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The impact of Inequality on Economic Growth: Evidence for Mexico 1895-1994

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Gutiérrez-Romero, Roxana
Abstract

The aim of the paper is to explore the influences of initial inequality on the long run distribution of wealth. The paper presents two mathematical models that analyse the occupational choice of individuals in the presence of capital constraints and risk in entrepreneurial activities. The models show that inequality and particularly polarization hinder economic growth. The higher the initial level of polarization is, the lower the long run aggregate wealth of the economy and the higher the long run polarization will be. The models are calibrated using numerical simulations. The implications of the models are assessed empirically using data on economic growth, and income distribution in Mexico, during the period 1895-1994, as well as the "Doing Business" databases of the World Bank. Policy-wise it is found that a more egalitarian wealth distribution and less poverty can be achieved through wealth redistribution policies and by improving the business climate. This can be done by reducing the cost of setting-up firms (technology,bureaucratic and administrative costs), introducing labour-market reforms encouraging the hiring of those typically excluded such as the poor, improving the access to credit markets by reducing the costs of creating and/or registering collateral and broadening the credit bureau coverage. --

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Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Göttingen 2007 with number 11.

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Date of creation: 2007
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Handle: RePEc:zbw:gdec07:6534

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  3. Esteban, J.M. & Ray, D., 1992. "On the Measurement of Polarization," UFAE and IAE Working Papers 171.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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  4. Ghatak, Maitreesh & Nien-Huei Jiang, Neville, 2002. "A simple model of inequality, occupational choice, and development," Journal of Development Economics, Elsevier, vol. 69(1), pages 205-226, October. [Downloadable!] (restricted)
  5. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 35-52, January. [Downloadable!] (restricted)
  6. Wolfson, Michael C, 1994. "When Inequalities Diverge," American Economic Review, American Economic Association, vol. 84(2), pages 353-58, May.
  7. Simeon Djankov & Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "The Regulation Of Entry," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 1-37, February. [Downloadable!] (restricted)
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  8. Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, vol. 96(384), pages 1011-34, December. [Downloadable!] (restricted)
  9. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April. [Downloadable!] (restricted)
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  10. Benabou, R., 1996. "Inequality and Growth," Working Papers 96-22, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  11. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May. [Downloadable!] (restricted)
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