Does Inclusive Growth equal Income Equality?

October 8, 2017

The short answer is NO. Although the two concepts are closely related, inclusive growth encompasses more than just income (in)equality, as it includes both monetary and non-monetary measures of prosperity.

 

But why do we care in the first place?

 

Many financial economists are interested on the impact of financial development on welfare. More broadly, economists often assess the impact of laws and regulations on the well being of individuals. But how should we measure welfare and well-being?

 

FROM ECONOMIC GROWTH TO INCOME (IN)EQUALITY 

 

Traditionally, GDP has been used as a measure of economic activity in a country. Using this measure, several authors have found a positive impact of finance (both through banks and stock markets) on economic growth (e.g. King and Levine, 1993; Levine and Zervos, 1998; Beck and Levine, 2004).

 

However, more recently, results of studies using GDP as an outcome have frequently been interpreted as evidence of a more broad impact on well-being. Criticism arose, since many have (rightfully) argued that a measure of aggregate income does not properly reflect the prosperity of different individuals.

 

Simon Knutzels published the first set of income inequality distribution statistics for the US in 1952. In his 1955 paper "Economic growth and income inequality", he seeks to answer the question of whether inequality in a country's distribution of income increases or decreases as the country grows economically. Since then, many measures of income distribution inequality have been developed. The most popular ones are indices, such as the GINI and the Theil index, ratios as the Palma ratio, the 20:20 ratio, and the coefficient of variation in income.

 

Good surveys of the literature on the impact of finance on inequality are provided in Demirgüç-Kunt, and Levine (2009), Levine (2012), and, more recently, Cournède, Denk, and Hoeller (2015). The impact of finance on inequality seems to be far from linear. Although there is some theoretical and empirical evidence that financial development reduces inequality (e.g. Clarke,  Xu, and Zou, 2006; Beck, Demirgüç-Kunt, and Levine, 2007), results seem to depend on several factors such as initial country wealth, power distribution in the country, and financial regulations (e.g. Barth, Caprio, and Levine 2006; Claessens, and Perotti, 2007; Barth, Lin, Lin, and Song, 2009; Beck, Levine, and Levkov, 2010; Favilukis, 2013). Bilias, Georgarakos, and Haliassos (2017) find no evidence of an impact of access to stock markets in the US on income inequality.

 

TOWARDS A MEASUREMENT OF INCLUSIVE GROWTH 

 

Despite being more informative than GDP, the different measures of income inequality are also monetary measures of prosperity. They do not necessary reflect the general well being of individuals. More recently, economists have doubled their efforts to produce more encompassing measures of non-monetary well being. Although income inequality is an indicator included in most of these measures, it is certainly not their only focus. Some attempts at producing measurements for inclusive growth have been produced by Ali, and Son (2007), and Ianchovichina, and Lundström (2009). 

 

The World Economic Forum has just produced a report ("The Inclusive Growth and Development Report 2017"), in which it establishes a framework for analyzing and measuring inclusive growth. The two pictures below depict this framework and the key performance indicators associated with it. The index is available for 109 countries.

 

The framework is composed by 7 pillars that represent different aspects of inclusive growth: Education and Skills, Basic Services and Infrastructure, Corruption and Rents, Financial Intermediation of Real Economy Investment, Asset Building and Entrepreneurship, Employment and Labor Compensation, and Fiscal Transfers.

 

The question remains: is this the ultimate measure of welfare and well-being?

 

 

REFERENCES

 

Ali, I., & Son, H. H. (2007). Measuring inclusive growth. Asian Development Review, 24(1), 11.

 

Barth, J.R., G. Caprio and R. Levine (2006), Rethinking Bank Regulation: Till Angels Govern, Cambridge University Press, New York.


Barth, J.R., C. Lin, P. Lin and F.M. Song (2009), “Corruption bank lending to firms: Crosscountry evidence on the beneficial role of competition and information sharing”, Journal of Financial Economics, 91, pp. 361-388.

 

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of economic growth, 12(1), 27-49.

 

Beck, T., & Levine, R. (2004). Stock markets, banks, and growth: Panel evidence. Journal of Banking & Finance, 28(3), 423-442.

 

Beck, T., Levine, R., & Levkov, A. (2010). Big bad banks? The winners and losers from bank deregulation in the United States. The Journal of Finance, 65(5), 1637-1667.

 

Bilias, Y., Georgarakos, D., & Haliassos, M. (2017). Has Greater Stock Market Participation Increased Wealth Inequality in the Us?. Review of Income and Wealth, 63(1), 169-188.

 

Claessens, S., & Perotti, E. (2007). Finance and inequality: Channels and evidence. Journal of comparative Economics, 35(4), 748-773.

 

Clarke, G. R., Xu, L. C., & Zou, H. F. (2006). Finance and income inequality: what do the data tell us?. Southern economic journal, 578-596.

 

Cournède, B., Denk, O., & Hoeller, P. (2015). Finance and inclusive growth.

(Focus on income inequality).

 

Demirgüç-Kunt, A., & Levine, R. (2009). Finance and inequality: Theory and evidence. Annu. Rev. Financ. Econ., 1(1), 287-318.

 

Favilukis, J. (2013). Inequality, stock market participation, and the equity premium. Journal of Financial Economics, 107(3), 740-759.

 

Ianchovichina, E., & Lundström, S. (2009). Inclusive growth analytics: Framework and application.

 

King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. The quarterly journal of economics, 108(3), 717-737.

 

Kuznets, S. (1955). Economic growth and income inequality. The American economic review, 45(1), 1-28.

 

Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American economic review, 537-558.

 

Levine, R. (2012). Finance, regulation and inclusive growth. Promoting inclusive growth: Challenges and policies, 55-75.

 

 

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