Mike Palmedo mpalmedo@wcl.american American University School of International Service

1. Mike Palmedo mpalmedo@wcl.american.edu American University School of International Service Does greater inequality lead to slower economic growth?

2. Is there a relationship between inequality and growth?And which way does it run? • A negative relationship will support redistributive policies such progressive taxation and expanding social safety net programs. • A positive relationship will support laissez faire fiscal policies

3. Lit Review Yields No Consensus • Kuznets (1955) – Positive correlation at early stages of development, negative correlation at late stages of development. • Barro (2000) – Negative correlation at early stages of development, positive correlation at late stages of development. • Alesina and Rodrick (1994) – Negative, statistically significant correlation. • Li and Zou (1998) – Positive, statistically significant correlation. • Bleaney and Nishiyama (2004) – no statistically significant relationship.

4. Deininger and Squire (1996):The Least-Bad Data Available • Collected all the data from government sources and previous studies that relied on government sources they could. Rejected all that did not meet the following standards: • Data must be collected from feet-on-the-ground surveys • Must be representative of entire population – no biased subsets based on rural or urban populations • Must be the most complete measurement of income or expenditure available – no reliance on wages on income tax data • The primary source must be independently confirmed • Discarded over 74% of their initial data. Wound up with 682 observations.

5. Regression Model growth = a(const.) + b(gini) + c(igdp) + d(edu)

6. Descriptive Statistics

7. Regression Results F-stat = 4.00, Prob > F = 0.01, R2 = 0.16, Adj. R = 0.12

8. Next Steps • Add relevant variables to raise R2 • Find good data for investment and supply of labor relative to population • Find good data measuring technological capacity (data from 1980s needed) • Address issue of geographic dummy variables

9. Tentative Conclusion Cross-sectional data shows there has been a statistically significant negative correlation between inequality and the rate of economic growth in the last quarter-century.