Relative deprivation,wealth inequality and economic growth

This paper presents an endogenous growth model where utility depends on relative deprivation as well as consumption. It is shown that a negative relationship exists between wealth inequality and equilibrium growth rate. In addition, if the concern for relative deprivation is strong enough, instantaneous utility decreases while aggregate income increases.      

Inequality,unemployment, and endogenous growth in a political economy with a minimum wage

This paper presents development of an endogenous growth model with heterogeneous households and political determination of the minimum wage. We investigate the interaction of inequality, unemployment, and economic growth. First, the arguments in this paper show that a positive correlation exists between inequality and unemployment, Second, the interaction between inequality and economic growth is shown to be a positive relation if high inequality pertains in a society. It is a negative relation if low inequality pertains.      

Wealth inequality,democracy and economic freedom

Using a novel panel data set from the Credit Suisse on the top wealth shares for 46 sample countries spanning 2000–2014, this paper empirically investigates to what extent wealth inequality influences economic freedom and whether this relationship is affected by the level of democracy. Economic freedom is measured by the Fraser Institute's economic freedom summary index as well as its five major sub-indices, such as government size, property rights, access to sound money, freedom to trade, and regulations. Wealth inequality is measured by the top wealth shares. Trade union density is used as an instrument for wealth inequality. Empirical results suggest that the rising wealth inequality significantly hampers overall economic freedom, property rights protection, freedom to trade, soundness of money and regulatory environment. Furthermore, this negative effect of wealth inequality is reinforced at a lower level of democracy. These findings are robust to alternative measures of wealth inequality, economic freedom, treatment for endogeneity, and model specification.     

Infrastructural change and secular economic development

Long-term economic development is determined by changes to the infrastructure, especially material and non-material infrastructural networks that link agents in different locations. The infrastructure consists of the slowly changing, collective arena that supports production, exchange, and consumption, such as the built environment, transport networks, and institutions. In the short run the infrastructure can be regarded as fixed. Changes to the infrastructure are under normal conditions small enough to be disregarded by producers and consumers. With the creation of a critical link of a network, there will however be a revolutionary restructuring of the arena. Critical links are here defined as additions to infrastructural networks that create opportunities for new information and transport flows between previously unconnected regions. Such a revolutionary restructuring of infrastructural networks has been called a logistical revolution. Certain institutional pre-conditions are necessary for a logistical revolution, while the creation of a critical link is both a necessary and a sufficient condition. This paper discusses the three logistical revolutions that occurred in the 13th century, around 1600, and in the 19th century, which each had crucial similarities with the current “information revolution.”     

Development outcomes,resource abundance,and the transmission through inequality

The paper studies the effect of resource abundance on human development in light of two complementary hypotheses: (i) resource abundance increases the inequality of income distribution within a country and (ii) higher income inequality reduces human development. The estimation of a system of equations provides support to both hypotheses. In addition, results suggest that resource abundance might also affect human development by reducing the quality of institutions. However, while statistically significant, this effect is quantitatively small. Finally, there is evidence of a strong, negative direct effect of resource abundance on human development after controlling for inequality, institutional quality, and the level of per-capita income.     

Frontiers and sustainable economic development

Exploiting new resource “frontiers,” such as agricultural land and mineral reserves, is a fundamental feature of economic development in poor economies. Yet frontier-based development is symptomatic of a pattern of economy-wide resource exploitation in developing economies that: (a) generates little additional economic rents, and (b) what rents are generated are not being reinvested in other sectors. Such development is inherently unsustainable. The following paper explains this phenomenon, and provides evidence that long-run expansion of agricultural land and oil and natural gas proved reserves across poor economies is associated with lower levels of real income per capita. The paper proposes a frontier expansion hypothesis to explain why the structural economic dependence of these economies on frontier land expansion and resource exploitation is not conducive to sustained long-run growth. The key to sustainable economic development in poor economies will be improving the economic integration between frontier and other sectors of the economy, targeting policies to improved resource management in frontier areas and overcoming problems of corruption and rent-seeking in resource sectors.      

Income inequality and economic growth

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.     

Reliving the 1950s: the big push, poverty traps, and takeoffs in economic development

The classic narrative of economic development—poor countries are caught in poverty traps, out of which they need a Big Push involving increased investment, leading to a takeoff in per capita income—has been very influential in foreign aid debates since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce. Poverty traps in the sense of zero growth for low-income countries are rejected by the data in the whole period 1950–2001 and for most sub-periods. The poorest quintile also does not have significant negative growth of the relative income ratio to the world’s richest country over 1950–2001, nor is relative growth for the lowest quintile significantly different than other quintiles. The claim that “well-governed poor nations” are caught in poverty traps is rejected by simple regressions that control for both initial income and quality of government (instrumenting for the latter). The idea of the takeoff also does not garner much support in the data. Takeoffs are rare in the data, most plausibly limited to the Asian success stories. Even then, the takeoffs are not associated with aid, investment, or education spending as the standard narrative would imply.     

Informal sector, income inequality and economic development

This paper addresses - with the help of numerical simulations - some of the issues relating to income distribution in the context of development of an economy with an informal sector and migration of both low- and high-skilled workers from the rural to the urban area. A major aim has been to see under what conditions we do or do not get an inverted U-shaped curve of income distribution. The paper finds that the tendency always is for the Gini coefficient to rise and then decline. However, once it starts declining, it need not continuously decline; it may rise, then decline, then rise again and indeed rise above the previous peak before starting to decline again and may well end at the end of the simulation at a higher value than at the start. Any case for the redistribution of income is seen to be much stronger at the later stages of development that at earlier stages, even though at later stages, Gini coefficient may be lower than at earlier stages. The policy implications of the findings are considered.     

Agriculture and economic development in sub-Saharan Africa and Asia

This paper is a comparative study of the role of agriculturein economic development in sub-Saharan Africa and Asia. Popularnotions of economic duality and agricultural squeeze in sub-SaharanAfrica are re-examined, and new explanations in terms of agrarianstructures and resource availabilities are put forward to accountfor the apparent economic duality in that continent. Comparisonwith surplus labour economies of Asia highlights the constraintsposed by the prevailing agrarian structures for capital accumulationand industrialisation in post-colonial sub-Saharan Africa. Policyconclusions from this new perspective are contrasted with theconventional policies focusing on price reform and market liberalisation.     

The long term impact of economic development in developed countries on developing countries since 1820

The linkages between the economic development of developed and developing countries are analyzed historically. The analysis is divided into epochs, distinguished by global trade regimes and by common characteristics of long term economic growth. The break throughs in long distance transport technology which occured during the industrial revolution created a global economy in which the rythm of economic activity in developing economies became linked to that of developed economies. The major transmission mechanisms were international trade, international migration and international capital flows. Exports were the main engine of growth in developing countries. But the effects of export expansion varied across countries. The speed of transmission of the industrial revolution to developing countries depended on their institutional readiness; countries with most developed capitalist institutions in factor markets were the first to develop. The extent of diffusion of the benefits of growth from export expansion within developing countries also depended on the nature of their institutions, both economic and political. Finally, policies with respect to international trade, investment and agriculture were also critical to the speed and diffusion of economic development.The research underlying this paper is the result of a twentyfive year collaboration with Professor Cynthia Taft Morris. She is indebted to the World Bank for financing the research in this paper as part of the background studies for the World Development Report 1991. She is also indebted to Sherman Robinson for his comments.     

When does growth trickle down to the poor? The Indian case

A theoretical analysis and several econometric tests have beenundertaken to examine whether the trickle down effect took placein rural India over a long time period. We found little evidenceto suggest that the trickle down effect had occurred at all;our analysis suggests that the emergence of capital-labour substitutionwas primarily responsible for preventing growth from reducingpoverty. The decline in poverty and a higher growth rate thattook place during the late 1970s and 1980s were largely a resultof government anti-poverty measures teamed with the more equitabledistribution of credit and inputs to smaller and marginal farmers.     

The choice of technology in economic development

The impact of capital accumulation on job creation is an important and interesting issue in economic development. This model provides a general-equilibrium framework for studying technology choice with unemployment in a developing economy based on micro-foundations. Unemployment in the urban sector results from the existence of efficiency wages. Manufacturing firms engage in oligopolistic competition and choose technologies to maximise profits. A more advanced technology uses more capital and less labour. In the steady state, an increase in the amount of capital induces firms to choose more advanced technologies and the wage rate increases. While a higher capital stock always induces firms to choose more advanced technologies, urban unemployment rate may decrease and agricultural sector employment may increase.     

Finance,inequality and the poor

Financial development disproportionately boosts incomes of the poorest quintile and reduces income inequality. About 40% of the long-run impact of financial development on the income growth of the poorest quintile is the result of reductions in income inequality, while 60% is due to the impact of financial development on aggregate economic growth. Furthermore, financial development is associated with a drop in the fraction of the population living on less than $ 1 a day, a result which holds when conditioning on average growth. These findings emphasize the importance of the financial system for the poor.      

Real exchange rate levels and economic development: theoretical analysis and econometric evidence

According to the development approach to exchange rates, competitivecurrencies have been a key factor in most East and SoutheastAsian successful growth strategies. There is also today an importantempirical literature that relates overvaluations to low percapita growth rates. While the econometric literature on thisissue is relatively rich, theoretical analysis of channels throughwhich real exchange rate levels could affect economic developmentare very scarce. This paper intends to contribute to the debateby bringing more theoretical elements and providing new econometricevidence to the connections between real exchange rate levelsand development.     

Effects of monetary and government spending policy on economic inequality

Using detailed micro-level income and expenditure data, we study the effects of monetary and government spending policy shocks on income and expenditure inequality in the US from 1990 to 2018. We find that expansionary monetary and government spending policy shocks systematically decrease income, disposable income and expenditure inequality. There is evidence of time variation on the effects and monetary policy and transfer payment shocks. Various impulse responses suggest that the impacts of the policy shocks increase during and after the Great Recession. The responses of income and expenditures of households at different percentiles suggest that expansionary monetary and government spending policy have a larger positive impact on households with low income and expenditures relative to those at the top of the distribution. We do not find evidence of the significant impact of Quantitative Easing policies on income inequality, however, expenditure inequality appear to increase due to the policies.     

Foreign Direct Investment, inequality, and growth

This paper examines the interactions between Foreign Direct Investment (FDI), inequality, and growth, both from an empirical and a theoretical point of view. Using a panel of 119 developing countries, we observe that FDI promotes both inequality and growth, and tends to reduce the share of agriculture to GDP in the recipient country. We then set up a growth model of a dual economy in which the traditional (agricultural) sector uses a diminishing returns technology, while FDI is the engine of growth in the modern (industrial) sector. The main predictions of the model are consistent with the stylized facts observed in the data.     

Distributive politics and economic growth: the Markovian Stackelberg solution

Summary. We generalize the result of Alesina and Rodrik (1994) by showing that their static solution is also a time consistent Stackelberg solution of a differential game between the government and the median voter.Received: 11 June 2001, Revised: 7 February 2003, JEL Classification Numbers: O15, O40, E61, C73.We would like to thank Claus Peter Ortlieb, Nikolaus A. Siegfried, and two anonymous referees for useful comments. The first version of this work was written while Holger Strulik was Marie Curie Research Fellow at the Department of Applied Economics, University of Cambridge, U.K. A research grant of the European Commission is gratefully acknowledged. Correspondence to: H. Strulik     

Symbolic values, occupational choice, and economic development

Channeling human resources into occupations with high social productivity has historically been a key to economic prosperity. Occupational choices are not only driven by the material rewards associated with the various occupations, but also driven by the esteem that they confer. We propose a model of endogenous growth in which occupations carry a symbolic value that makes them more or less attractive; the evolution of symbolic values is endogenously determined by purposive transmission of value systems within families. The model sheds light on the interaction between cultural and economic development and identifies circumstances under which value systems matter for long-run growth. It shows the possibility of culturally determined poverty traps and offers a framework for thinking about the transition from traditional to modern values.