A Reassessment of the Relationship Between Inequality and Growth,” American Economic Review 90(4

This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequal-ity which not only reduces measurement error, but also allows estimation via a panel technique. Panel estimation makes it possible to control for time-invariant country-specific effects, therefore eliminating a potential source of omitted-variable bias. Results suggest that in the short and medium term, an increase in a country’s level of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications. (JEL O40, O15, E25) In the 1950’s and 1960’s, economists such as Nicholas Kaldor and Simon Kuznets argued that there is a trade-off between reducing in-equality and promoting growth. In the post– World War period, however, many East Asian economies had relatively low levels of inequal