Inequality, Poverty, and Growth: Cross-Country Evidence

IMF Working Papers, February 1, 2005

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The paper examines the empirical relationship between inequality and growth, and analyzes the impacts of growth, inequality, and government spending on poverty reduction.
A new panel dataset has been assembled on inequality and poverty that reduces measurement error and ensures comparability across countries and over time.
The empirical results challenge the belief that income inequality has a negative effect on growth.
The results confirm the validity of the Kuznets curve.
Credit market imperfections in low- and medium-income countries are identified as the likely reason for the positive link between inequality and growth over the short-to-medium term.
In the long term, inequality may have an adverse impact on growth.

Data quality and comparability: emphasis on a newly assembled panel dataset designed to reduce measurement error across countries and over time.
Short-to-medium term dynamics: identification of credit market imperfections as a mechanism linking higher inequality to higher growth in low- and medium-income countries.
Long-term dynamics: potential adverse effects of inequality on long-run growth, even if short-term links are positive.
Poverty reduction drivers analyzed: growth, inequality, and government spending.

Inequality, Poverty, and Growth: Cross-Country Evidence — IMF Working Paper by Garbis Iradian, February 1, 2005.