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What drives the cross‐country growth and inequality correlation?

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  • Debasis Bandyopadhyay
  • Parantap Basu

Abstract

. We present a neo‐classical model that explores the determinants of growth‐inequality correlation and attempts to reconcile the seemingly conflicting evidence on the nature of the growth‐inequality relationship. The initial distribution of human capital determines the long‐run income distribution and the growth rate by influencing the occupational choice of the agents. The steady‐state proportion of adults that innovates and updates human capital is path dependent. The output elasticity of skilled‐labour, barriers to knowledge spillovers, and the degree of redistribution determine the range of steady‐state equilibria. From a calibration experiment we report that a skill‐intensive technology, low barriers to knowledge spillovers, and high degrees of redistribution characterize the industrial countries with a positive growth‐inequality correlation. A negative correlation between growth and inequality arises for the group of non‐industrial countries with the opposite characteristics. JEL classification: E1, O4 Qu’est‐ce qui sous‐tend la corrélation transversale entre la croissance des pays et son niveau d’inégalité? On présente un modèle néo‐classique qui explore les déterminants de la corrélation croissance‐inégalité et on tente de réconcilier les résultats qui semblent contradictoires à ce propos. La distribution initiale de capital humain détermine la distribution des revenus à long terme et le taux de croissance en influant sur le choix occupationnel des agents. En régime permanent, la proportion des adultes qui innovent et améliorent le capital humain dépend du sentier d’origine. L’élasticité de la production par rapport au travail qualifié, les barrières aux effets de débordement de la connaissance, et le degré de redistribution déterminent le corridor des équilibres en régime permanent. A partir d’une expérience de calibration, il appert qu’une technologie à forte intensité de compétences, des barrières faibles aux effets de débordement de la connaissance, et beaucoup de redistribution sont des éléments qui caractérisent les pays où la corrélation croissance‐inégalité est positive. Une corrélation négative émerge dans le groupe de pays non industrialisés qui a les caractéristiques inverses.

Suggested Citation

  • Debasis Bandyopadhyay & Parantap Basu, 2005. "What drives the cross‐country growth and inequality correlation?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(4), pages 1272-1297, November.
    • Handle: RePEc:wly:canjec:v:38:y:2005:i:4:p:1272-1297
    DOI: 10.1111/j.0008-4085.2005.00325.x
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    Cited by:

    1. Lin Yi-Chen & Huang Ho-Chuan (River) & Yeh Chih-Chuan, 2014. "Inequality-growth nexus along the development process," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(3), pages 237-252, May.
    2. Andergassen, Rainer & Nardini, Franco, 2007. "Educational choice, endogenous inequality and economic development," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 940-958, December.
    3. Basu, Parantap & Getachew, Yoseph, 2015. "An adjustment cost model of social mobility," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 177-190.
    4. Basu, Parantap & Guariglia, Alessandra, 2007. "Foreign Direct Investment, inequality, and growth," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 824-839, December.
    5. Lin Shu-Chin & Huang Ho-Chuan & Kim Dong-Hyeon & Yeh Chih-Chuan, 2009. "Nonlinearity between Inequality and Growth," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(2), pages 1-20, May.
    6. Arshad Ali Bhatti & M. Emranul Haque & Denise R. Osborn, 2015. "Threshold Effects of Inequality on the Process of Economic Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 205, Economics, The University of Manchester.
    7. Parantap Basu & Alessandra Guariglia, 2004. "Inequality and Industrialization," CDMA Conference Paper Series 0401, Centre for Dynamic Macroeconomic Analysis.
    8. Wang, Shengquan, 2023. "Income inequality and systemic banking crises: A nonlinear nexus," Economic Systems, Elsevier, vol. 47(4).

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    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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