Despite the developmental progress of recent decades, developed and developing countries alike are experiencing widening income inequality. But how does income distribution affect economic growth? And to what extent does economic growth impact on income distribution?

Research from Queen Elizabeth House, Oxford examines the links between income distribution and economic growth. It finds the hypothesis that income distribution worsens as levels of income increase is not supported by empirical evidence, while growth rates income are not systematically related to changes in income distribution. Evidence suggests, however, that more equal income distribution promotes economic growth.

Income distribution is extremely important for development, since it influences the cohesion of society, determines the extent of poverty for any given average per capita income, the poverty-reducing effects of growth, and even affects people's health. This paper reviews evidence on how economic growth affects income distribution, and how income distribution affects economic growth. It examines strategies to promote more egalitarian growth and considers recent trends in income distribution.

Research findings include:

• From empirical and theoretical perspectives, greater equality of income distribution is good for economic growth, for social cohesion, for poverty elimination and for health.
• Governments can influence income distribution by their policies towards asset distribution, by the growth strategy chosen, and by tax and expenditure policies.
• Higher levels of taxation and expenditure improve the distribution compared with the pre-tax system, even where the tax system is not notably progressive.
• Well-designed tax, expenditure and transfer policies can greatly improve the distribution of welfare. And within limits, empirical evidence suggests that higher taxes do not impede economic growth.
• Globalisation is restricting governments' ability to counter the rise in inequality of primary monetary incomes by redistributive taxation and expenditure because of feared impacts on competitiveness, trade and capital movements.
• Rising inequality and downward pressure on government expenditure is likely to reduce expenditure on social and economic infrastructure and political stability, essential for sustained growth and social stability.

Policy implications include:

• Co-ordinated regional, or better international action would help promote equality without weakening the ability to compete.
• Liberalisation and globalisation of late twentieth century has titled the balance of power and benefits towards those with capital (physical, human and financial) against those without. This needs to be corrected through a global social response for example through the international support for universal economic and social rights.
• At the national level, policies likely to improve income distribution include agrarian focused and employment-intensive growth strategies; high and widely spread expenditure on education; redistribution of assets; and strong policies towards social protection and social income.
• Gender balance is necessary to improve intra-household income distribution.
• It is essential to consider not just vertical income distribution, but also horizontal inequalities (or inequalities between groups divided on religious, ethnic, racial or other cultural grounds), since these are closely related to societal stability.

Source(s):
‘Income Distribution and Development', QEH Working Paper Series #37, Oxford, by Frances Stewart, March 2000 Full document.

Funded by: UNCTAD

id21 Research Highlight: 5 February 2002

Further Information:
Frances Stewart
Queen Elizabeth House
Oxford University
21 St Giles
Oxford OX1 3LA
UK

Tel: +44 (0)1865 273600
Fax: +44 (0)1865 273607
Contact the contributor: frances.stewart@qeh.ox.ac.uk

Queen Elizabeth House (QEH), UK

Other related links:
''Growth is good for the poor' say World Bank researchers'

'Globalisation’s litmus test: can it level world income distribution?'

'For richer, for fairer. Poverty reduction and income distribution'

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