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Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations

  • Pedro H. Albuquerque

This paper presents a simple Cass-Koopmans-Ramsey AK growth model with heterogeneity that explains how policies that increase income inequality may temporarily boost a country's income growth rate. Briefly put, a change in policy that reduces redistributive transfers will free up resources to the households with the highest productivities, resulting in an aggregate growth rate increase that will endure until new limits to differentiated accumulation are found. The unambiguous effect takes place in poor and rich countries alike, arising from productivity heterogeneity and redistribution (although it could also arise from other sources of heterogeneity). The effect is explicitly captured in the aggregate growth equation by the changes of the mean logarithmic deviation (MLD or Theil's second measure) of the income. The model supports the empirical results found in Forbes (AER, 2000). The accelerated growth episodes observed in Brazil from 1968 to 1973 and in China recently are shown to be empirically consistent with the model. If the model predictions are correct, Chinese growth rates may eventually fall, following a pattern that, even if not presenting the same magnitude, could resemble the one observed during the Brazilian slowdown

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 769.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:769
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  1. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
  2. Van Garderen, K. J. & Lee, K. & Pesaran M., 1998. "Cross-sectional Aggregation of Non-linear Models," Cambridge Working Papers in Economics 9803, Faculty of Economics, University of Cambridge.
  3. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "The sources of growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 75-114, January.
  4. Bourguignon, Francois, 1979. "Decomposable Income Inequality Measures," Econometrica, Econometric Society, vol. 47(4), pages 901-20, July.
  5. Fields, Gary S, 1980. "Who Benefits from Economic Development? Reply," American Economic Review, American Economic Association, vol. 70(1), pages 257-62, March.
  6. Deininger, K & Squire, L, 1996. "Measuring Income Inequality : A New Data-Base," Papers 537, Harvard - Institute for International Development.
  7. Pedro H. Albuquerque, 2003. "A practical log-linear aggregation method with examples: heterogeneous income growth in the USA," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(6), pages 665-678.
  8. Ravallion, Martin, 1998. "Does aggregation hide the harmful effects of inequality on growth?," Economics Letters, Elsevier, vol. 61(1), pages 73-77, October.
  9. Lewbel, Arthur, 1992. "Aggregation with Log-Linear Models," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 635-42, July.
  10. Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-95, August.
  11. Fishlow, Albert, 1972. "Brazilian Size Distribution of Income," American Economic Review, American Economic Association, vol. 62(2), pages 391-402, May.
  12. Hirschman, Albert O & Rothschild, Michael, 1973. "The Changing Tolerance for Income Inequality in the Course of Economic Development; with a Mathematical Appendix," The Quarterly Journal of Economics, MIT Press, vol. 87(4), pages 544-66, November.
  13. Fishlow, Albert, 1980. "Who Benefits from Economic Development? Comment," American Economic Review, American Economic Association, vol. 70(1), pages 250-56, March.
  14. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  15. Xu, Lixin Colin & Zou, Heng-fu, 2000. "Explaining the changes of income distribution in China," China Economic Review, Elsevier, vol. 11(2), pages 149-170, December.
  16. Gibson, John & Huang, Jikun & Rozelle, Scott, 2001. "Why is income inequality so low in China compared to other countries?: The effect of household survey methods," Economics Letters, Elsevier, vol. 71(3), pages 329-333, June.
  17. Xin Meng, 2004. "Economic Restructuring and Income Inequality in Urban China," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(3), pages 357-379, 09.
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