Do Redistributive Policies Affect Economic Growth.docVIP

Technology and Investment, 2013, 4, 67-72 Published Online February 2013 (http://www.SciRP.org/journal/ti) Do Redistributive Policies Affect Economic Growth? ——An Empirical Study based on Canadian data Zheng Liu Department of Economics, Concordia University, Montreal, Canada Email: jacquesliu@ Received 2012 ABSTRACT To reduce income inequality, redistributive policies are widely adopted by both federal and provincial governments in Canada. Quebec and Canada have a fairer society in OECD countries. However, their economic growth is slower than many other countries. This paper studies how these redistributive policies affect economic growth based on Canadian data for the first time. The growth model is based on standard augmented Solow model and includes several different self-defined policy indexes. Using high quality panel data spanning the period 1982 to 2009 calculated from statistic Canada’s website and Arellano-Bond panel technique, empirical analyses show that redistributive policy is negatively and significantly associated with economic growth. These findings are in accordance with many former literatures and may have important policy significance. Keywords: Income Inequality and Economic Growth 1. Introduction presence of asymmetric information and limited access to credit, investments favor people with more assets. Se- condly, high income inequality in a society will often bring social unrest even revolution. Poor people are easy to engage in crime, riots and disruptive activities which are a waste of social resources. Therefore, higher inequa- lity means more social resource waste and lower eco- nomic growth. Thirdly, under Alesina and Rodrik’s polit- ical economy model, a system of majority voting tends to redistributive policies from rich to poor and many public expenditure programs. Poor people will lose interest to work again and rich people will have to prevent this redi- stributive policy through