“Inequality, Trade Liberalisation and Growth”

There has been a recent resurgence of interest in the relationship between income inequality and growth. We use the WIDER/UNDP World Income Inequality Database to investigate the effects of inequality and trade liberalisation on growth in a sample of exclusively developing countries. Cross-section (long-run) and panel (short run) techniques are used to test for the effect of inequality on growth controlling for other variables (initial GDP, endowments, investment, human capital and natural barriers to trade). We find consistent evidence for a negative effect of inequality on growth in the long run but no significant effect in the short run. Trade liberalisation appears to have a consistent and significant positive association with growth. These results are quite robust to the inclusion of alternative control variables, and we find no evidence of any interaction affect between inequality and trade liberalisation. We also find consistent evidence that countries relatively endowed with land (and thus dependent on primary commodity exports) and/or that face high natural barriers to trade experience lower growth rates. There is also evidence that, controlling for most other variables, sub-Saharan African countries experience below average growth performance; however, accounting for trade restrictions and natural barriers seems to eliminate this effect. The evidence suggests that inequality is an important factor in explaining low growth in developing countries over the long run.