Hostname: page-component-7dc689bd49-kfntg Total loading time: 0 Render date: 2023-03-21T01:58:15.498Z Has data issue: true Feature Flags: { "useRatesEcommerce": false } hasContentIssue true

Why Inequality Matters: Some Economic Issues

Published online by Cambridge University Press:  28 September 2012


Many industrialized countries, developing countries, and countries that have recently made the transition from communism to market-oriented economies are characterized by high and increasing income inequality. Trends in income inequality have been understood to have ethical significance for different reasons. Some have argued that lessening income inequality is a valuable goal in itself. This essay, on the other hand, focuses on three instrumental reasons for pursuing economic policies that engender less income inequality, particularly in developing countries.

• Inequality can inhibit growth and slow poverty reduction.

• Inequality often undermines the political process: that may lead to an inadequate social contract and may trigger bad economic policies-with ill effects on growth, human development, and poverty reduction.

• Inequality may undermine civic and social as well as political life, and inhibit certain kinds of collective decision-making; at the societal level it may also generate its own self-justifying tolerance, perpetuating a high inequality equilibrium despite the potential economic and political costs.

The author concludes that while societies with relatively high income inequality can, in principle, be equitable, it is more likely that income differentials will compound and aggravate unfairness in the allocation of opportunities, the functioning of the political process, and efforts to improve the well-being of the least advantaged.

Copyright © Carnegie Council for Ethics in International Affairs 2001

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


1 See Tawney, Richard H., Equality (New York: Barnes & Noble, 1952Google Scholar).

2 Kuznets, Simon, “Economic Growth and Income Inequality,” American Economic Review 45, No. 1 (1955), pp. 128Google Scholar; and Chenery, Hollis and Syrquin, Moises, Patterns of Development, 1950–1970 (New York: Oxford University Press, 1975Google Scholar).

3 See Sen, Amartya, Inequality Reexamined (Cambridge: Harvard University Press, 1992Google Scholar).

4 Sen, Amartya, Development as Freedom (New York: Knopf, 1999Google Scholar).

5 United Nations Development Programme, Human Development Report 2001, Making New Technology Work for Human Development (New York: Oxford University Press, 2000).

6 United Nations Development Programme, Human Development Report 2000, Human Development and Human Rights (New York: Oxford University Press, 1999Google Scholar); and World Bank, World Development Report 2000/01: Attacking Poverty (New York: Oxford University Press, 2000).

7 See Sen, Amartya, “Possibility of Social Choice,” American Economic Review 89, No. 3 (June 1999), pp. 349–78CrossRefGoogle Scholar.

8 See Young, Peyton H., Equity: In Theory and Practice (Princeton: Princeton University Press, 1994Google Scholar).

9 Deininger, Klaus and Squire, Lyn, “A New Data Set Measuring Income Inequality,” World Bank Economic Review 10, No. 3 (1996), pp. 565–91CrossRefGoogle Scholar.

10 Among the many measures of income distribution, the Gini coefficient is the most sensitive to income differences in the middle of the distribution. Other measures such as the ratio of the richest to poorest decile or quintile of individuals or households are more sensitive to the bottom and the top of distributionsGoogle Scholar.

11 World Bank, World Development R2000/01Google Scholar; see also David Dollar and Aart Kraay, “Growth Is Good for the Poor,” World Bank Paper No. 2587, April 12, 2001.

12 Narayan, Deepa, Voices of the Poor, Vol. 1. Can Anyone Hear Us? Voices from 47 Countries (Washington, D.C.: World Bank, 1999Google Scholar).

13 Kaldor, Nicholas, “Capital Accumulation and Economic Growth,” in Kaldor, Nicholas, ed., Further Essays on Economic Theory (New York: Holmes and Meier, 1978), pp. 153Google Scholar.

14 Okun, Arthur M., Equality and Efficiency: The Big Tradeoff (Washington, D.C.: Brookings Institution 1975Google Scholar).

15 Rawls, John, A Theory of Justice (Cambridge: Harvard University Press, 1971Google Scholar).

16 Betts, Julian R. and Roemer, John E., “Equalizing Opportunity Through Educational Finance Reform” (paper presented at the First Workshop of the LACE/IDB/World Bank Inequality and Poverty Network, Buenos Aires, Argentina, August 25, 1998)Google Scholar.

17 Nancy Birdsall and Carol Graham, “Mobility and Markets: Conceptual Issues and Policy Questions,” in Birdsall, Nancy and Graham, Carol, eds., New Markets, New Ideas: Economic and Social Mobility in a Changing World (Washington, D.C.: Brookings Institution and Carnegie Endowment for International Peace, 2000), pp. 321Google Scholar.

18 Sawhill, Isabel V., “Opportunity in the United States: Myth or Reality,” in Birdsall, and Graham, , eds., New Markets, New IdeasGoogle Scholar.

19 Fields, Gary, “Income Mobility: Concepts and Measures,” in Birdsall and Graham, eds., New Markets, New Ideas, pp. 101–34Google Scholar.

20 Behrman, Jere, Birdsall, Nancy, and Szekely, Miguel, “Intergenerational Mobility in Latin America: Deeper Markets and Better Schools Make a Difference,” in Birdsall, Nancy and Graham, Carol, eds., New Markets, New Opportunities? Economic and Social Mobility in a Changing World (Washington, D.C.: Brookings Institution and Carnegie Endowment for International Peace, 1999), pp. 135–67Google Scholar.

22 Sawhill, , “Opportunity in the United States: Myth or Reality,” pp. 2235Google Scholar.

23 Nancy Birdsall and Lesley O'Connell, “Putting Education to Work in Egypt,”Carnegie Endowment Working Paper#5 {Washington, D.C.: Carnegie Endowment for International Peace, October, 1999}; and David Lam, “Generating Extreme Inequality: Schooling, Earnings and Intergenerational Transmission of Human Capital in South Africa and Brazil,” PSC Report, No. 99–439 (Ann Arbor: Population Studies Center, University of Michigan, 1999).Google Scholar

24 Bank, World, The East Asian Miracle: Economic Growth and Public Policy (New York: Oxford University Press, 1993Google Scholar).

25 Alesina, Alberto and Rodrik, Dani, “Distributive Politics and Economic Growth,” Quarterly Journal of Economics 109, No. 2 (May 1994), pp. 465–90CrossRefGoogle Scholar.

26 Easterly, William and Rebelo, Sergio, “Fiscal Policy and Economic Growth: An Empirical Investigation,” Journal of Monetary Economics 32, No. 3 (1993), pp. 417–58CrossRefGoogle Scholar.

27 Birdsall, Nancy, Ross, David, and Sabot, Richard, “Inequality and Growth Reconsidered: Lessons from East Asia,” World Bank Economic Review 9, No. 3 (1995), pp. 477508CrossRefGoogle Scholar.

28 See Benabou, Roland, “Unequal Societies,” NBER Working Paper #5583 (Cambridge: National Bureau of Economic Research, May 1996)Google Scholar; and Bowles, Samuel and Gintis, Herbert, “Escaping the Efficiency-Equity Trade-off: Productivity-Enhancing Asset Redistribution,” in Epstein, Gerald and Gintis, Herbert, eds., Macroeconomic Policy After the Conservative Era: Studies in Investment, Saving and Finance (New York: Cambridge University Press, 1995), pp. 408–40Google Scholar.

29 Hoff, Karla, “Market Failures and the Distribution of Wealth: A Perspective from the Economics of Information,” Politics and Society 24, No. 4 (1996), pp. 411–32CrossRefGoogle Scholar.

30 Behrman, Birdsall, and Szekely, “Intergenerational Mobility in Latin America: Deeper Markets and Better Schools Make a Difference,” pp. 135–67Google Scholar.

31 Deininger, Klaus and Olinto, Pedro, “Asset Distribution, Inequality and Growth: An Illustration of World Bank's Inequality Data” (Washington, D.C.: World Bank mimeo, 1999)CrossRefGoogle Scholar.

32 Carter, Michael, “Land Ownership, Inequality and the Income Distribution Consequences of Economic Growth”Google Scholar (paper presented for the conference “Rising Income Inequality and Poverty Reduction,” WIDER, Helsinki, December 11–13, 1999).

33 Nancy Birdsall and Juan Luis Londono, “Assets Inequality Matters: An Assessment of the World Bank's Approach to Poverty Reduction,” Applied Economics in Action Papers and Proceedings (May 1997), pp. 3237Google Scholar; and Thomas, Vinod and Wang, Yan, “Revisiting the Lessons of Development” (Washington, D.C.: World Bank mimeo, 1999Google Scholar).

34 Aghion, Philippe, Caroli, Eva, and Garcia-Peñalosa, Cecelia, “Inequality and Economic Growth: The Perspective of the New Growth Theories,” Journal of Economic Literature 37 (December 1999), pp. 1615–60CrossRefGoogle Scholar.

35 Nancy Birdsall, Thomas C. Pinckney, and Richard Sabot, “Natural Resources, Human Capital and Growth” (paper prepared for the UNU/WIDER project on Environmental, Export and Human Capital Accumulation Problems of Resource Based Growth Models, 1999)Google Scholar.

36 Hausmann, Ricardo and Gavin, Michael, “Securing Stability and Growth in a Shock-Prone Region: The Policy Challenge for Latin America,” in Hausmann, Ricardo and Riesen, Helmut, eds., Securing Stability and Growth in Latin America: Policy Issues and Prospects for Shock-Prone Economies (Paris: OECD, 1996), pp. 2364Google Scholar; Rodrik, Dani, “Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapse” (Cambridge: Harvard University mimeo, 1999)Google Scholar; and Aghion, Caroli, and Garcia-Peñalosa, , “Inequality and Economic Growth: The Perspective of the New Growth Theories,” pp. 1615–60Google Scholar.

37 This is not necessarily true for the more industrialized countries–probably because both markets and government institutions work better there and, as discussed in the text, the negative effect of inequality on growth operates through weak markets and weak government institutionsGoogle Scholar.

38 Ravallion, Martin, “Can High-Inequality Developing Countries Escape Absolute Poverty?” Economic Letters 56, No. 1 (September 1997), pp. 5157CrossRefGoogle Scholar.

39 deJanvry, Alain and Sadoulet, Elisabeth, “Growth, Poverty, and Inequality in Latin America: A Causal Analysis, 1970–1994,” in Lustig, Nora, ed., Shield the Poor: Social Protection in the Developing World (Washington, D.C.: Brookings Institution, 2000Google Scholar).

40 This high-end inequality or concentration of income at the top may have slowed average growth, too, by preventing the dynamic multiplier effects that consumer demand would have generated for the industrial sector. See John Mellor, “Pro-Poor Growth: The Relation Between Growth in Agriculture and Poverty Reduction” (report prepared for USAID/GEGAD, November 1999); and Birdsall, Ross, and Sabot, “Inequality and Growth Reconsidered: Lessons from East Asia,” pp. 477–508. This may be part of the reason for the finding of Birdsall and Londoño, reported above, that inequality of education and land are associated with less growth of income among the poor than for other income groupsGoogle Scholar.

41 Buchanan, James M., Tollison, Robert D., and Tullock, Gordon, eds., Toward a Theory of the Rent-Seeking Society (College Station: Texas A&M University Press, 1980Google Scholar).

42 Pritchett, Lant and Filmer, Deon, “What Educational Production Functions Really Show,” World Bank Policy Research Working Paper, 1975 (Washington, D.C.: World Bank, 1997Google Scholar).

43 Birdsall, Nancy and James, Estelle, “Efficiency and Equity in Social Spending: How and Why Governments Misbehave,” in Lipton, Michael and van der Gaag, Jacques, eds., Including the Poor: Proceedings of a Symposium Organized by the World Bank and the International Food Policy Research Institute (Washington, D.C.: World Bank, 1993), pp. 335–58Google Scholar.

44 Birdsall, Nancy and Hecht, Robert, “Swimming Against the Tide: Strategies for Improving Equity in Health,” in Colclough, Christopher, ed., Marketising Education and Health in Developing Countries (Oxford: Oxford University Press, 1997), pp. 347–66Google Scholar.

45 Birdsall, Nancy, Ross, David, and Sabot, Richard, “Inequality and Growth Reconsidered: Lessons from East Asia,” pp. 477508Google Scholar.

46 Behrman, Jere and Birdsall, Nancy, “Quality of Schooling: Quality Alone Is Misleading,” American Economic Review 73, No. 5 (1983), pp. 928–46Google Scholar.

47 Thomas M. Scanlon, cited in Charles, R. Beitz, “Does Global Inequality Matter?” Metaphilosophy 32 (January 2001), pp. 95112Google Scholar.

48 William Darity Jr., “Intergroup Inequalities Across Countries” (paper presented at the Macrodynamics of Economic Inequality conference, Jerome Levy Economics Institute, Bard College, Annandale-on-Hudson, New York, October 28–29, 1999)Google Scholar.

49 Beitz, “Does Global Inequality Matter?”Google Scholar

50 See Scanlon, Thomas M., What We Owe to Each Other (Cambridge: Harvard University Press, 1998Google Scholar).

51 See Birdsall, Nancy, “Life Is Unfair: Inequality in the World,” Foreign Policy (Summer 1998), pp. 7693CrossRefGoogle Scholar. The essays in Birdsall, Nancy, Graham, Carol, and Sabot, Richard, eds., Beyond Tradeoffs: Market Reforms and Equitable Growth in Latin America (Washington, D.C.: Inter-American Development Bank, Brookings Institution Press, 1998Google Scholar) discuss a range of policies that can enhance both efficiency and equity, yet are not always chosen.

52 See Sachs, Jeffrey and Warner, Andrew, “Sources of Slow Growth in African Economies,” Journal of African Economics 6, No. 3 (October 1997), pp. 335–76CrossRefGoogle Scholar.

53 Easterlin, Richard, “Will Raising the Incomes of All Increase the Happiness of All?” Journal of Economic Behavior and Organization 27, No. 1 (June 1995), pp. 3547CrossRefGoogle Scholar.

54 See Birdsall, Nancy, Graham, Carol, and Pettinato, Stefano, “Stuck in the Tunnel: Have New Markets Muddled the Middle Class?” Working Paper Number 14 (Washington, D.C.: Brookings Institution and Carnegie Endowment for International Peace, 2000), pp. 321Google Scholar.

55 Amartya, Sen, Inequality ReexaminedGoogle Scholar.

56 Putnam, Robert, Making Democracy Work: Civic Traditions in Modern Italy (Princeton: Princeton University Press, 1993Google Scholar).

57 Parthasarathy, D. and Chopde, V. K. “Building Social Capital: Collective Action, Adoption of Agricultural Innovations, and Poverty Reduction in the Indian Semi-Arid Tropics”Google Scholar (paper for the Global Development Network meeting, Tokyo, Japan, December 2000).

58 Ostrom, Elinor, Governing the Commons: The Evolution of Institutions for Collective Action (New York: Cambridge University Press, 1990CrossRefGoogle Scholar).

59 Galbraith, John K., The Affluent Society, 3d ed., rev. (Boston: Houghton Mifflin, 1976Google Scholar).

60 Kaus, Mickey, The End of Equality (New York: Harper Collins, 1992Google Scholar).

61 Alesina, Alberto and La Ferrara, Eliana, “Participation in Heterogeneous Communities,” Working Paper #7155 (Cambridge: National Bureau of Economic Research, June 1999Google Scholar); available at See also Bardhan, Pranab, Bowles, Samuel, and Gintis, Herbert, “Wealth Inequality, Wealth Constraints and Economic Performance,” in Atkinson, Anthony and Bourguignon, François, eds., Handbook on Income Distribution (Elsevier, North Holland, 1999), pp. 541603Google Scholar.

62 La Ferrara, Eliana, “Inequality and Participation: Theory and Evidence from Rural Tanzania,” unpublished paper, cited by Alesina and La Ferrara, “Participation in Heterogeneous Communities,” p. 14Google Scholar.

63 Abhijit V. Banerjee, Dilip Mookherjee, Kalvan Munshi, and Debraj Ray, “Inequality, Control Rights and Rent-Seeking: A Theoretical and Empirical Analysis of Sugar Cooperatives in Maharashtra,” mimeo, 1998, cited in Banerjee, Abhijit V. and Duflo, Esther, “Inequality and Growth: What Can the Data Say?” NBER Working Paper #7793, (Cambridge: National Bureau of Economic Research, July 2000Google Scholar).

64 Alesina and La Ferrara, “Participation in Heterogeneous Communities,” p. 23Google Scholar.

65 Fernandez, Raquel F. and Rogerson, Richard R., “Income Distribution, Communities and the Quality of Public Education,” Quarterly Journal of Economics 111, No. 1 (1996), pp. 135–64CrossRefGoogle Scholar.

66 Juan-Camilo Cardenas, “Real Wealth and Experimental Cooperation: Evidence from Field Experiments” (paper for Global Development Network Meeting, Tokyo, Japan, December 2000)Google Scholar.

67 Fajnzylber, Pablo, Lederman, Daniel, and Loayza, Norman, “Inequality and Violent Crime” (Washington, D.C.: World Bank mimeo, 1999Google Scholar).

68 Atkinson, Anthony, “Equity Issues in a Globalizing World: The Experience of OECD Countries,” in Tanzi, Vito, Chu, Ke-young, and Gupta, Sanjeev, eds., Economic Policy and Equity (Washington, D.C.: World Bank, International Monetary Fund, 1999), pp. 6380Google Scholar; quotation at p. 68.

69 Akerlof, George, “A Theory of Social Custom, of Which Unemployment May Be One Consequence,” Quarterly Journal of Economics. 94, No. 4 (June 1980), pp. 749–75CrossRefGoogle Scholar.

70 Easterly, and Rebelo, , “Fiscal Policy and Economic Growth: An Empirical Investigation,” pp. 417–58Google Scholar; Barro, Robert, The Determinants of Growth: A Cross-Country Empirical Study, Lionel Robbins Lectures (Cambridge: MIT Press, 1997)Google Scholar; and see Birdsall and Londoño, “Asset Inequality Matters,” pp. 32–37, and Thomas and Wang, “Revisiting the Lessons of Development.”

71 Francois Bourguignon and Thierry Verdier, in “The Political Economy of Education and Development in an Open Economy,” (unpublished mimeo, Delta, Paris, November 2000), model the effects of open capital markets and other liberalization measures on redistribution, including through political change. See also Nancy Birdsall, “Managing Inequality in the Developing World,”Current History (November 1999), pp. 336–81Google Scholar.