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Thursday, 21 April 2011

Does Inequality Matter? 3rd Edition

We found that high “growth spells” were much more likely to end in countries with less equal income distributions. The effect is large. For example, we estimate that closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a “growth spell”. Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a “growth spell”. Inequality is of course not the only thing that matters but, from our analysis, it clearly belongs in the “pantheon” of well-established growth factors such as the quality of political institutions or trade openness.
From a recent analysis by Berg and Ostry  (full paper here) which appears to show that narrowing inequality helps to sustain growth. This is particularly important because empirical evidence appear to show that starting a growth spell is the easy part, sustaining it is much harder. For Zambia, like many African countries, currently enjoying a growth spell, the question clearly is “Will it last?” and related to that, “How do we keep it going?” Part of the answer, according to this research, appears to depend on what is done to reduce income inequality. So we find again that the issue of equity (and social cohesion) cannot be divorced from growth. Now the question is – what policies should Zambia be pursuing to narrow rampant inequality and deliver long-term growth?

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