What effect does wealth inequality have on economic growth?

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     There is an astounding lack of consensus on the relationship between economic disparity and growth. Unsurprisingly, there are many factors that contribute to this polarization on the subject:

    First off, many theoretical arguments are often based on wealth distribution; however, empirical studies generally only cover statistics of income inequality, not that of wealth. Simply put, not enough countries produce numbers on wealth distribution for it to be a viable source of evidence. This is an issue because there is a general consensus that wealth inequality is much more significant than income inequality, at least in the realm of economic growth. Without concrete empirical data, these theoretical arguments will remain theoretical. And concrete data will not come forth without more studies on wealth distribution across the globe. Studies on the difference between wealth inequality and income inequality have even found that wealth inequality has a negative, statistically significant relationship with economic growth, while income inequality is borderline insignificant.

    Secondly, studies on the aforementioned relationship between economic growth and economic inequality do not adequately account for the present sources of inequality. A great example of this is a brief comparison of economic growth in the U.K. and Indonesia. They have very similar Gini coefficients (measure of statistical dispersion that represents income inequality), U.K. being 32.5 and Indonesia being 33.7. For some context, a 0 on this scale would be absolute economic equality and a 100 would be complete economic disparity. These numbers are not imposingly crucial, yet it is good to know that these two exampled countries are very similar economically when you strictly look at the numbers. Yet, the political stats of these two countries are severely different. And these political differences are large contributors to how individuals get their wealth. In Indonesia, many of the country's elite attained their wealth through political connections and corruption. Business and politics tend to mix and unhealthy amount, while in the U.K. business is conducted in a much more orderly fashion. The wealth gap is very similar in the U.K., but those at the top gained their riches through business creation and development. Therefore, the wealth gap in the U.K. is much healthier and would lead to much stronger economic growth. Studies often do not account for details like this, and that is a major issue. Studies that have accounted for political differences have overwhelmingly discovered that when in the presence of political corruption, wealth inequality negates economic growth. However, in the absence of external factors, wealth inequality seemingly has no significant effect on growth. 

    Lastly, there are some substantial arguments to be made that both income and wealth are irrelevant. The true factor could in fact be the poverty rate in a country. This was first strongly suggested in the Ravallion (2012) and has been looked into ever since, but never adequately proven. Results are robust to a number of alternative factors, but results with respect to income do tend to differ from those with respect to poverty.

Economic Inequality, Part 1: Where We Are and Why | Darden Ideas to Action



If you would like to learn more about this topic, please reference the research paper where I gathered many of my ideas:

 Does wealth inequality matter for growth? The effect of billionaire wealth, income distribution, and poverty

by Sutirtha Bagchi and Jan Svejnar

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