Is economic inequality bad for growth?

How many times have you heard that meme?  It turns out that political inequality is possibly at fault.  Acemoglu et. al. report:

Is inequality harmful for economic growth?  Is the underdevelopment of
Latin America related to its unequal distribution of wealth?  A recently
emerging consensus claims not only that economic inequality has
detrimental effects on economic growth in general, but also that
differences in economic inequality across the American continent during
the 19th century are responsible for the radically different economic
performances of the north and south of the continent.  In this paper we
investigate this hypothesis using unique 19th century micro data on
land ownership and political office holding in the state of
Cundinamarca, Colombia.  Our results shed considerable doubt on this
consensus.  Even though Cundinamarca is indeed more unequal than the
Northern United States at the time, within Cundinamarca municipalities
that were more unequal in the 19th century (as measured by the land
gini) are more developed today.  Instead, we argue that political rather
than economic inequality might be more important in understanding
long-run development paths and document that municipalities with
greater political inequality, as measured by political concentration,
are less developed today.  We also show that during this critical period
the politically powerful were able to amass greater wealth, which is
consistent with one of the channels through which political inequality
might affect economic allocations.  Overall our findings shed doubt on
the conventional wisdom and suggest that research on long-run
comparative development should investigate the implications of
political inequality as well as those of economic inequality.

In other words, at least from that data set, the real problem seems to be rent-seeking behavior through the political process.  Here is the link.  Here is a non-gated version of the paper.

Comments

Isn't this a bit like saying that "genes don't cause X, environment causes X" or vice versa when it's blatantly obvious that additive effects take the system beyond a critical threshold or that interactions are actually relevant?
Economic inequality causing political inequality which causes slow growth IS economic inequality slowing growth, just as guns firing bullets which kill people IS guns killing people.

Well Michael, your single variable called economic inequality and it's unicausal relationship to political inequality strikes me as simplistic.

A. Different types of economic inequality may have different effects on political inequality.

If somebody makes a lot of money in the free market, that may not impact political inequality as much as somebody who makes a lot of money by being tight with the local mayor and getting city-funded loans to buy land and then getting the loans forgiven.

B. In terms of reverse causation, political inequality may generate economic inequality of the latter "bad rent-seeking" type, but not economic inequality of the former "good productive" type. In fact, political inequality may increase the "bad" type of economic inequality at the expense of the benign type of economic inequality.

In fact, if one creates more political inequality to get rid of the relatively harmless types of economic inequality, then the net effect may be bad for development.

Frankly, I'm not automatically opposed to a simple theory that says, beyond a certain threshhold, economic inequality, even of the relatively just variety, generates political inequality.

But whether that's actually the cause of retarded economic development in many countries remains an open question.

Offhand, wouldn't it be more likely that the more economically promising pieces of land in Colombia were grabbed up by the rich and powerful, leaving ownership of the less promising pieces of land to small landowners? If true, then it's hardly surprising that the land owned by the rich is richer today than the land then owned by the poor.

Nice paper.
There are strong similarities with "Centuries of Economic Endeavor: Parallel Paths in Japan and Europe and Their Contrast With the Third World" by John Powelson (1994).

Comments for this post are closed