Inequality, poverty and growth

The question of inequality has received very little attention from economists over the last two decades. There are subtle ideological and sociological reasons for this neglect, which need not detain us here.²² More significantly, from the perspective of this paper, at a policy level this omission has been justified on the grounds that income distribution for most countries remains stable for long periods. Therefore for short- to medium-term policy analysis, this variable can be assumed to be given and policy makers can concentrate on questions of growth and poverty reduction.²³

²² See Atkinson (1997); Kanbur and Lustig (1999).

²³ See Li et al. (1998).

But this argument has serious limitations, as has been pointed out by Kanbur and Lustig (1999). First, it is incorrect to assume that income inequality remains stable over time. Empirical evidence from a wide range of countries with reliable data for the last decade suggests considerable changes in the Gini coefficient.²⁴ Second, even if the Gini coefficient²⁵ remained stable, the neglect of income distribution would not be a correct approach to policy. This is because actual policy measures to promote growth and poverty reduction have distributional consequences, even in the short run that cannot simply be ignored.²⁶

²⁴ Kanbur and Lustig observe: “one result that becomes immediately apparent is that, while rising inequality is by no means the norm, there have been very sharp upward movements in a number of countries. In 11 countries..., Gini coefficient has increased between five and nine percentage points; in seven countries, between ten and nineteen percentage points; and in two countries, by more than twenty (!) percentage points. These changes occurred in a span of a decade or less. Clearly, monitoring the evolution of the Gini coefficient is no longer as unexciting as ‘watching the grass grow’.” (1999:9)

²⁵ The Gini coefficient is a summary measure of inequality commonly used in economic literature. A value of 1 indicates total or maximum inequality and that of zero, perfect equality. Thus the higher the value of the Gini coefficient, the greater the inequality.

²⁶ The technical argument here is that policy cannot be based simply on a reduced form equation, which neglects an important structural variable. Policy analysis requires either a more comprehensive structural model or, as Kanbur and Lustig (1999) emphasize, nuanced case-by-case analysis.

Turning to the theoretical and empirical controversies on the relationship between inequality and growth, some aspects were examined in a previous subsection. A priori, the relationship between two variables can be modelled in a number of different ways, most of which are plausible. Empirically, the experience of East Asian countries has received a great deal of attention in the literature. These countries have managed to achieve, as seen earlier, historically unprecedented sustained fast growth; they have, however, also evidently enjoyed much more equal income distribution than most. The significant point here is that fast economic growth does not appear to have worsened income distribution; the issue nevertheless remains controversial. As was observed elsewhere (Singh, 1995a), although income distribution may not have become more unequal, there is evidence as well as good reason to suggest that the wealth distribution in these countries has worsened over time. If this hypothesis is confirmed in further work, it has important implications for certain political economy interpretations of East Asian success.