Revisiting the debate on inequality and economic

Figure 1. Wealth transfer and efficiency

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Revisiting the debate on inequality and development

Figure 1. Wealth transfer and efficiency
François Bourguignon ——————————————————————————————————————————————— 639
REP 125 (5) septembre-octobre 2015
Document téléchargé depuis - Biblio SHS - - - 26/04/2016 h. © Dalloz

empirical literature, is unjustified, except to the extent that the latter maybe considered as a good proxy of the former. Second, note that the preceding argument does not refer to the degree of inequality of the distribution.
Instead, it states that some transfer of wealth from rich to less rich people,
and not necessarily the poorest, would improve economic efficiency and growth. This maybe the case with a relatively egalitarian distribution or in a very inegalitarian distribution of wealth, as long as there is some threshold under which the credit market constraints bind on investment behavior.
Third, this being the case, what matters is the unequal access to credit,
whatever the cause of that inequality, rather than the inequality of wealth.
For instance, it might well be that unequal access to credit within a population is caused by ethnic or gender discrimination. Inequality of “opportunities”
The case of an unequal access to credit can actually be generalized to many other areas. Barring some people in the population from undertaking an activity that would be profitable for both them and society necessarily generates economic inefficiency and, possibly, slower growth. More could be produced in the economy without this particular type of inequality.
One can think of many examples of such an inefficient inequality in the income-generating opportunities open to people. Unequal access to quality primary or higher education because families are liquidity constrained would be a special case of the credit rationing case, and a highly relevant one. Children in low-income households may fail to receive quality education or gain access to an upper secondary or university education, even though they maybe more talented than others. Discrimination in the labor market by ethnicity or gender reduces the incentives of those discriminated against to participate in the labor force or to invest in further training.
Unequal access to justice weakens property rights and discourages land improvements in agriculture or entrepreneurship in other sectors. Unequal access to healthcare maybe responsible for some irreversible damage inhuman capital. Unequal access to formal insurance generates poverty traps.
The list goes on.
Of course, in all these cases, the limited access to some facility, service, or income enhancement activity is correlated with the standard of living of people or their family. Thus, there maybe some relationship between the distribution of standards of living and this kind of inequality. However, the important point is that the relationship maybe a very loose one. For instance, it is well known that the same distribution of individual earnings maybe consistent with various degrees of gender discrimination, including no discrimination at all.
Note too that the inequality in access to good quality or well-paid jobs for people with different gender or ethnicity is often referred to as horizontal inequality as opposed to vertical inequality The former refers to people who are otherwise identical, but cannot generate the same income. The ——— Revisiting the Debate on Inequality and Economic Development
REP 125 (5) septembre-octobre 2015
Document téléchargé depuis - Biblio SHS - - - 26/04/2016 h. © Dalloz

latter simply considers the position of people along the income or earnings ladder, while ignoring their characteristics. Yet, horizontal inequality clearly matters for economic growth, as is evident from recent literature on gender inequality and economic development, or from the discussion of the role of ethnic fragmentation in explaining cross-country differences in growth rates in the developing world and, in particular, in sub-Saharan Africa 2.5. The demand side
The theoretical literature on development tends to emphasize the supply side of the economy and the availability of productive resources as the factor limiting growth. This maybe justified in aggregate terms, but it must be recognized that the structure of demand may affect both the sectoral structure of the production side and the overall growth rate of the economy.
Not all goods are traded with the rest of the world, and foreign demand may impose constraints on the development of national economies, either through the volume or, more likely, the price of exports. If this is the case,
then domestic demand and, therefore, the income distribution, which determines the size of aggregate demand and its composition by type of goods,
have a role to play. For example, China’s outward oriented development strategy is affected by the slowing down of demand in developed countries;
reorienting this strategy toward the domestic market may require appropriate measures to betaken on the income distribution front.
Oddly enough, the literature that links inequality and development through the consumption channel is somewhat limited. A major paper was that by Murphy et al. [1989]. Even though abundantly cited, few researchers seem to have followed in their footsteps. The basic idea in their paper is both simple and powerful. Ina developing economy that exports some basic commodity, an unequal distribution of the income derived from that commodity generates a limited demand for manufactured mass consumption goods because only a minority of the population can afford to buy such goods. If there are economies of scale in the production of those goods,
domestic producers would be unable to compete with imports without heavy protection, which would make the goods more expensive and further limit the demand. In contrast, a more equal distribution of export revenue would expand the demand and possibly allow domestic producers to take advantage of scale economies in the production of these goods. Thus,
industrialization maybe incompatible with an initial specialization in the export of natural resources or raw agricultural products and a high degree of inequality in the distribution of the resulting income. Of course, such an argument applies to an economy of a size above some minimum for economies of scale to be relevant. It also requires frictions in foreign markets. With no transport costs and no trade barriers of any kind, demand would never be a constraint in the industrialization of the economy. On gender, seethe recent survey by Kabeer and Natali [2013], and on ethnic fractiona- lization, see Alesina and La Ferrara [2005].

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