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Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways
To Change The Tide

Not Just A Problem For The Poor

Do societies inevitably face a choice between efficient production and the equitable distribution of income? According
to IMF economists Andrew Berg, Jonathan Ostry, and Jeromin Zettelmeyer, the answer is no. They argue that the
empirical literature on growth and inequality using long-run average growth may have missed how income distribution
is tied to abrupt ends in growth.

Their work examined growth over a long time horizon, between 1950 and 2006, focusing on the duration of growth
spells, and showed that there may be no trade-off between efficiency and equality (51). In fact, they posited that
equality could be an important component of sustained growth, observing that the level of inequality may be the key
difference between countries that enjoy extended, rapid expansion and those whose growth spurts quickly dissipate. In
short, promoting greater equality may also improve efficiency in the form of more sustainable long-run growth.

Of the number of variables associated with longer growth spells, income inequality's relationship with the duration of
growth spells was the strongest (see chart 8). They found that a 10% decrease in inequality (a change in the Gini
coefficient to 0.37 from 0.40) increases the expected length of a growth spell by 50%.

Chart 8
Income Distribution Has A Stronger Impact On How Long Growth Lasts Than Other
Factors

Percent change in expected growth duration

External debt
Exchange rate competitiveness
Foreign direct investment
Political institution
Trade openness
Income distribution

0 10 20 30 40 50 60

Note: See Glossary of Relevant Terms for details on authors' calculations. Source:
Berg and Ostry, "Equality and Efficiency", September 2011.

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