A Refinement of the Relationship between Economic Growth and Income Inequality in Developing Countries

Fadi Fawaz, Masha Rahnamamoghadam and Victor (Vic) Valcarcel

MPRA Paper from University Library of Munich, Germany

Abstract: There is mixed evidence in the literature of a clear relationship between income inequality and economic growth. Most of that work has focused almost exclusively on developed economies. In what we believe to be a first effort, our emphasis is solely on developing economics, which we classify as high-income and low-income developing countries (HIDC and LIDC). We make such distinction on theoretical and empirical grounds. Empirically, the World Bank has classified developing economies in this manner since 1978. The data in our sample is also supportive of such classifications. We provide a theoretical scaffolding that uses asymmetric credit constraints as a premise for separating developing economies in such a way. We find strong evidence of a negative relationship between income inequality and economic growth in LIDC to be in stark contrast with a positive inequality-growth relationship for HIDC. Both correlations are statistically significant across multiple econometric specifications. These results are robust to degree of persistence in the variables of interest as well as a measure threshold of income that is estimated endogenously for our sample.

Keywords: Income inequality; economic growth; Gini coefficient; credit constraints; collateral (search for similar items in EconPapers)
JEL-codes: O1 O10 O40 (search for similar items in EconPapers)
Date: 2014-04-08
New Economics Papers: this item is included in nep-dev, nep-fdg and nep-gro
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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