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Does Inequality Harm Income Mobility and Growth? An Assessment of the Growth Impact of Income and Education Inequality in Paraguay 1992: 2002

  • Otter, Thomas
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    Poverty reduction is entirely determined by the growth rate of population?s mean per capita income1 and by the change in the distribution of income. This places the empirical relation between growth and inequality at the heart of poverty reducing strategies. This study, which estimates the relation for Paraguay, aims to identify the growth effects of income and education inequality while controlling other factors such as initial levels of wealth and human capital, family characteristics and unobserved spatial heterogeneity. The paper uses two sets of small area welfare estimates – often referred to as poverty maps – to estimate five different models of per capita income growth between 1992 and 2002, by comparing pseudo panel samples of these poverty maps. Since the analysis is based on groups of people, grouped in a pseudo panel, the results can be understood as well as an income mobility indicator. In the models used, standard errors were corrected to reflect the uncertainty as a result of income estimates, rather than income observations, being used. These corrections are sizable: standard errors using estimates are between 1 and 20 times larger than using income observations. The more homogeneous the sample is, the lower the error increase. Conditional convergence (initially low income groups grew faster) is confirmed by the results. They indicate that it is income inequality rather than human capital inequality, that affects growth and that this effect is negative. Nevertheless, there are also positive growth effects of human capital inequality, however some not as strong as income inequality results.

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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 25.

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    Date of creation: 2007
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    Handle: RePEc:zbw:gdec07:6548
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    1. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implications for Growth," NBER Working Papers 3530, National Bureau of Economic Research, Inc.
    2. Ravallion, Martin, 1997. "Can high-inequality developing countries escape absolute poverty?," Economics Letters, Elsevier, vol. 56(1), pages 51-57, September.
    3. Hentschel, Jesko, et al, 2000. "Combining Census and Survey Data to Trace the Spatial Dimensions of Poverty: A Case Study of Ecuador," World Bank Economic Review, World Bank Group, vol. 14(1), pages 147-65, January.
    4. Ravallion, Martin, 1998. "Does aggregation hide the harmful effects of inequality on growth?," Economics Letters, Elsevier, vol. 61(1), pages 73-77, October.
    5. Klaus Deininger & John Okidi, 2003. "Growth and Poverty Reduction in Uganda, 1999-2000: Panel Data Evidence," Development Policy Review, Overseas Development Institute, vol. 21, pages 481-509, 07.
    6. Mattias Lundberg & Lyn Squire, 2003. "The simultaneous evolution of growth and inequality," Economic Journal, Royal Economic Society, vol. 113(487), pages 326-344, 04.
    7. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
    8. Markus Jäntti & Stephen P. Jenkins, 2013. "Income Mobility," SOEPpapers on Multidisciplinary Panel Data Research 607, DIW Berlin, The German Socio-Economic Panel (SOEP).
    9. 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.
    10. Thorbecke, Erik & Charumilind, Chutatong, 2002. "Economic Inequality and Its Socioeconomic Impact," World Development, Elsevier, vol. 30(9), pages 1477-1495, September.
    11. Joel B. Slemrod, 1992. "Taxation and Inequality: A Time-Exposure Perspective," NBER Chapters, in: Tax Policy and the Economy, Volume 6, pages 105-128 National Bureau of Economic Research, Inc.
    12. Shorrocks, Anthony, 1978. "Income inequality and income mobility," Journal of Economic Theory, Elsevier, vol. 19(2), pages 376-393, December.
    13. Galor, Oded, 2000. "Income distribution and the process of development," European Economic Review, Elsevier, vol. 44(4-6), pages 706-712, May.
    14. Chris Elbers & Jean O. Lanjouw & Peter Lanjouw, 2005. "Imputed welfare estimates in regression analysis," Journal of Economic Geography, Oxford University Press, vol. 5(1), pages 101-118, January.
    15. repec:chb:bcchwp:03 is not listed on IDEAS
    16. Chris Elbers & Jean O. Lanjouw & Peter Lanjouw, 2003. "Micro--Level Estimation of Poverty and Inequality," Econometrica, Econometric Society, vol. 71(1), pages 355-364, January.
    17. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. " Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
    18. Andersen, Lykke Eg, 2000. "Social Mobility in Latin America," Documentos de trabajo 3/2000, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    19. Balisacan, Arsenio M. & Fuwa, Nobuhiko, 2003. "Growth, inequality and politics revisited: a developing-country case," Economics Letters, Elsevier, vol. 79(1), pages 53-58, April.
    20. Lakshmi K. Raut, 1996. "Signalling equilibrium, Intergenerational mobility and long-run growth," GE, Growth, Math methods 9603002, EconWPA.
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