This paper analyzes the extent of income inequality from a global perspective, its drivers, and what to do about it. The drivers of inequality vary widely amongst countries, with some common drivers being the skill premium associated with technical change and globalization, weakening protection for labor, and lack of financial inclusion in developing countries. We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth—that is, when the rich get richer, benefits do not trickle down. This suggests that policies need to be country specific but should focus on raising the income share of the poor, and ensuring there is no hollowing out of the middle class. To tackle inequality, financial inclusion is imperative in emerging and developing countries while in advanced economies, policies should focus on raising human capital and skills and making tax systems more progressive.
This collection of essays honors a remarkable man and his work. Erik Thorbecke has made significant contributions to the microeconomic and the macroeconomic analysis of poverty, inequality and development, ranging from theory to empirics and policy. The essays in this volume display the same range. As a collection they make the fundamental point that deep understanding of these phenomena requires both the micro and the macro perspectives together, utilizing the strengths of each but also the special insights that come when the two are linked together. After an overview section which contains the introductory chapter and a chapter examining the historical roots of Erik Thorbecke's motivations, the essays in this volume are grouped into four parts, each part identifying a major strand of Erik's work—Measurement of Poverty and Inequality, Micro Behavior and Market Failure, SAMs and CGEs, and Institutions and Development. The range of topics covered in the essays, written by leading authorities in their own areas, highlight the extraordinary depth and breadth of Erik Thorbecke's influence in research and policy on poverty, inequality and development. Acknowledgements These papers were presented at a conference in honor of Erik Thorbecke held at Cornell University on October 10-11, 2003. The conference was supported by the funds of the H. E. Babcock Chair in Food, Nutrition and Public Policy, and the T. H. Lee Chair in World Affairs at Cornell University.
We study whether higher gender equality facilitates economic growth by enabling better allocation of a valuable resource: female labor. By allocating female labor to its more productive use, we hypothesize that reducing gender inequality should disproportionately benefit industries with typically higher female share in their employment relative to other industries. Specifically, we exploit within-country variation across industries to test whether those that typically employ more women grow relatively faster in countries with ex-ante lower gender inequality. The test allows us to identify the causal effect of gender inequality on industry growth in value-added and labor productivity. Our findings show that gender inequality affects real economic outcomes.
Inequality has drastically increased in many countries around the globe over the past three decades. The widening gap between the very rich and everyone else is often portrayed as an unexpected outcome or as the tradeoff we must accept to achieve economic growth. In this book, three International Monetary Fund economists show that this increase in inequality has in fact been a political choice—and explain what policies we should choose instead to achieve a more inclusive economy. Jonathan D. Ostry, Prakash Loungani, and Andrew Berg demonstrate that the extent of inequality depends on the policies governments choose—such as whether to let capital move unhindered across national boundaries, how much austerity to impose, and how much to deregulate markets. While these policies do often confer growth benefits, they have also been responsible for much of the increase in inequality. The book also shows that inequality leads to weaker economic performance and proposes alternative policies capable of delivering more inclusive growth. In addition to improving access to health care and quality education, they call for redistribution from the rich to the poor and present evidence showing that redistribution does not hurt growth. Accessible to scholars across disciplines as well as to students and policy makers, Confronting Inequality is a rigorous and empirically rich book that is crucial for a time when many fear a new Gilded Age.
A Nobel Prize–winning economist tells the remarkable story of how the world has grown healthier, wealthier, but also more unequal over the past two and half centuries The world is a better place than it used to be. People are healthier, wealthier, and live longer. Yet the escapes from destitution by so many has left gaping inequalities between people and nations. In The Great Escape, Nobel Prize–winning economist Angus Deaton—one of the foremost experts on economic development and on poverty—tells the remarkable story of how, beginning 250 years ago, some parts of the world experienced sustained progress, opening up gaps and setting the stage for today's disproportionately unequal world. Deaton takes an in-depth look at the historical and ongoing patterns behind the health and wealth of nations, and addresses what needs to be done to help those left behind. Deaton describes vast innovations and wrenching setbacks: the successes of antibiotics, pest control, vaccinations, and clean water on the one hand, and disastrous famines and the HIV/AIDS epidemic on the other. He examines the United States, a nation that has prospered but is today experiencing slower growth and increasing inequality. He also considers how economic growth in India and China has improved the lives of more than a billion people. Deaton argues that international aid has been ineffective and even harmful. He suggests alternative efforts—including reforming incentives to drug companies and lifting trade restrictions—that will allow the developing world to bring about its own Great Escape. Demonstrating how changes in health and living standards have transformed our lives, The Great Escape is a powerful guide to addressing the well-being of all nations.
This dissertation is composed of three chapters. All three deal with topics in development economics. The first chapter examines the effects on village institutions of introducing formal financial institution options into the village. The second addresses the effects of government policy on educational investment and crime. The third tests the explanatory power of various explanations of the gender gap in math test scores. The first chapter examines the effects of a transition from a ``traditional'' economy based on an uncertain source of income, with risk fully insured away by one's neighbors in a social network through costly network ties, to a ``modern'' economy in which some agents have access to partial insurance at a lower cost. A theoretical model is used to show that village social networks can break down as some members of the village no longer need the insurance the social network provides, producing a reduction in welfare (if the costs of reducing moral hazard are not too high) for at least some individuals and possibly the village as a whole. This loss of welfare can occur even when networks provide other benefits to those belonging to them and is likely to be heterogeneous, depending on the opportunities and networks available to individuals. This paper tests these predictions using Indonesian data to examine the effect of a change in the banking institutions available to a community on the strength of social networks (measured by community participation) and welfare (measured by household expenditure and by child health). The analysis finds that changing financial institution availability in general does not influence community participation or welfare, but that financial institutions that primarily serve certain groups do relatively reduce the welfare of households not in those groups, which is consistent with the hypotheses generated by the model. Crime is an important feature of economic life in many countries, especially in the developing world. Crime distorts many economic decisions because it acts like an unpredictable tax on earnings. In particular, the threat of crime may influence people's willingness to invest in schooling or physical capital. The second chapter explores the questions "What influence do crime rates and levels of investment have on one another?" and "How do government policies affect the relationship between investment and crime?" by creating a simple structural model of crime and educational investment and attempting to fit this model to Mexican data. A method of simulated moments procedure is used to estimate parameters of the model and the estimated parameters are then used to carry out policy simulations. The simulations show that increasing spending on police or increasing the severity of punishment reduces crime but has little effect on educational investment. Increased educational subsidies increase educational investment but reduce crime only slightly. Thus, one type of policy is insufficient to accomplish the goals of both reducing crime and increasing education. The third chapter is joint work with Prashant Bharadwaj, Giacomo De Giorgi, and Christopher Neilson. Boys tend to have better performances than girls in mathematical testing; in particular, there are significantly more boys than girls among high achievers and the score distribution appears to have a longer right tail for boys. We confirm such results on several low- and middle-income countries. In particular we find that the gender gap is already present by age 10 and substantially increases by age 14 and 15. We propose and try to test a series of explanations for such a gap: (i) parental investment, (ii) ability, (iii) school resources, (iv) individual investment and effort (not tested directly), (v) competitive environment, and (vi) cultural norms. We conclude that none of our proposed explanations can account for a substantial portion of the gap.
The Fund has recognized in recent years that one cannot separate issues of economic growth and stability on one hand and equality on the other. Indeed, there is a strong case for considering inequality and an inability to sustain economic growth as two sides of the same coin. Central to the Fund’s mandate is providing advice that will enable members’ economies to grow on a sustained basis. But the Fund has rightly been cautious about recommending the use of redistributive policies given that such policies may themselves undercut economic efficiency and the prospects for sustained growth (the so-called “leaky bucket” hypothesis written about by the famous Yale economist Arthur Okun in the 1970s). This SDN follows up the previous SDN on inequality and growth by focusing on the role of redistribution. It finds that, from the perspective of the best available macroeconomic data, there is not a lot of evidence that redistribution has in fact undercut economic growth (except in extreme cases). One should be careful not to assume therefore—as Okun and others have—that there is a big tradeoff between redistribution and growth. The best available macroeconomic data do not support such a conclusion.
Originally published in 1975, Equality and Efficiency: The Big Tradeoff is a very personal work from one of the most important macroeconomists of the last hundred years. And this new edition includes "Further Thoughts on Equality and Efficiency," a paper published by the author two years later. In classrooms Arthur M. Okun may be best remembered for Okun's Law, but his lasting legacy is the respect and admiration he earned from economists, practitioners, and policymakers. Equality and Efficiency is the perfect embodiment of that legacy, valued both by professional economists and those readers with a keen interest in social policy. To his fellow economists, Okun presents messages, in the form of additional comments and select citations, in his footnotes. To all readers, Okun presents an engaging dual theme: the market needs a place, and the market needs to be kept in its place. As Okun puts it: Institutions in a capitalist democracy prod us to get ahead of our neighbors economically after telling us to stay in line socially. This double standard professes and pursues an egalitarian political and social system while simultaneously generating gaping disparities in economic well-being. Today, Okun's dual theme feels incredibly prescient as we grapple with the hot-button topic of income inequality. In his foreword, Lawrence H. Summers declares: On what one might think of as questions of "economic philosophy," I doubt that Okun has been improved on in the subsequent interval. His discussion of how societies rely on rights as well as markets should be required reading for all young economists who are enamored with market solutions to all problems. With a new foreword by Lawrence H. Summers
