Growth, Equity and Cumulative
Causation
brendan fisher
Gund Institute for Ecological Economics
University of Vermont
Gund Institute for
Ecological Economics
Kuznets Curve
• “Does inequality in the distribution of
income increase or decrease in the course of
a country’s economic growth?” (Kuznets, 1955)
Economic Development
Gund Institute for
Ecological Economics
Solow’s Growth Model
Y = Af(K)
Y/N
LR
Poor Nations
Rich
Nations
Time
Gund Institute for
Ecological Economics
Textbook Theory
• “The conventional textbook approach is that
inequality is good for incentives and
therefore good for growth, even though
incentive and growth considerations might
be traded off against equity or insurance
goals” (Aghion et al. 1999).
Gund Institute for
Ecological Economics
Recent Findings…
Gund Institute for
Ecological Economics
Growth - Equity Studies
Perotti (1992)
Credit Markets
Perotti (1996)
Marginal tax
Alesina and
Denninger and
Rodrik (1994)
Squire (1996)
Tax rate/redist.
Partridge (1997) Barro (1999)
US States
Rich/Poor effect
Glaeser et al
(2003)
f (legal capacity)
Gund Institute for
Ecological Economics
Our work
Gund Institute for
Ecological Economics
Gini Coefficient
100%
Income
A
B
Gini = A/(A+B)
0
Income recipients
100%
Gund Institute for
Ecological Economics
Early
Growth
and
Equity
40
Gini
Level Number Mean Std Error Lower 95% Upper 95%
e
22
0.051
0.00653
0.03785
0.06397
u
38
0.0299
0.00496
0.02
0.03987
F Ratio Prob > F
t-Test
DF
Prob > |t|
6.545
0.0132
2.558
58
0.0132
Gund Institute for
Ecological Economics
Recent
Growth
and
Equity
Level Number Mean Std Error Lower 95% Upper 95%
e
29
0.0303
0.00411
0.02206
0.0385
u
31
0.0163
0.00397
0.00832
0.0242
F Ratio Prob > F
t-Test
DF
Prob > |t|
6.023
0.0171
2.454
58
0.0171
Gund Institute for
Ecological Economics
A Closer Look
Norway
Taiwan
South Korea
(1961)
Growth Rate
3%
Niger
Malaysia
Thailand
Singapore (1973)
Tunisia
Honduras, Iran,
Philippines,
Venezuela, Zambia,
Madagascar,
Tanzania, Senegal
40
Gini
Gund Institute for
Ecological Economics
Long Run Dynamic
Growth Rate
3%
Japan, Sweden,
Bolivia, Mexico
Denmark*, Italy Turkey, Hong Kong
Pakistan*, Germany Brazil, Costa Rica,
Indonesia*, Spain, Columbia, Jamaica
Greece, Canada
40
Gini
Gund Institute for
Ecological Economics
Long Run Dynamic
Growth Rate
3%
Australia, United
States, United
Kingdom
40
Gini
Gund Institute for
Ecological Economics
Long Run Dynamic
Sri Lanka, China,
Bangladesh, India
Growth Rate
3%
Finland, France,
The Netherlands
Nepal*, Portugal*,
Egypt, El Salvador
40
Gini
Gund Institute for
Ecological Economics
Another View
China
Denmark
Egypt
Finland
France
Germany
Italy
Japan
Netherlands
Norway
Pakistan
Sri Lanka
Growth Rate 3%
Bangladesh
Bolivia
Jamaica
Madagascar (-)
Nepal
New Zealand
Peru
Sweden
Tanzania
Turkey
Gini
> - .2/yr
Brazil
Canada
Greece
Hong Kong
India
Indonesia
Ireland
Malaysia
Mexico
Puerto Rico
Singapore
South Korea
Spain
Taiwan
Thailand
Trinidad and Tobago
Tunisia
USA
Australia
Chile
Colombia
Costa Rica
Dominican Republic
Ecuador
El Salvador
Honduras
Iran
Niger (-)
Nigeria
Panama
Philippines
Portugal
Sierra Leone (-)
United kingdom
Venezuela (-)
Zambia (-)
< - .2/yr
Gund Institute for
Ecological Economics
35.00%
Growth and Gini Change
30.00%
GDP Growth/yr
25.00%
20.00%
15.00%
Netherlands
10.00%
USA
5.00%
Finland France
Australia
3%
UK
0.00%
-0.0250
-0.0200
-5.00%
-0.0150
-0.0100
-0.0050
0.0000
0.0050
0.0100
0.0150
0.0200
%Gini Chg/Yr
Gund Institute for
Ecological Economics
Growth and Gini Change
3%
China, Denmark, Italy,
Japan, Finland, France,
Germany, Norway,
Netherlands, Sri Lanka
Canada, USA, India,
Spain
New Zealand, Sweden
Australia, Portugal,
United Kingdom
>-.2/yr>
Gund Institute for
Ecological Economics
Government Spending
30
Australia
25
UK
USA
cG ($PPP)
20
Canada
Spain
15
Denmark
Finland
France
10
Netherlands
Norway
5
0
1950
Sweden
1960
1970
1980
1990
2000
Gund Institute for
Ecological Economics
Openness
140
120
Australia
UK
(NX/cGDP)/GDP
100
USA
Canada
80
Spain
Denmark
60
Finland
France
Netherlands
40
Norway
Sweden
20
0
1950
1960
1970
1980
1990
2000
Gund Institute for
Ecological Economics
Consistent?
• Low tax rate and high government spending
show weak correlation to growth in crosscountry analysis (Slemrod, 1995)
Gund Institute for
Ecological Economics
Conclusion I
Intervention
Growth
Equity
• T-tests supports other
studies: positive
relationship between
equity and growth.
• Confidently reject the
mindset that ‘equity is
sought at the cost of
growth.’
Gund Institute for
Ecological Economics
Conclusion I
Growth
Equity
Gund Institute for
Ecological Economics
Conclusions II
• Increasing equity can
be achieved even in
economic downturn.
(Global Slowdown
since 1973, national
downturns)
– Middle East and North
Africa low growth,
lowered poverty levels
over past 20yrs
Growth
Equity
(Adams and Page, 2003).
Gund Institute for
Ecological Economics
Conclusions III
Market
• Growth can be a
force to increase
inequity (UK,
Australia, USA)
“the growth
Growth
process is unlikely
to leave inequality
unchanged” (Aghion,
Inequity
1999)
Gund Institute for
Ecological Economics
Cumulative Causation
• “If things were left to market forces unhampered
by any policy interferences, industrial production,
commerce, banking, insurance, shipping and
indeed almost all of those economic activities
which in a developing economy tend to give a
bigger than average return – and, in addition,
science, art, literature, education, and higher
culture generally – would cluster in certain
localities and regions, leaving the rest of the
country more or less in a backwater” (Mrydal,
1957).
Gund Institute for
Ecological Economics
1979-1998 Real Family Income Growth by Quintile and for Top 1%
120%
106%
100%
80%
60%
38%
40%
20%
15%
8%
3%
0%
Bottom 20%
-5%
Second 20%
Middle 20%
Fourth 20%
Top 20%
Top 1%
-20%
Source: Economic Apartheid in America, Collins, Yeskel, p. 42, 44.
Gund Institute for
Ecological Economics
Conclusions IV
• Policy and Implementation matter, often
more than economic status.
– Egypt, Sri Lanka, China seeking growth and
equity.
– USA, UK, Australia poor performance in
combating inequity.
Gund Institute for
Ecological Economics
Policy Considerations and
Implications
• Cross-country data can be helpful, but historical
analysis, key component to not fall into IMF
blanket policy trap.
• Enlightened by the process Cumulative Causation.
• Growth and equity as a dynamic relationship.
• Ecological consequences of growth and inequity.
Gund Institute for
Ecological Economics