Arguments Of Inequality

It is not possible for a country to really develop and grow if it does not directly target the problem of inequality”

The question of inequality has been raised especially concerning developing countries and the models that are currently used to attempt to effect development and growth. It is not really clear what correlation effect inequality has on subsequent economic growth. Different types of data used and varying econometric methods lead to a varying array of conclusions. In this essay, it will be shown that there is a strong correlation between rising inequalities and growth, in a positive relationship, inspired from data collection and analysis by (Forbes, September 2000). Likewise, some opposing arguments that propose a negative relationship

Inequality is measured by the Gini coefficient. A series of complex estimations and tests follows as detailed in (Forbes, September 2000). She finds that despite different estimation techniques of data, the coefficient of inequality is always positive and significant at 5 percent level, and that a ten point increasing of the Gini coefficient of a country will lead to an increase in 1.3 percent in average annual growth predicted over a five year period. This is viable for the short or medium term periods. She finds that positive relationship is very robust across variable definitions, differing model and sample specifications. The results differ significantly from those attained by (Perroti, 1996) , who finds a negative relationship between inequality and growth. This is due to different estimation methods and techniques used, such as Forbes’ use of Generalised Method of Moments developed previously by technique previously developed by (Arellano & Bond, 1991) as opposed to OLS estimation by Perroti (1996). However, an exercise of model specification by Forbes that entails inclusion of country effects into pooled OLS estimates of 5-year relationship between growth and inequality demonstrate a positive and significant relationship. This leads to conclude that time-invariant, omitted variables which are country-specific do create a

This would be the case of very low inequality countries, which are traditionally the more developed and rich countries. As concerns the poor countries, which normally have very high initial unequal levels of income, and increase of average incomes will only explain a little percent of 0.6 in terms of poverty reduction. The conclusion is therefore that reduction of poverty levels can only be effective if national average income levels increase on the basis of having an initial level of inequality that is somewhat low. High inequality countries will have less poverty effective policies as their policies apparently do not target to reduce inequality in the first