1. Economic Inequality and Development Barbara Liberda University of Warsaw, Faculty of Economics 18 October 2011

2. Disparities of wealth and income Aversion to inequality Philosophical grounds Functional level of inequalty Personal income distribution Tunnel effect Positive aspects of income inequality? Savings Aspirations 2

3. Measurement of inequality - criteria Anonymity principle Population principle Relative income principle Dalton transfer principle Above 4 principles create the Lorenz curve - Lorenz criterion 3

4. Lorenz curve Lorenz curve – shows how cumulative shares of income are earned by cumulatively increasing fractions of the population, ranked from poorest to richest Regressive transfers Progressive transfers When Lorenz curves cross 4

5. Complete masures of inequality The range The Kuznets ratios The mean absolute deviation (from the mean income) The coefficient of variation The Gini coefficient Inequality between individuals at the world scale and within countries as well as between countries 5

6. Branko Milanovic, 2007, Where in the world are you? 6

7. Income mobility of countries 1980-2000 in Markov mobility matrix (132 countries, shares of world average income) 1/41/212>2 1/4888400 1/248431000 102856143 200324226 >2033688 7

8. Kuznets curve The Kuznets curve — an inverse-U shape relationship between income inequality and per capita GDP International data confirm that the Kuznets curve is relatively stable from the 1960s into the 2000s (Barro, 1991, 2000, 2008) Latin (America) effect 8

9. Kuznets Curve estimated by Barro, 2008 9

10. Effect of income inequality on growth A cross-country-growth equation shows a negative effect of income inequality on economic growth, holding fixed a set of other explanatory variables (life expectancy, investment, openness, school attainment, etc). 10

11. Effect of income inequality on growth, Barro 2008 11

12. Effect of income inequality on growth and income level The negative effect of income inequality on growth diminishes as per capita GDP rises and may be positive for the richest countries. 12

13. Effect of income inequality on growth at income levels below (left graph) or above (right graph) 12000 $ 13

14. Inequality and savings Distribution of savings versus distribution of income Marginal saving rates: constant, increasing, decreasing Average saving rates rise in higher income groups Aspirations and savings 14