Income Distribution - IMF STAFF DISCUSSION NOTE April 8...

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I M F S T A F F D I S C U S S I O N N O T E April 8, 2011 SDN/11/08 Inequality and Unsustainable Growth: Two Sides of the Same Coin? Andrew G. Berg and Jonathan D. Ostry I N T E R N A T I O N A L M O N E T A R Y F U N D
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INTERNATIONAL MONETARY FUND Research Department Inequality and Unsustainable Growth: Two Sides of the Same Coin? Prepared by Andrew G. Berg and Jonathan D. Ostry 1 April 8, 2011 JEL Classification Numbers: O1, O4 Keywords: Income distribution; sustainable growth Author s E-mail Address: [email protected] ; [email protected] 1 We would like to thank Olivier Blanchard and other IMF colleagues for useful suggestions and Yorbol Yakhshilikov for excellent research assistance. DISCLAIMER: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.
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2 Contents Page Executive Summary ................................................................................................................... 3 I. Introduction ............................................................................................................................ 4 II. The Hills and Valleys of Growth .......................................................................................... 5 III. Income Distribution and Growth Sustainability .................................................................. 8 IV. Some Tentative Policy Implications .................................................................................. 16 References ................................................................................................................................ 19 Tables 1. Growth Breaks by Region and Decade ............................................................................... 7 2. Characteristics of Growth Spells ......................................................................................... 8 3. The Ends of Six Spells ...................................................................................................... 11 Figures 1a. The Hills of Growth ............................................................................................................. 5 1b. The Hills, Valleys, and Plateaus of Growth ......................................................................... 6 2. Duration of Growth Spells and Inequality ........................................................................... 9 3. Effect of Increase of Different Factors on Growth Spell Duration .................................... 12 Box 1. Is It Really Income Distribution? A Closer Look at Country Cases .................................. 14
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3 E XECUTIVE S UMMARY The relationship between income inequality and economic growth is complex. Some inequality is integral to the effective functioning of a market economy and the incentives needed for investment and growth. But inequality can also be destructive to growth, for example, by amplifying the risk of crisis or making it difficult for the poor to invest in education. The evidence has also been mixed: some find that average growth over long periods of time is higher with more initial equality; others find that an increase in equality today tends to lower growth in the near term. The empirical literature on growth and inequality, however, has missed a key feature of the growth process in developing countries: namely, its lack of persistence. Per capita incomes do not typically grow steadily for decades. Rather, periods of rapid growth are punctuated by collapses and sometimes stagnation the hills, valleys, and plateaus of growth. Relating income distribution to long-run average growth may thus miss the point. The more relevant issue for many countries is: how is income distribution related to these sharp growth breaks? This note focuses on the duration of growth spells defined as the interval starting with a growth upbreak and ending with a downbreak and on the links between duration and various policies and country characteristics, including income distribution. It turns out that
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