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The effect of inequality on growth: Theory and evidence from the Indian states

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  • Sugata Ghosh

    (Cardiff Business School)

  • Sarmistha Pal

    (Cardiff Business School)

Abstract

This paper examines the effect of inequality on growth among the sub- national states in India. Theoretically, growth of the regional economy is driven by productive public investment in the provision of health and education services financed by a linear output tax, and the optimum tax rate is determined by the median voter. Unlike the existing results, we obtain an ambiguous relationship between initial inequality and subsequent economic growth. Analysis of the Indian state-level data suggests that rural inequality influences growth of total output more than urban inequality, and does so, negatively. The indicator of intersectoral inequality is more important in explaining sectoral output growth.

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File URL: http://128.118.178.162/eps/dev/papers/0309/0309006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 0309006.

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Length: 20 pages
Date of creation: 09 Sep 2003
Date of revision:
Handle: RePEc:wpa:wuwpdc:0309006

Note: Type of Document - ; pages: 20
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Web page: http://128.118.178.162

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Keywords: Endogenous growth; inequality; public investment; optimum tax rate; panel data analysis; Indian states.;

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References

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  1. Ravallion, Martin & Datt, Gaurav, 1996. "How Important to India's Poor Is the Sectoral Composition of Economic Growth?," World Bank Economic Review, World Bank Group, vol. 10(1), pages 1-25, January.
  2. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  3. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  4. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
  5. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  6. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  7. Paul Cashin & Ratna Sahay, 1996. "Internal Migration, Center-State Grants, and Economic Growth in the States of India," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 123-171, March.
  8. Ravallion, Martin, 1995. "Growth and poverty: Evidence for developing countries in the 1980s," Economics Letters, Elsevier, vol. 48(3-4), pages 411-417, June.
  9. Partridge, Mark D, 1997. "Is Inequality Harmful for Growth? Comment," American Economic Review, American Economic Association, vol. 87(5), pages 1019-32, December.
  10. Richard Blundell & Ian Preston, 1998. "Consumption Inequality And Income Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 603-640, May.
  11. Ravallion, Martin, 1998. "Does aggregation hide the harmful effects of inequality on growth?," Economics Letters, Elsevier, vol. 61(1), pages 73-77, October.
  12. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  13. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
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Citations

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Cited by:
  1. Andrew McKay & Sarmistha Pal, 2003. "Relationships between consumption and inequality in the Indian states," Development and Comp Systems 0309005, EconWPA.
  2. Pal, Sarmistha & Ghosh, Sugata, 2007. "Elite Dominance and Under-Investment in Mass Education: Disparity in the Social Development of the Indian States, 1960-92," IZA Discussion Papers 2852, Institute for the Study of Labor (IZA).
  3. Pal, Sarmistha & Palacios, Robert, 2008. "Understanding Poverty among the Elderly in India: Implications for Social Pension Policy," IZA Discussion Papers 3431, Institute for the Study of Labor (IZA).
  4. Sarmistha Pal & Robert Palacios, 2006. "Old Age Poverty In The Indian States:What Do The Household Data Tell Us?," Economics and Finance Discussion Papers 06-16, Economics and Finance Section, School of Social Sciences, Brunel University.
  5. Andrew McKay & Sarmistha Pal, 2004. "Relationships between Household Consumption and Inequality in the Indian States," Journal of Development Studies, Taylor & Francis Journals, vol. 40(5), pages 65-90.
  6. Sarmistha Pal & Sugata Ghosh, 2008. "The Elite and the Marginalised: an Analysis of Public Spending on Mass Education in the Indian States," CEDI Discussion Paper Series 08-15, Centre for Economic Development and Institutions(CEDI), Brunel University.
  7. Sarmistha Pal & Robert Palacios, 2005. "Old Age Poverty In The Indian States: What The Household Data Can Say?," Labor and Demography 0505015, EconWPA.

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