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.


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