Development Economics Inequality in Growth Models 4/17/2017 Development Economics Inequality in Growth Models Jinjie Cui (Eric) Friedrich Schnitzler Faculty of Economics, University of Warsaw 8th December, 2008 J.Cui & F.Schnitzler 08/12/2008

The planning for today 1. Definition of inequality 6. The Lorenz curve 2. Causes of inequality 7. Perfect inequality - Kuznets curve 3. Evolution of inequality 8. Perfect equality 4. Effects of inequality 9. Properties of the Lorenz curve 5. Mitigating factors for inequality 10. Problems of the Lorenz curve 11. The Gini coefficient 12. Statistics for Gini coefficient 13. Effects of inequality on growth and investment 14. Determinants of inequality J.Cui & F.Schnitzler 08/12/2008

1. What is inequality? Definition: Inequality refers to disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among nations. J.Cui & F.Schnitzler 08/12/2008

2. The causes of inequality The labor market 1).Innate ability 2).Education 3).Globalization Gender, race, and culture Diversity of preferences Development patterns (Kuznets curve) J.Cui & F.Schnitzler 08/12/2008

Kuznets curve J.Cui & F.Schnitzler 08/12/2008

3. Evolution of Inequality Kuznets (1955) curve was accepted through the 1970s as a strong emiprical regularity. Papanek and Kyn (1986) found that Kuznets relation is statisticlly significant but explains little of the variations in inequality across countries or over time. Anand and Kanbur (1993) stated the Kuznets relation had weakened over time. Li, Squire and Zou (1998) argued that the Kuznets curve works better for a cross section of countries at a point in time than for the evolution of inequality over time within countries. Barro (2000) found that Kuznets curve shows up as a clear empirical regularity across countries and over time and that the relationship has not weakened over time. J.Cui & F.Schnitzler 08/12/2008

4. Effects of Inequality Credit-Market Imperfections Political Economy Sociopolitical Unrest Saving Rates J.Cui & F.Schnitzler 08/12/2008

5. Mitigating factors for inequality Public education Progressive taxation Minimum wage Subsidization J.Cui & F.Schnitzler 08/12/2008

6. The Lorenz curve Was developed by Max O. Lorenz Is a graphical representation of the distribution of functions Often used to represent income distribution or other inequality We are using the curve in the most cases for presenting income inequalities J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 9

The Lorenz curve J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 10

The Lorenz curve Every point on the Lorenz curve (red line) represents the income of a given percent of people. For example 60% of all people have only 40 % of the total income J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 11

7. Perfect inequality If we are looking to the blue line we see that in this case, the case of perfect inequality, only 1 people is going to earn 100 % of the total income. J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 12

8. Perfect equality In the case of perfect equality 1% of the people is going to earn 1 % of the total income. ( the green line) J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 13

9. Properties of the Lorenz curve Starts in (0;0) and ends in (1;1) Cannot rise above the line of perfect equaltiy Cannnot sink below the line of perfect inequality Is increasing Is a convex function J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 14

10. Problems of the Lorenz curve The Lorenz curve is just a graphical presentation of facts or distributions. J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 15

11. The Gini coefficient J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 16

The Gini coefficient The Gini coefficient (Gini) is often used as a measure of inequaltity of income distribution or inequaltiy of weath distribution. J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 17

The Gini coefficient Is defined as a ration with values between 0 and 1 A low Gini coefficent indicates a more equal distribution (The space between the “perfect Distribution line” and the “Lorenz Curve” is small) J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 18

12. Statistics for Gini coefficients J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 19

Statistics for Gini coefficients J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 20

Statistics for Gini coefficients (Results) No big changes in the “Gini coefficients” High correlation between the years also we are talking about a time period of 30 years Number of observations is not very high Question : From which countries are the “Gini coefficients” taken ? J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 21

13. Effects of Inequality on Growth and Investment We can say that there is no relation between the general Gini coefficient and the growth rate. (Surprising result BUT ) J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 22

Effects of Inequality on Growth and Investment If we allowed that the Gini coefficient depends on the level of economic development our results are going to change. J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 23

Effects of Inequality on Growth and Investment J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 24

Effects of Inequality on Growth and Investment Now we are going to see the expected influence (-)of the Gini coefficients on the grow rate But what is more interesting is the change in omen by comparing the influence of the Gini coefficient from Countries with a per Capital GDP lower than $2070 or higher than this level J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 25

Effects of Inequality on Growth and Investment We are seeing the expected omen for countries with a lower per capital GDP but a positive influence of inequality for countries with an high per capital GDP. J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 26

J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 27

Effects of Inequality on Growth and Investment Robert J. Barro gives a possible explanation in his paper: “A possible interpretaition of the results involves the idea that credit- market constraints would be more serious in poorer countries. In poor countries, the net effect of inequality on growth may be negative because of the severity of these credit – market problems. (…) In contrast, for rich countries, here credit constraints are less serious, the growth-promoting aspects of inequality max dominate." J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 28

14. Determinants of Inequality J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 29

Take Home sentence “Growth tends to fall with greater inequality when per capita GDP is below around $ 2000 and to rise with inequality when per capita GDP is above $2000.” ( Robert J. Barro “Inequality and growth in a panel of countries” ) J.Cui & F.Schnitzler J.Cui & F.Schnitzler 08/12/2008 08/12/2008 30

Source: Journal: [1] Barro, Robert J. “Inequality and Growth in a Panel of Countries.” Journal of Economic Growth 5: 5-32 (2000) Internet: www.wikipedia.org J.Cui & F.Schnitzler 08/12/2008

Questions??? Thank you for your time!!! J.Cui & F.Schnitzler 08/12/2008