Since then, inequality

has become a hot topic, and presently focuses strongly on income inequality and its increase in a number of developed countries. In light of this renewed interest on the issue of inequality, it seems worth reevaluating the approach and recommendations of the WDR with reference to developing countries. In particular, what should we make of its emphasis on the inequality of opportunities as an impediment to economic development at a time when attention is focused on the inequality of income and income redistribution instruments?

The remainder of this paper is organized as follows. The sections 2 and provide short reviews of theoretical and empirical research on the topic,

respectively, emphasizing in particular the heterogeneity of the inequality concept used in that literature. Section 4

discusses the contribution, main messages, and limitations of the WDR 2006, as well as its innovative focus on the inequality of opportunities. Section 5 lists various priorities for further research on the positive relationship between inequality and development.

The final section concludes. Inequality of what?”

in the theoretical literature on growth and inequality

This section does not seek to duplicate existing surveys of the growth- inequality literature.

3

Rather, it provides a brief review of this literature,

highlighting the fact that it often refers to different

inequality concepts and,

because of this, may sometimes lack consistency. Some contributions refer to vertical income inequality, without always providing a clear distinction between market or disposable income. Others refer to horizontal inequality among ethnic groups or genders, to wealth inequality, or to inequality in terms of access to creditor education. These different approaches correspond to different aspects of inequality. Yet, to understand how inequality affects economic

growth and development, it is necessary to understand the role played by these various dimensions and the channels through which they weigh upon the pace and the structure of growth.

The theoretical literature on the link between inequality and growth has grown rapidly during the last two decades or so. In particular, the rising level of income inequality in several developed countries has awakened the interest of the economic profession on this issue. However, this paper focuses on the perspective of developing countries. In what follows, the main channels through which various aspects of inequality have been thought to possibly affect the development of such countries will be considered in turn. See Aghion

*et al. *[1999]. A more recent survey is that of Ehrhart [2009], and fora greater emphasis

on empirical literature, see Neves and Silva [2013] or Ostry

*et al. *[2014].

636 ———

*Revisiting the Debate on Inequality and Economic Development**REP *125 (5) septembre-octobre 2015

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2.1. Saving propensity differential and the Kaldorian mechanism

It is somewhat improper to refer to this channel of transmission of inequality to growth as “Kaldorian” because the causality is opposite to that of Kaldor’s

original contribution, where it runs from growth to the functional distribution of income between capital and labor.

4

In fact, the modern literature essentially refers to the idea in Kaldor’s work that capitalists save more than workers. Furthermore, this difference in saving propensity between capital and labor income is taken to be equivalent to there being a higher propensity to save among richer people. Given this argument, and if savings determine investment, more inequality should be associated with faster growth. Then, an important empirical issue is whether it is valid to extend the saving propensity differential between capital and labor income at the macro level to individual incomes. If a substantial part of savings arises

from undistributed profits, the observed level of inequality among households will have a negligible impact on savings, investment, and growth. It would then be better to consider aggregate factor shares than inequality measures.

This potential negative impact of too much inequality,

via the saving propensity gap, generalizes to the effect of progressive redistribution upon the rate of growth. Transferring income from the top to the bottom of the distribution through taxation may reduce the overall propensity to save of the economy through the preceding mechanism. More directly, however,

income taxation may reduce the rate of return to capital and the incentives to save and invest. This is the traditional argument for the existence of the tradeoff between inequality and growth. Economies that redistribute more must be less unequal than others, but they may not grow as fast. This hypothesis has been the focus of an important part of the empirical literature on inequality and growth. Endogenous redistribution

Redistribution

may also be endogenous, and a response precisely to too much inequality in market incomes. This provides another channel through which income inequality may affect economic growth. If redistribution does reduce investment incentives and entrepreneurship, inequality may indeed be responsible for slower rather than faster growth. The difference with the preceding case is that the relationship now is between the inequality of market incomes and growth, rather than disposable incomes (

*i.e.*, after taxes and transfers) and growth. The same can be said of Piketty [2014], which considers steady states where both the growth rate and the rate of return on wealth are exogenous. Thus, the causality again runs from growth to distribution, rather than in the opposite direction.

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