## Warning! Inequality May Be Hazardous to Your Growth

_IMF Blog, April 8, 2011_

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**Canonical URL:** [Warning! Inequality May Be Hazardous to Your Growth](https://www.imf.org/en/blogs/articles/2011/04/08/inequality-and-growth)

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## Bibliographic details
- Authors: Andrew G Berg, Jonathan D Ostry
- Published: April 8, 2011

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### Summary of argument
- Income inequality has risen sharply in the United States over the past thirty years: the rich have gotten much richer while most households experienced very modest income growth.
- The authors reject the view that overall growth alone suffices ("a rising tide lifts all boats") and illustrate inequality visually: imagining a thousand boats with boat length proportional to family income.
- Inequality matters for growth duration: high income inequality is associated with a higher probability that long periods of high growth (“growth spells”) will end.

### Key findings and evidence
- Illustrative comparison of U.S. income distribution changes:
  - In the late 1970s, the average boat was a 12 foot canoe and the biggest yacht was 250 feet long.
  - Thirty years later, the average boat is a slightly roomier 15 footer, while the biggest yacht, at over 1100 feet, would dwarf the Titanic.
- Historical parallels:
  - The increase in U.S. income inequality in recent decades is strikingly similar to the increase in the 1920s; in both cases there was a boom in the financial sector, heavy borrowing by poor households, and an eventual huge financial crisis.
  - Inequality may have contributed to large upheavals, including political transformations in the Middle East.
- Quantitative results from the authors’ analysis of “growth spells”:
  - Closing half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a “growth spell”.
  - A reduction of the magnitude achieved by Brazil from the early 1990s through focused transfer programs could increase the expected length of a typical “growth spell” by about 50 percent.
- Robustness:
  - The effect of inequality on growth-spell duration appears large and persistent across alternative model specifications and definitions of “growth spells”.
- Caveat:
  - Income distribution within a country is generally stable most of the time, though significant shifts do occur (examples cited include the United States, China, Brazil).

### Mechanisms and interpretation
- Channels discussed or implied:
  - Inequality may foster financial booms and borrowing by poorer households, increasing systemic vulnerability to crises.
  - Unequal distribution may undermine the durability of growth even when other favorable conditions (political institutions, trade openness, health, education) are present.
- Comparative importance:
  - Inequality is placed alongside established growth determinants such as the quality of political institutions and trade openness in the “pantheon” of growth factors.

### Policy implications and recommendations
- General principle:
  - Analyses of growth should not be separated from analyses of income distribution; reducing inequality can promote sustained growth.
- Short-run vs. long-run trade-offs:
  - The immediate role for policy is unclear because poorly designed redistribution could distort incentives and undermine growth, harming the poor.
  - When short-run trade-offs exist, the authors’ evidence does not prescribe a definitive policy choice but tilts the balance toward considering long-run benefits of reduced inequality.
- Potential “win-win” measures the authors identify:
  - Better-targeted subsidies.
  - Better access to education for the poor that improves equality of economic opportunity.
  - Active labor market measures that promote employment.
- Historical lesson:
  - The 1980s debt crises and the resulting “lost decade” demonstrate that sustainable reform is possible only when benefits are widely shared; similar considerations should guide adjustment and reform in the context of current global economic turmoil.

*Source: Andrew G. Berg and Jonathan D. Ostry, April 8, 2011*

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## Content in this bundle

- **Staff Discussion Note**
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_Source: https://www.imf.org/en/blogs/articles/2011/04/08/inequality-and-growth_