Inequality and Growth

Question 1

What are the 3 Stages of the Kuznets curve ?

Answer 1

1) Low levels of per capita income and low levels of inequality
2) As per-capita income increases, inequality increases
3) As per-capita income increases, inequality decreases

Question 2

Explain Stage 1 of Kuznets

Answer 2

Economy at subsistence level. No Difference in productivity between jobs. Most of income is spent on not saved. Lack of dynamism.

Question 3

Explain Stage 2 of Kuznets

Answer 3

Introduction of new technologies to certain industries lead to higher productivity in these sectors. Causes higher returns to these skilled labour. Higher returns lead to some having access to income yielding assets.

Question 4

Explain Stage 3 of Kuznets

Answer 4

Economy more dynamic and mobile, other sectors receive technological improvements, increasing their productivity and wages. Population moves into the more productive service sector. More groups have access to income yielding assets.

Question 5

What are the Implications of Kuznets?

Answer 5

‘Trickle-down’ effect means no need for intervention as it will eventually improve standard of living of poor. Development is naturally uneven and sequential

Question 6

Who supported Kuznets?

Answer 6

Ahluwalia (1976)

Question 7

Cautions of Kuznets?

Answer 7

1) Sensitive to different measures of inequality
2) Sensitive to functional form
3) Captures between country differences (cross sectional) rather than within-country (panel data)

Question 8

What did Barrow (2000/2008) argue in relation to Kuznets?

Answer 8

1) Some evidence of inverted curve but KC does not explain most variations in inequality across time/countries
2) Regional Dummies have large explanatory power

Question 9

Through what channels does inequality impact growth?

Answer 9

1) Credit Market imperfections
2) Political Economy/Fiscal Policy
3) Social Conflict
4) Savings Rate

Question 10

How do Credit market imperfections impact Growth?

Answer 10

Markets unable to screen borrowers well enough, they impose restrictions such as high rates and collaterals and a minimum loan size. This restricts investment in human capital and entrepreneurial activities. Unequal distribution means less people with the capital. Picketty (2006), more wealth passed down generations the lower social mobility.

Question 11

What is the Old Political story?

Answer 11

As inequality increases, majority of people are not benefitting from growth thus vote for redistribution. This decreases growth through taxes - savings rate

Question 12

What is the new political story?

Answer 12

The rich have more influence on political events and demand NO redistribution so growth increases

Question 13

Social Conflict impact on growth?

Answer 13

Violence/disruption reduces output and productivity as: people aren’t working; resources spent on defensive activities; conflict effects property rights; political uncertainty

Question 14

How does the savings rate impact inequality and growth?

Answer 14

1) If there is an increasing marginal savings rate, positive relationship between inequality and growth
2) If decreasing marginal savings rate, negative relationship between inequality and growth

Question 15

What were Neves and Silva’s (2014) challenges to earlier studies?

Answer 15

1) Quality of data
2) Wealth should be the focus NOT income
3) Lack of data comparability across countries/time (unit of analysis, income vs expenditure)
4) Panel Data vs Cross-sectional

Question 16

What did Neves and Silva find for the social-political link?

Answer 16

The link of inequality causing social conflict and that causing slower growth is found to work through property rights.

Question 17

What did Neves and Silva find for the fiscal policy channel?

Answer 17

Mixed evidence that inequality leads to fiscal redistribution. No evidence to suggest the fiscal distribution leads to a decrease in growth.

Question 18

What did Neves and Silva find for credit market imperfections?

Answer 18

Evidence for both inequality causing a decrease in investment in physical and human capital and for that in turn to lead to restricting growth.

Question 19

What did Neves and Silva find for savings rate?

Answer 19

Little/no evidence

Question 20

What criticisms of the Kuznets curve did Picketty (2006) underline?

Answer 20

1) The data was of poor quality - didn’t compose into labour and capital income. Cross-sectional data gives inaccurate results - Panel data is better.
2) No data before 1900s so can’t confirm whether inequality was on the rise or not.
3) Rural-Urban migration had little impact on wages

Question 21

How did Picketty (2006) explain the rise and fall of inequality?

Answer 21

1) The fall in inequality occurred due to capital market shocks such as the great depression and the world wars alongside progressive taxation
2) The rise in inequality since the 1980s was due to educational institutions not keeping up the supply of skilled labour, a fall in the real minimum wage, inefficient bargaining power for the top salaries and a socially high level of tolerance for inequality