On the impact of inequality on growth, human development, and governance

Abstract

Countering recent rises in many countries of inequality in income and wealth is widely recognized as a major development challenge. This is so from an ethical perspective and because greater inequality is perceived to be detrimental to key development aims. Still, an informed debate on the effects of inequality requires clear evidence. This review contributes to the literature by taking stock and providing an overview of current knowledge of the impact of income inequality on three important outcomes: economic growth, health and education as two dimensions of human development, and governance, with a focus on democracy. Drawing on the insights from different disciplines and considering recent work, it reveals that existing evidence provides somewhat mixed results and argues for a need for further in-depth empirical work. It also points to explanations for the lack of consensus embedded in data quality and availability, measurement issues, and the shortcomings of the different methods employed. Finally, we point to promising future research avenues relying on experimental work for micro level analysis, more region- and country-specific studies, and reiterate the need for improvements in the availability and reliability of data.

Human development and decentralization: The importance of public health expenditure

“…An extensive literature analyzes the effects of inequality on economic development, in particular on economic growth, highlighting multiple mechanisms of transmission through which inequality has predominately a negative effect on growth, but its effect continues to be hotly debated (Voitchovsky, 2011; Neves & Silva, 2014; Bourguignon, 2015; Ferreira et al., 2021). Moreover, inequality can also affect other aspects of human development, such as education and health outcomes; again, even though it is generally pointed a negative effect, there is a lack of consensus about its effects (Ferreira et al., 2021). In a recent paper, Castells‐Quintana et al.…”

“…An extensive literature analyzes the effects of inequality on economic development, in particular on economic growth, highlighting multiple mechanisms of transmission through which inequality has predominately a negative effect on growth, but its effect continues to be hotly debated (Voitchovsky, 2011;Neves & Silva, 2014;Bourguignon, 2015;Ferreira et al, 2021). Moreover, inequality can also affect other aspects of human development, such as education and health outcomes; again, even though it is generally pointed a negative effect, there is a lack of consensus about its effects (Ferreira et al, 2021). In a recent paper, Castells-Quintana et al ( 2019) studied the relationship between income inequality and human development (and its dimensions) and identified a negative long-run effect of inequality on human development, whereas in the short run find a positive effect on income and a negative effect on educational outcomes.…”

Theoretical models of inequality: Examples from rational choice theory and behavioural economics

“…The modelling of inequality is one area of study where the strengths of neo‐classical economics and behavioural economics can be used together. The impact of inequality on various outcomes is the subject of considerable literature (Ferreira et al., 2021). One key point of contention is the measurement of inequality in absolute vs relative terms in theoretical models and their empirical validity from experimental data.…”