high levels of income inequality both across countries—in terms of
economic growth, health and social well-being, and political
stability—as well as within countries—in terms of social
inequalities, especially among children. Building on existing
research, we also present updated empirical analyses where possible.
5.A. Slows economic growth
Some argue that income inequality is necessary for economic
growth, following initial analysis by Simon Kuznets in the 1950s.
Supporters of this position advise governments to invest in growth
as a first priority, believing that the benefits will eventually “trickle
down” to the poor. The argument is based on the following: (i)
since the rich save more, higher inequality means higher rates of
savings, investment and future growth; (ii) poverty and a flexible
labour market keep wage levels cheap and encourage investment;
and (iii) taxation on higher income groups should be limited to
maximize the retained income available for investment. Such views
are still influential in development debates, mostly via vague “trickle
down plus” approaches that focus on growth first with some basic
education, health and other limited social interventions.
Evidence, however, suggests otherwise. Alesina and Rodrick (1994),
Bourguignon (2004) and Birdsall (2005), among others, have shown
that developing countries with high inequality tend to grow more
slowly. We build on Birdsall’s analysis using more recent data and
an expanded sample of countries, and we also look at changes in
inequality over time alongside economic growth rates. For the 131
countries that allow us to estimate the change in Gini index values
between 1990 and 2008, we find that, on the aggregate, those
countries that increased levels of inequality experienced slower
annual per capita GDP growth over the same time period (ρ= -
0.20). Moreover, the strong negative correlation between high
inequality and high growth remains virtually unchanged when
restricting the sample to developing countries only (94 countries)
(ρ= -0.19) (Figure 20).