November 12, 2007 University of Warsaw1 The Distributional Effects of Growth: Case Studies vs. Cross- Country Regressions By Francois Bourguignon Presented by Elizabeth Rivard and Erita Narhetali

November 12, 2007 University of Warsaw2 Diverging Findings “Growth really does help the poor: in fact it raises their incomes by about as much as it raises the incomes of everybody else. … In short, globalization raises incomes, and the poor participate fully.” (The Economist, May 27, 2000, p.94.) “There is plenty of evidence that current patterns of growth and globalization are widening income disparities and hence acting as a brake on poverty reduction.” (Justin Forsyth, Oxfam Policy Director, Letter to The Economist, June 20, 2000, p.6.)

November 12, 2007 University of Warsaw3 Unanswered Questions Are cross-country regressions appropriate for measuring income inequality? How much income distribution affected by the pattern of economic growth? (increasing or decreasing inequality) –The authors comment on the different growth experiences of 4 countries and how these differences affected income distribution

November 12, 2007 University of Warsaw4 Some early theories Classical and Marxian economist  output growth is saving-driven forces Trade off between growth and distribution?!

November 12, 2007 University of Warsaw5 More early theories... Supporter: Kuznets and.... Growth contributes to increasing inequality at low levels of development and reducing it later

November 12, 2007 University of Warsaw6 More... Solow (exogenous growth model): –Savings-driven growth –Perfect competition –Factor-prices flexibility  full employment income distribution does not directly affect economic growth, though it is possible to have reverse causality

November 12, 2007 University of Warsaw7 More... But, Keynes (1936) said: NO! –Wealth distributed inequally –Failure to provide full employment Kalecki (1971): –Aggregate demand and distribution of income determine growth through wages and profit More.....

November 12, 2007 University of Warsaw8 More... Solimano (1998), three methodologies: –Reverse the causality derived by Kuznet curve and Solow model –Investment-driven growth –Political mechanism  modification of income tax will affect physical and human capital That means.....

November 12, 2007 University of Warsaw9 Implications income concentration is harmful for growth, for three worrisome reasons: –the more unequal income distribution, the higher the income taxes and the degree of implementation of redistributive policies  discouraging private accumulation of physical and human capital

November 12, 2007 University of Warsaw10 Implications –high concentration of income and wealth can increase social tension and be a source of political instability –inequality of wealth impedes poor people’s access to credit  obstructs their investing in education and other opportunities that may increase their market value as human capital  slowing down investment and growth

November 12, 2007 University of Warsaw11 Back to the paper... Micro-simulation indeed gives lots of information about the dynamic effects of economic growth but it has at least 2 weaknesses: –Feedback effects.. –‘unobservable variables’

November 12, 2007 University of Warsaw12 Horizontal Inequality Existence of severe inequalities between culturally defined groups Policies: group elements of inequality vs. individuals Equality of inputs vs. equality of outputs

November 12, 2007 University of Warsaw13 Examples Mexico (Chiapas region): Indigenous peoples Europe: Roma Malaysia: Chinese minority U.S.: African-Americans, Native Americans Brazil/Columbia: African descendents

November 12, 2007 University of Warsaw14 Discussion Rising inequality vs. Economic growth Is it always a tradeoff? Is there an acceptable level of inequality? How to measure inequality?