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From Physical to Human Capital Accumulation: Inequality in the Process of Development

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This paper presents a unified theory that provides an intertemporal reconciliation between conflicting viewpoints about the effect of inequality on economic growth. It argues that the replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth has changed the qualitative impact of inequality on the process of development. In early stages of industrialization as physical capital accumulation is a prime source of economic growth, inequality enhances the process of development by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, however, as the return to human capital increases due to capital-skill complementarity, human capital becomes the prime engine of growth and equality, given credit constraints, stimulating investment in human capital and economic growth. As wages increase, however, credit constraints become less binding and the overall effect of inequality becomes insignificant.

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File URL: http://www.econ.brown.edu/faculty/galor/working/pdfs/gmii-sep20.pdf
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Paper provided by Brown University, Department of Economics in its series Working Papers with number 99-27.

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Date of creation: 1999
Handle: RePEc:bro:econwp:99-27
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Department of Economics, Brown University, Providence, RI 02912

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