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Growth, inequality, and social welfare: Cross-country evidence

Dollar, D., Kleineberg, T. & Kraay, A. (2014) “Growth, inequality, and social welfare: Cross-country evidence“, VoxEU Organisation, 19 November.

 

Concerns about inequality are at the forefront of many policy debates. While inequality has increased in many countries over the past few decades, in others it has decreased. This column uses data from 117 countries over the past four decades to investigate the importance of such changes in inequality, as well as of overall economic growth. Whereas inequality changes in most countries have been small, differences in overall growth performance have been large. Policymakers should therefore be careful not to undermine growth in the quest for greater equality.

Concerns about inequality are at the forefront of many policy debates today. From speeches by US President Barack Obama to the bestselling book Capital in the Twenty-First Century by Thomas Piketty, it is hard to escape the view that rising inequality poses major challenges in advanced economies. In the developing world too, much has been written about the adverse effects of high and rising inequality on the pace of poverty reduction. Public opinion surveys suggest that strong majorities of respondents in advanced economies feel that the gap between rich and poor has been rising in recent years (Pew Research Center 2013).

Inequality changes worldwide

These views, no doubt, reflect in part the fact that inequality has indeed been increasing in many countries. In the US over the past four decades, the Gini coefficient of income inequality has risen from around 0.3 to around 0.4. Roughly the same has happened in China, only more rapidly; between 1990 and 2009, the Gini coefficient has increased from 0.32 to 0.42. According to the Atkinson et al.’s data (2011), much of this increase has happened at the upper end of the income distribution.

However, it is also important not to lose sight of the fact that inequality has not increased in other countries, and has declined appreciably in still others. In Atkinson et al.’s data, income shares of the top decile have been stable, or even slightly declining since the mid-20th century in countries such as Germany, France, Switzerland, the Netherlands, and Japan. In Brazil, the Gini coefficient has declined from around 0.6 in the late 1990s to around 0.55 in the late 2000s. More systematically, in a large dataset of changes in inequality over periods at least five years long, in almost half of episodes the Gini coefficient of inequality increases, while in the other half of episodes it decreases.

 

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