1. Mike Palmedo mpalmedo@wcl.american.edu American University School of International Service Does greater inequality lead to slower economic growth?

2. Is there a relationship between inequality and growth? And which way does it run? A negative relationship will support redistributive policies such progressive taxation and expanding social safety net programs. A positive relationship will support laissez faire fiscal policies

3. Lit Review Yields No Consensus Kuznets (1955) – Positive correlation at early stages of development, negative correlation at late stages of development. Barro (2000) – Negative correlation at early stages of development, positive correlation at late stages of development. Alesina and Rodrick (1994) – Negative, statistically significant correlation. Li and Zou (1998) – Positive, statistically significant correlation. Bleaney and Nishiyama (2004) – no statistically significant relationship.

4. Deininger and Squire (1996): The Least-Bad Data Available Collected all the data from government sources and previous studies that relied on government sources they could. Rejected all that did not meet the following standards: Data must be collected from feet-on-the-ground surveys Must be representative of entire population – no biased subsets based on rural or urban populations Must be the most complete measurement of income or expenditure available – no reliance on wages on income tax data The primary source must be independently confirmed Discarded over 74% of their initial data. Wound up with 682 observations.

5. Regression Model growth = a(const.) + b(gini) + c(igdp) + d(edu) VariableDescription growth Average GDP growth over 20 year period gini Gini coefficient from Deininger/Squire Dataset igdp Initial per capita GDP, adjusted for purchasing power parity and measured in constant international dollars edu UN educational index

6. Descriptive Statistics Obs.MeanMedian Standard Deviation growth722.053.381.86 gini7240.3945.87.35 igdp689,17510,83113,354 edu710.79.0830.23

7. Regression Results VariableCoefficient Standard Error T-Statistic Prob > |t| gini-0.070.03-2.580.01 igdp-.0001.00004-2.460.02 edu4.341.812.390.02 constant2.241.311.360.18 F-stat = 4.00, Prob > F = 0.01, R 2 = 0.16, Adj. R = 0.12

8. Next Steps Add relevant variables to raise R 2 Add relevant variables to raise R 2 Find good data for investment and supply of labor relative to population Find good data for investment and supply of labor relative to population Find good data measuring technological capacity (data from 1980s needed) Find good data measuring technological capacity (data from 1980s needed) Address issue of geographic dummy variables Address issue of geographic dummy variables

9. Tentative Conclusion Cross-sectional data shows there has been a statistically significant negative correlation between inequality and the rate of economic growth in the last quarter- century.