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The IMF finds what sustains economic growth

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In advanced economies incomes grow steadily and exponentially with time In emerging or developing markets, growth is less steady
More inequality is linked to less sustained growth Income distribution has the highest correlation with long-term growth

The graphs above tell almost the whole story. However, the parent article (by Berg and Ostry) in the IMF’s journal Finance and Development has an even more robust conclusion:

Somewhat surprisingly, income inequality stood out for the strength and robustness of its relationship with the duration of growth spells: a 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. The effect is large, but is the sort of improvement that a number of countries have experienced during growth spells. We estimate that closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a growth spell in Latin America.

Remarkably, inequality retains its statistical and economic significance even when we include many potential determinants at the same time, a claim that we cannot make for many of the conventional determinants of good growth performance, such as the quality of institutions and trade openness. Inequality still matters when we allow for regional differences in expected growth duration (such as between emerging Asia and Africa). This all suggests that inequality seems to matter in itself and is not just proxying for other factors. Inequality also preserves its significance more systematically across different samples and definitions of growth spells than the other variables do. Of course, inequality is not the only thing that matters but, from our analysis, it clearly belongs on the list of well-established growth factors such as the quality of political institutions or trade openness.

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Written by Arhopala Bazaloides

February 16, 2012 at 4:57 am

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