flurry of econometric tests of the effect of the initial Gini coefficient of income distribution on economic growth during some period. Heterogeneous results were obtained, although a slight majority favored a negative relationship.
Despite the considerable work and energy expended by the economic profession on this matter, there are few conclusions on whether inequality has a positive or negative effect on economic growth and development, or what the policy implications of the effect might be. Of course, equality maybe seen as an objective worth pursuing per se, for ethical reasons. Even so,
however, it seems important to know something about the economic cost of reducing inequality. Is the cost substantial, or perhaps even prohibitive, as some claim Alternatively, are there situations in which the objectives of equality and economic growth are complementary?
The theme of the 2006 World Development Report (WDR) published by the
World Bank was Equity and Development This was probably the first major attempt at answering the preceding questions with a policy focus.
Interestingly, the report used the word equity rather than equality or
“inequality.” This distinction was conceptual, not rhetorical. An important contribution of the report was to emphasize the ambiguity and, often, the confusion associated with the concept of inequality in the debate on inequality and development. Inline with the theoretical contributions in this area, the main message of the report was that inequality in terms of opportunities rather than economic outcomes can hinder economic efficiency and growth. Thus, the distribution of income, which had been the exclusive focus of empirical analyses, should be seen more as a consequence of how opportunities are distributed in the population and an imperfect marker of the inequality of opportunities than as the single target of policies aimed at generating equity, economic efficiency, and faster growth.
This report was published 10 years ago, under my supervision as the then
Chief Economist of the World Bank. While it was certainly not the first time the issue of inequality and development was being brought to the forefront in the development community, the WDR 2006 followed along period of neglect. For instance, it appeared more than 30 years after the influential
“Redistribution with Growth volume edited by H. Chenery [1974]. During this period, the reflection had focused more on absolute poverty reduction and aggregate growth than on inequality per se. The report was also conceptually innovative in that it considered not only the intrinsic value of equity, but also its instrumental role in economic growth and development. Throughout this paper, income distribution or income inequality refers to either income proper or consumption expenditure, as distribution data in developing countries cover one or the other.

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