The significantly positive variable in most models shows how important human capital is for economic growth, especially in developing countries. Similarly, the inflation rate has a significant negative effect https://www.absa.co.za/ on growth, except for a few models. The fact that a high inflation level, as an indicator of macroeconomic instability, harms the economic growth in these countries supports Stockman (1981).
Growth and distributional impacts of fiscal structures
With the wider usage of various panel data estimation techniques in the later studies, it is not surprising that we found more diverse results in the inequality-growth literature. Given the above background, the aim here is to provide a comprehensive literature sasol south africa review of the relationship between income inequality and economic growth, both in theory and empirically. While Section 2 critically analyses the theoretical framework of the income inequality–growth nexus, Section 3 reviews empirical studies on this relationship. Section 4 provides a critical survey on methodology issues employed in the prior studies and proposes a better methodology that can help reconcile the literature.
Studies with negative results on the relationship between income inequality and economic growth
The results of that study documented that income inequality negatively affected economic growth. Another single-country sasol ltd study was conducted on China, where Wan et al. 64 investigated the short- and long-run relationship between inequality and economic growth during the period 1987–2001. By using three-stage least squares, they found that the relationship was nonlinear and negative for China.
- This study aims to explain whether the positive and negative channels expressed in the theory on the effect of income inequality on economic growth play a significant role in different income group countries.
- There are also some works that can rationalise the diverging empirical results and theoretical predictions on the relationship between income inequality and economic growth (or economic efficiency).
- This happens when those in the upper decile of income distribution prevent the redistribution of income and resources to the poor, resulting in a wastage of government funds and corruption, both of which hamper economic growth in the long run 11,46,48,50.
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On the other hand, although inequality does not have significant effects directly on political instability, it can still harm economic growth as it negatively affects investment (Nel, 2003). Therefore, although we do not find direct empirical evidence, it can be concluded that the negative impact of income inequality on economic growth through the socio-political instability channel may be more important in low-income countries. In summary, the relationship between income inequality and economic growth is not very clear and further investigation is needed to understand this relationship more clearly. Although the robustness of the results is controlled by using panel estimation techniques and different indicators, there are also some limitations of this study. Especially in low and lower-middle income countries, there may be missing observations regarding the selected variables.
Strong economy scenario
Governments should reduce corruption and regulate financial markets to ensure equal education and business creation opportunities. In addition, it https://www.investec.com/ should implement tax policies that encourage individuals to work, not reduce their motivation. While many studies in the literature examine the direct relationship between relevant variables, some focus only on bilateral relationships such as income inequality-channel variable or channel variable-economic growth. Studies that determine whether the effect of income inequality on economic growth occurs through a channel focus mainly on some of the negative channels stated in theory. The primary purpose of this study is to test whether the positive and negative channels specified in theory are valid, rather than the direct effect of income inequality on economic growth.
Social-political unrest
Growth is considered inclusive if it creates opportunities for all segments of the population and shares them fairly (OECD 2020a). To understand inclusive growth, we must first understand inequality, which has two crucial categories. One is the inequality of opportunity in access to education, jobs, healthcare, finance or the judicial system, for example. The other is inequality of outcomes, such as income, wealth, health and educational attainment. Extensive literature shows that both the level and composition of public expenditures and revenues have implications for economic development.
