The Conditional Relationship between Inequality and Development

Inrecent years political scientists and economists have spent considerable efforts investigating the impact of income inequality both on political institutions and social conflict (Boix 2003, 2008; Acemoglu and Robinson 2006; Geddes 2007) and on growth and development (Atkinson andBourguignon 2000). In this article I focus on the latter question: I discuss the extent to which (that is, the conditions under which) inequality may hinder economic growth. I do so by moving away from the current literature, which models the relationship between development and inequality in a linear fashion—with the latter unconditionally distorting (or boosting) the incentives to invest and therefore reducing (or increasing) the rate of growth. Instead, I claim that the potential correlation between inequality and development will be always conditional on the (mostly political and institutional) causes that generate the existing income distribution to start with. Hence it is not surprising to find instances in which growth and (mostly temporary) inequality come hand in hand as well as other periods and countries where there is both high and persistent inequality jointly with economic stagnation. The article is organized as follows. The first section reviews the existing theoretical literature on the economic consequences of inequality. The second section summarizes the (mostly inconclusive) empirical literature on the problem at hand. The final section offers an alternative explanation that stresses the contingent relationship between inequality and development across time. That explanation accounts both for the joint outcome of low growth and high inequality that characterizes many underdeveloped economies and for those temporary spells of high growth and increasing income heterogeneity experienced by developed economies from time to time (such as nineteenth-century Europe or in several Organisation for Economic Co-operation and Development [OECD] economies in the last decades).