# Inequality and Unsustainable Growth: Two Sides of the Same Coin?

POLICY CORNER

First Online:

- 507 Downloads
- 7 Citations

## Abstract

The relationship between income inequality and economic growth is complex and the evidence mixed. This paper focuses on the connections between income inequality and the fragility of economic growth. We find that longer *growth spells*—periods of strong, healthy, per capita growth—are robustly associated with more equality in the income distribution, even when controlling for a range of other standard determinants. A key implication is that it would be a gamble to think that distribution will take care of itself provided policy makers steadfastly pursue growth. Over longer horizons, avoiding excessive inequality and sustaining economic growth may be two sides of the same coin.

## JEL

O1 O4## References

- Aerts, J.-J., D. Cogneau, J. Herrera, G. de Monchy, and F. Roubaud, 2000,
*L’economie camerounaise: Un espoir évanoui*, Karthala, Paris.Google Scholar - Aguiar, M. and G. Gopinath, 2007, “Emerging Market Business Cycles: The Cycle is the Trend,”
*Journal of Political Economy*, Vol. 115, pp. 69–102.CrossRefGoogle Scholar - Alesina, A. and D. Rodrik, 1994, “Distributive Politics and Economic Growth,”
*Quarterly Journal of Economics*, Vol. 109, No. 2, pp. 465–90.CrossRefGoogle Scholar - Alvaredo. F., A. Atkinson, T. Piketty, and E. Saez, 2013, “The Top 1 Percent in International and Historical Perspective,”
*Journal of Economic Perspectives*, Vol. 27, No. 3, Summer, pp. 3–20.Google Scholar - Bai, J. and P. Perron, 1998, “Estimating and Testing Linear Models with Multiple Structural Changes,”
*Econometrica*, Vol. 66, No. 1, pp. 47–8.Google Scholar - Bai, J. and P. Perron, 2003, “Critical Values for Multiple Structural Change Tests,”
*Econometrics Journal*, Vol. 6, pp. 72–8.CrossRefGoogle Scholar - Banerjee, A. V. and E. Duflo, 2003, “Inequality and Growth: What Can the Data Say?”
*Journal of Economic Growth*, Vol. 8, No. 3, pp. 267–99.CrossRefGoogle Scholar - Barro, R. J., 2000, “Inequality and Growth in a Panel of Countries,”
*Journal of Economic Growth*, Vol. 5, No. 1, pp. 5–32.CrossRefGoogle Scholar - Berg, A., E. Buffie, and F. Zanna, 2017, “Robots, Growth, and Inequality,” mimeo.Google Scholar
- Berg, A., J. D. Ostry, and J. Zettelmeyer, 2012, “What Makes Growth Sustained?”
*Journal of Development Economics*, Vol. 98, No. 2, pp. 149–66.CrossRefGoogle Scholar - Berg, A. and J. Sachs, 1988, “The Debt Crisis: Structural Explanations of Country Performance,”
*Journal of Development Economics*, Vol. 29, No. 3, pp. 271–306.CrossRefGoogle Scholar - Carbonnier, G., 2002, “The Agendas of Economic Reform and Peace Process: A Politico-Economic Model Applied to Guatemala,”
*World Development,*Vol. 30, pp. 1323–39.CrossRefGoogle Scholar - Cárdenas, M., 2007, “Economic Growth in Colombia: A Reversal of ‘Fortune’?”
*Ensayos Sobre Politica Economica*, Vol. 25, No. 53, pp. 220–59.Google Scholar - Chaudhuri, S. and M. Ravallion, 2006, “Partially Awakened Giants: Uneven Growth in China and India,” in
*Dancing with Giants: China, India, and the Global Economy*, ed. by L. A. Winters and S. Yusuf. World Bank, Washington.Google Scholar - Coady, D., R. Gillingham, R. Ossowski, J. Piotrowski, S. Tareq, and J. Tyson, 2010, “Petroleum Product Subsidies,” IMF Staff Position Note 10/05. International Monetary Fund, Washington.Google Scholar
- Deininger, K. and L. Squire, 1998, “New Ways of Looking at Old Issues: Inequality and Growth,”
*Journal of Development Economics*, Vol. 57, No. 2, pp. 259–87.CrossRefGoogle Scholar - Dell’Ariccia, G., J. di Giovanni, A. Faria, M. A. Kose, P. Mauro, J. D. Ostry, M. Schindler, and M. Terrones, 2008,
*Reaping the Benefits of Financial Globalization*, IMF Occasional Paper No. 264. International Monetary Fund, Washington.Google Scholar - Easterly, W., 2007, “Inequality Does Cause Underdevelopment: Insights from a New Instrument,”
*Journal of Development Economics*, Vol. 84, No. 2, pp. 755–76.CrossRefGoogle Scholar - Easterly, W. and R. Levine, 1997, “Africa’s Growth Tragedy: Policies and Ethnic Divisions,”
*Quarterly Journal of Economics*, Vol. 112, No. 4, pp. 1203–50.CrossRefGoogle Scholar - Forbes, K. J., 2000, “A Reassessment of the Relationship between Inequality and Growth,”
*American Economic Review*, Vol. 90, No. 4, pp. 869–87.CrossRefGoogle Scholar - Furceri, D., P. Loungani, and J. D. Ostry, 2017, “The Aggregate and Distributional Effects of Financial Globalization,” mimeo.Google Scholar
- Halter, D., M. Oechslin, and J. Zweimüller, 2014, “Inequality and Growth: The Neglected Time Dimension,”
*Journal of Economic Growth*, Vol. 19, No. 1, pp. 81–104.CrossRefGoogle Scholar - Hausmann, R., J. Hwang, and D. Rodrik, 2007, “What You Export Matters,”
*Journal of Economic Growth*, Vol. 12, No. 1, pp. 1–25.CrossRefGoogle Scholar - Hausmann, R., L. Pritchett, and D. Rodrik, 2005, “Growth Accelerations,”
*Journal of Economic Growth*, Vol. 10, No. 4, pp. 303–29.CrossRefGoogle Scholar - Hausmann, R., F. Rodriguez, and R. Wagner, 2006, “Growth Collapses,” Working Paper No. 136, Center for International Development, Kennedy School of Government. Harvard University, Cambridge, MA.Google Scholar
- Heathcote, J., F. Perri, and G. Violante, 2010, “Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967–2006,”
*Review of Economic Dynamics*, Vol. 13, pp. 15–51.CrossRefGoogle Scholar - International Institute for Labour Studies (IILS), 2010,
*World of Work Report*, International Labour Organization, Geneva.Google Scholar - International Labour Organization (ILO), 2011,
*Global Employment Trends 2011*, International Labour Organization, Geneva.Google Scholar - Jácome, L., C. Larrea, and R. Vos, 1998, “Políticas macroeconómicas, distribución y pobreza en el Ecuador,” in
*Política macroeconómica y pobreza en América Latina y el Caribe*, ed. by E. Ganuza, L. Taylor, and S. Morley (Mundi**-**Prensa, Madrid).Google Scholar - Johnson, S., J. D. Ostry, and A. Subramanian, 2007, “The Prospects for Sustained Growth in Africa: Benchmarking the Constraints,”
*IMF Staff Papers*, Vol. 57, No. 1, pp. 119–71.CrossRefGoogle Scholar - Kar, S., L. Pritchett, S. Raihan, and K. Sen, 2013, “Looking for a Break Identifying Transitions in Growth Regimes,”
*Journal of Macroeconomics*, Vol. 38, No. PB, pp. 151–66.CrossRefGoogle Scholar - Kumhof, M. and R. Rancière, 2010, “Inequality, Leverage and Crises,” IMF Working Paper 10/268, International Monetary Fund, Washington.Google Scholar
- Lewis, P., 2007,
*Growing Apart: Oil, Politics, and Economic Change in Indonesia and Nigeria*, University of Michigan Press, Ann Arbor.CrossRefGoogle Scholar - Mbaku, J. M. and J. Takougang, eds., 2003,
*The Leadership Challenge in Africa: Cameroon under Paul Biya.*Africa World Press, Trenton, NJ.Google Scholar - Ostry, J. D., A. Berg, and C. G. Tsangarides, 2014, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note 14/02, International Monetary Fund, Washington.Google Scholar
- Ostry, J. D., A. Berg, and S. Kothari, 2017, “Growth-Equity Trade-offs in Structural Reforms,” mimeo.Google Scholar
- Ostry, J. D., P. Loungani, and D. Furceri, 2016, “Neoliberalism: Oversold?”
*Finance & Development*, Vol. 53, No. 2, pp. 38–41.Google Scholar - Piketty, T. and E. Saez, 2003, “Income Inequality in the United States, 1913–1998,”
*Quarterly Journal of Economics*, Vol. 118, No. 1, pp. 1–39.CrossRefGoogle Scholar - Pritchett, L., 2000, “Understanding Patterns of Economic Growth,”
*World Bank Economic Review,*Vol. 14, No. 2, pp. 221–50.CrossRefGoogle Scholar - Rajan, R., 2010,
*Fault Lines: How Hidden Fractures Still Threaten the World Economy.*Princeton University Press, Princeton.Google Scholar - Ravallion, M., 2009, “A Comparative Perspective on Poverty Reduction in Brazil, India and China,” Policy Research Paper No. 5080. World Bank, Washington.Google Scholar
- Rodrik, D., 1999, “Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses,”
*Journal of Economic Growth*, Vol. 4, No. 4, pp. 385–412.CrossRefGoogle Scholar - Ropp, S. C., 1992, “Explaining the Long-Term Maintenance of a Military Regime: Panama before the U.S. Invasion,”
*World Politics,*Vol. 44, No. 2, pp. 210–34.CrossRefGoogle Scholar - Taylor, L., 1991,
*Income Distribution, Inflation, and Growth: Lectures on Structuralist Macroeconomic Theory.*MIT Press, Cambridge, MA.Google Scholar - Thorp, R., C. Caumartin, and G. Gray-Molina, 2006, “Inequality, Ethnicity, Political Mobilisation and Political Violence in Latin America: The Cases of Bolivia, Guatemala and Peru,”
*Bulletin of Latin American Research,*Vol. 25, pp. 453–80.CrossRefGoogle Scholar - Wacziarg, R. and K. H. Welch, 2008, “Trade Liberalization and Growth: New Evidence,”
*World Bank Economic Review*, Vol. 22, No. 2, pp. 187–231.CrossRefGoogle Scholar - Welch, F., 1999, “In Defense of Inequality,”
*American Economic Review*, Vol. 89, pp. 1–17.CrossRefGoogle Scholar - Wilkinson, R. and K. Pickett, 2009,
*The Spirit Level: Why Greater Equality Makes Societies Stronger.*Bloomsbury Press, New York.Google Scholar - Woolridge, Jeffrey, 2002,
*Econometric Analysis of Cross Section and Panel Data*. MIT Press, Cambridge.Google Scholar - World Bank, 2005,
*World Development Report 2006: Equity and Development*, World Bank, Washington.Google Scholar - World Bank, 2015,
*Inequality, Uprisings, and Conflict in the Arab World*, World Bank, Washington.Google Scholar

## Copyright information

© International Monetary Fund 2017