Inequality, Human Capital Formation and the Process of Development

Abstract

Conventional wisdom about the relationship between income distribution and economic development has been subjected to dramatic transformations in the past century. While classical economists advanced the hypothesis that inequality is beneficial for growth, the neoclassical paradigm dismissed the classical hypothesis and suggested that income distribution has limited role in the growth process. A metamorphosis in these perspectives has taken place in the past two decades. Theory and subsequent empirical evidence have demonstrated that income distribution has a significant impact on human capital formation and the development process. In early stages of industrialization, as physical capital accumulation was a prime engine of growth, inequality enhanced the process of development by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, however, as human capital has become a main engine of growth, equality, in the presence of credit constraints, has stimulated human capital formation and growth. Moreover, unequal distribution of land has been a hurdle for economic development. While industrialists have had an incentive to support education policies that foster human capital formation, landowners, whose interests lay in the reduction of the mobility of their labor force, have favored policies that deprived the masses of education.

The inequality–growth plateau

“…Kaldor, 1995), whereas the neoclassical approach suggests that inequality plays no role in promoting economic development (see, e.g. Galor, 2011 for an excellent survey). In contrast to both views, more recent literature shows that inequality could have a long-lasting impact on economic development, and that the impact is not necessarily beneficial (e.g.…”

Znaczenie nierówności dochodowych dla inwestycji w kapitał ludzki w latach 1970–2012

“…-bodźce inwestycyjne [Bell i Freeman 2001, Galor i Tsiddon 1997, Welch 1999, -oszczędności [Bertrand i Morse 2015, Frank, Levine i Dijk 2014, szczególnie w warunkach niedoskonałości rynku kredytowego [Galor i Zeira 1993, Galor 2011, Foellmi i Zweimüller 2003, -publiczne inwestycje edukacyjne [Rajan i Zingales 2006, Anderson, Mellor i Milyo 2008, -procesy demograficzne [Galor i Weil 2000, Dahan i Tsiddson 1998, Becker, Murphy i Tamura 1990], -zdrowie [Lynch i in. 2004, Leigh, Jencks i Smeeding 2009.…”

Innovation and Inclusive Development

“…If the rich have a higher marginal propensity to save than the poor, transferring income from the poor to the rich can encourage capital accumulation and lead to a higher steady-state level of capital and output per worker. This might be particularly important in early stages of development (Galor, 2011). However, this argument does not hold if the rich do not invest in capital to build up "modern" sectors but instead spend on consumption, including of luxury goods which contribute little to economic development (Arocena and Sutz, 2012).…”

“…One is that in the presence of credit market imperfections the lack of access to capital can reduce investments in human capital (Galor, 2011). Talented individuals who would benefit from further education are excluded; only those with financial resources are educated.…”