Economic Growth and Equality Goes Together

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 (CC) craftivist collective / FlickrThe International Monetary Fund has just published the paper “Redistribution, Inequality, and Growth.” According to the study, economies with high levels of inequality suffered lower growth than countries that distributed incomes more evenly.

That equality seems to drive higher and more sustainable growth does not in itself support efforts to redistribute. In particular, inequality may impede growth because it calls forth efforts to redistribute that themselves undercut growth. The conclusion to the study is that we cannot separate issues of economic growth and stability from equality.

While considerable controversy surrounds these issues, we should not jump to the conclusion that the treatment for inequality may be worse for growth than the disease itself.

This paper is the first to take advantage of a recently compiled cross-country dataset that distinguishes market (before taxes and transfers) inequality from net (after taxes and transfers) inequality and allows authors to calculate redistributive transfers for a large number of country-year observations.

The study’s main findings are that:

1. More unequal societies tend to redistribute more. It is thus important in understanding the growth-inequality relationship to distinguish between market and net inequality.

2. Lower net inequality is robustly correlated with faster and more durable growth, for a given level of redistribution.

3. Redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth.

Read the Redistribution, Inequality, and Growth paper here.