A META‐ANALYSIS ON THE RELATIONSHIP BETWEEN INCOME INEQUALITY AND ECONOMIC GROWTH
| DOI | http://doi.org/10.1111/j.1467-9485.2008.00470.x |
| Author | Raymond J. G. M. Florax,Henri L. F. De Groot,Laura De Dominicis |
| Published date | 01 November 2008 |
| Date | 01 November 2008 |
A META-ANALYSIS ON THE
RELATIONSHIP BETWEEN INCOME
INEQUALITY AND ECONOMIC GROWTH
Laura de Dominicis
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, Raymond J. G. M. Florax
nn
and Henri L. F. de Groot
nnn
Abstract
In recent years there is a growing interest in determining the impact of inequality
on economic growth. Theoretical papers as well as empirical applications have,
however, produced controversial results. Although there is a considerable part of
the literature that considers inequality detrimental to growth, more recent studies
have challenged this result and found a positive effect of inequality on growth. In
this paper, we provide a contribution to the empirical puzzle by using meta-analysis
to systematically describe, identify and analyse the variation in outcomes of
empirical studies. We find that estimation methods, data quality and sample
coverage systematically affect the results. The results point out that it will be
particularly useful to increasingly focus research on determining the impact of
income inequality on economic growth using single-country data at the regional
level, or a relatively homogeneous set of countries with adequate controls for
country-wide differences in economic, social and institutional characteristics.
I Intro ductio n
Growing interest in the impact of inequality on economic growth has recently
stimulated new theoretical as well as empirical research. Some existing
theoretical models propose inequality is detrimental to growth, but alternative
theoretical models point at income inequality as an essential determinant
furthering economic growth. Benabou (1996) and Aghion et al. (1999) provide
excellent surveys of the theoretical literature. The line of reasoning in these
papers focuses on whether countries will face trade-offs between reducing
inequality and improving their growth performance, or instead whether there
exists a virtuous circle in which growth leads to lower inequality, and lower
inequality in turn leads to faster growth. These divergent theoretical deductions
have important policy implications, because stimulating economic growth as
n
VU University, Amsterdam, The Netherlands
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Purdue University, West Lafayette, USA, and VU University, Amsterdam, The Netherlands
nnn
VU University, Amsterdam, and Tinbergen Institute, Amsterdam-Rotterdam, The
Netherlands
Scottish Journal of Political Economy, Vol. 55, No. 5, November 2008
r2008 The Authors
Journal compilation r2008 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
654
well as obtaining a reasonably egalitarian income distribution is at the heart of
the efficiency-equity trade-off that shapes policy discussions in most countries
around the world.
The mechanisms linking inequality and growth have also been addressed in
an empirical literature (see Campano and Salvatore, 2006, for an excellent
review). Early studies are based on the estimation of cross-country growth
regressions in which some measure of inequality is added to the set of
explanatory variables. Based on this approach, studies such as Alesina and
Rodrik (1994), Persson and Tabellini (1994), Clarke (1995), and Deininger and
Squire (1998), provide a fairly robust body of evidence for a negative
relationship between income inequality and economic growth.
1
Recently,
however, the original cross-country evidence is challenged. The availability of
data on income distribution for a larger sample of countries and a longer time
span has allowed researchers to explore the issue by means of more sophisticated
econometric techniques, and frequently evidence is provided for a positive
correlation between income inequality and economic growth.
Arguably, the evidence constitutes a theoretical and empirical puzzle; no
general consensus has emerged so far. Conclusions seem to depend on
theoretical preferences and as far as empirical studies go, on the econometric
method employed, the countries considered, and the type of income distribution
data used. In this paper, we contribute to the discussion by presenting a meta-
analysis of the empirical literature on the relationship between income inequality
and economic growth. Traditional approaches of literature review typically use
qualitative methods, which provide a chronological, narrative and at times
critical overview of the research findings (see e.g. Leoni and Pollan, 2003). In
contrast, meta-analysis provides an in-depth quantitative review of the existing
literature, and employs formal statistical techniques to summarize the results
and to account for differences in study characteristics.
The remainder of the paper is organized as follows. Section II presents a
review of the theoretical literature and focuses on the empirical results. Section
III provides a description of the sample of studies used in the meta-analysis, and
introduces and illustrates the technique of meta-analysis. In Section IV, the
potential sources of heterogeneity in the effect sizes are discussed. Section V
presents and comments on the results of the meta-regression. Section VI
concludes.
II TheoreticalFoundationsand Empirical Evidence
Theoretical models
The literature on the relationship between inequality and growth dates back
to Kuznets (1955). He showed that inequality in per capita income increases
1
Note that Persson and Tabellini (1994) use an income distribution measure defined in terms
of equality among individuals. In their paper the negative relationship between income
inequality and economic growth is therefore corroborated by a positive coefficient of the income
distribution measure.
INEQUALITY AND GROWTH: A META-ANALY SIS 655
r2008 The Authors
Journal compilation r2008 Scottish Economic Society
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