Some Simple Arithmetic on How Income Inequality and Economic Growth Matter by.pdf

Some Simple Arithmetic on How Income Inequality and Economic Growth Matter by Danny Quah ∗ LSE Economics Department July 2 1 ∗ I thank the British Academy, the MacArthur Foundation, and the ESRC (Award R022250126) for financial support. Abhijit Baner- jee, Tim Besley, Richard Blundell, Andrew Chesher, Frank Cowell, Bill Easterly, Theo Eicher, Raquel Fernandez, Chico Ferreira, Louise Keely, Branko Milanovic, and Andrew Newman provided helpful com- ments. Also useful were Clarissa Yeap’s research assistance in the early stages of this work and Claudia Biancotti’s Ec473 LSE seminar presentation, in the spring of 2 1. All calculations and graphs were A produced using LT X and the author’s econometrics shell tsrf. E Some Simple Arithmetic on How Income Inequality and Economic Growth Matter by Danny Quah LSE Economics Department July 2 1 ABSTRACT This paper models inequality and growth as components in a vector stochastic process. It calibrates the impact each has on different wel- fare indicators and on the world’s income distribution. For personal income inequalities worldwide, the forces assuming first-order impor- tance are macroeconomic ones determining cross-country patterns of growth and convergence. The relation between a country’s growth performance and its inequality is insignificant in global inequality dynamics. The paper concludes that standard panel data economet- ric methods produce results misleading for the relation between in- equality and growth. Once this is t