Oil Prices and Nuclear Energy
Arunjana Das | February 16, 2015
February 16, 2015
Responding To: Week 4: Trends for Development
Is Inequality a ‘Bad’ for Economic Growth and Poverty Reduction?
Claire Cullen
World Bank Chief Economist, Dr Kaushik Basu, argued at Georgetown University last week that ‘good things’ can lead to bad results, and conversely, ‘bad things’ can lead to good results. The context was why GDP per capita has grown much faster in South Korea than India, though both started at roughly the same level in 1950. Dr Basu attributed some of the credit to South Korea’s strong, authoritarian leadership which had the power and capacity to respond quickly to changing conditions. By contrast, India’s democratic governance made reform difficult and slow because it needed to negotiate across a diverse constituency. In South Korea’s case, the ‘bad’ of authoritarianism fortunately resulted in a ‘good’- impressive economic growth and poverty reduction.
Inequality is one ‘bad’ that is sometimes thought to result in the ‘good’ of economic growth. Since economist Arthur Okun wrote in 1974 about the ‘big tradeoff’ between wealth redistribution and economic growth, some have argued that income inequality is the inevitable price poor countries must pay to boost growth. However, recent papers from the IMF conclude the opposite [1]. The authors found that countries with higher inequality experienced lower and more volatile growth than more equal countries, and that income redistribution is benign in terms of its impact on growth. They observed the potential for a win-win, with equality bolstering growth, and growth increasing the overall size of the income ‘pie’.
Dr Basu concedes that the controversy over inequality and growth is not over but we are now at a ‘tentative consensus’: when income is concentrated in the hands of too few, this “can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus...[which] tends to reduce the pace and durability of growth.” [2] The difficult task is to tease out what policies are most appropriate to support shared prosperity in each context.
Micro-level experiments and randomized control trials are providing new information on what policies work and where. What has not been studied sufficiently is the impact of local policy interventions at the macro level. Dr Basu’s call for more analysis on the interaction of micro and macro change is appropriate, particularly if we are to better understand the dynamics between policy, equality and growth. [3]
The growing global dialogue on inequality generated inter alia by IMF findings and Thomas Piketty’s treatise on capital and inequality suggests that advocating for reducing inequality is timely. [4] Dr Basu rightly cautions against knee-jerk populist ‘solutions’ that can lead to perverse outcomes. But he convincingly argues that current levels of inequality are morally unacceptable and that shared prosperity must be part of the development agenda.
Claire Cullen is completing her Masters in International Development Policy at Georgetown University. Cullen previously worked for the Australian Agency for International Development, where she focused on Australia’s aid program to the Pacific Islands on issues including economic reform, public financial management, governance, sovereign wealth funds, gender equality, and migration policy.
[1]http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
https://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf
[2]http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
[3]http://ideasforindia.in/article.aspx?article_id=406
[4]http://www.hup.harvard.edu/catalog.php?isbn=9780674430006
Other Responses
Rights and Internally Displaced Persons
Jonas Bergmann | February 16, 2015
Global Economic Development: What the Trends Portend
O. Felix Obi | February 16, 2015