Udviklingsøkonomi - grundfag

Lecture 13

Inequality and development: interconnections

Inequality and development in the long run Kuznet’s theory of ”inverted-U”

– Sector shifts during development lead us to expect first rising, then falling inequality

Can test based on the regressions

See if b1 and b2 are significant and produce the inverse ”U”. Or use another functional form, that allows non-linearity.

Conclusion: Inverse U pattern is found in cross-section data, but it does not survive the Latin-America dummy

21 2

21 2

21 2

, or

,

.

i i i i

it i it it it

LATINAMERICAit i it it it

Ineq A bY b Y

Ineq A bY b Y or

Ineq D A bY b Y

Inequality and savings

Savings and investment matter for growth

If only rich save: concentration of wealth savings & growth

If others save: redistribution may savings & growth

– We need to look at savings rates across people

– Focus on marginal savings rates because marginal income (potentially) is redistributed

Savings and income

savings rates

Hhold income

Total savings

0

Marginal savings

A theory of the virtues of the middle classesThe poorSubsistence needsTemporary ec. Problems - dissaveLack financial assets Lack realistic (small) investment options

The middle classesStrive for prosperity, education, better housingWish something better Means to save, access to banks

The richShow-off ”conspicuous” consumption (capital and import intensive luxury

goods)No need for high (marginal) savings rates

Can redistribution increase savings?

– In very poor societies

– In somewhat better-off places

Some conclusions

History = the existing income distribution, matters High inequality, high poverty, low savings growth trap

Inequality and demand

Composition of the demand for goods affects the composition of factor demand

If for example the rich demand capital-intensive luxury items, this will boost the return to capital

Engel curve

Food share in budget

income pcTrickle-down

-happens if there is demand for the goods produced by the poor

Depends on the participation of the poor in the economy

Inequality and credit markets

Why can’t the poor acess credit?

Problem of lenders1. Can people repay?2. Do people want to repay?

– Two conditions can ensure repayment– Collateral (assets)– People value the future

(informal enforcement can work)

Both poor tend to be excluded from credit markets

What is the use of credit anyway?

– Small production: inputs, capital goods

– Education– Consumption (smoothing)

Lack of credit can have large effects

See Ray and whiteboard for a small model of occupational choice, credit constraints, and distribution