29 Mar

Blanco and Grier (2009) stated that inequality can reduce political instability after a certain //www.easyequities.co.za/ threshold. Considering that low-income countries have relatively high levels of inequality, it can be said that the results support Blanco and Grier (2009) study, as these countries may have exceeded this threshold. The relationship between inequality and redistribution in these countries is significantly positive (except column 6). These results show that the relationship depends on the development level of the countries, and the first stage of the political economy channel is supported at UHC (Gründler & Scheuermeyer, 2018).

The Impact of Income Inequality on Economic Growth Through Channels in the European Union

Similar to the positive effects, the negative impact of income inequality on growth can occur through different channels. The modern approach, which claims that inequality in income distribution will harm economic growth, includes four different channels (Galor, 2009). (Aghion & Bolton, 1997; Aghion et al., 1999; Banerjee & Newman, 1993; Galor & Zeira, 1993). Due to the credit market imperfection, inequality reduces investment opportunities and the motivation of borrowers, and it creates macroeconomic volatility (Aghion et al., 1999). More generally, when individuals have unequal borrowing opportunities, the unjust income distribution under initial conditions will persist and continue for the next generations.

1 The Effect of Income Inequality on the Channel Variables

On the other hand, as stated above, since the complexity of the relations may also depend on the development level of the countries, these conditions should be taken into consideration. There is growing recognition that an excessively unequal income distributionmay itself be detrimental to sustainable growth. Couldn’t cost-effectiveprograms aimed at reducing excessive income and consumption inequality,in the context of macroeconomic stability and allocative efficiency, promote,not deter, sustainable economic growth? I will mention three well-recognizedchannels that provide insights into how economic policies are intertwinedwith social issues and the political process.

Method and Dataset

Income inequality does not increase total savings in LLMC, contrary to the classical view, while significant positive effects in UHC indicate the importance of income level. The fact that the increase in savings encourages economic growth in these countries also reflects that the positive channel may be valid. However, the effect of income inequality on economic growth is positive only for this channel. The fact that inequality does not increase the saving rate in low-income countries as in high-income countries may be related to the relatively low number of wealthy people in these countries. Moreover, this wealthiest part of the population can retain its savings so that future generations can invest in human capital. Finally, Table 7 shows the effect of inequality, a positive channel, on patent and saving rates.

Literature Review

According to this theory, which is analysed especially through the investments made in human capital, it will be inevitable that economic growth will be negatively affected since human capital is the basis for economic growth. According to the political economy approach, the second channel, a relationship is established between "inequality" and "income redistribution through taxes", and the effect of income inequality on economic growth is examined indirectly. The voting model explains the redistribution and taxation relationship (Alesina & Rodrik, 1994; Perotti, 1993; Persson & Tabellini, 1994).

• There are explanations about positive effects (Tobin, 1965), negative effects (Stockman, 1981) or no effects (Sidrauski, 1967).
• While low-income families have more children and low investment in education, the opposite will happen for affluent families.
• Therefore, the increase in the value of innovation encourages innovative activities and long-term growth (Foellmi & Zweimüller, 2006).

In this case, resources are transferred to individuals with a high marginal propensity to save, and total savings gradually increase. Therefore, a high level of economic growth can be achieved with increased investments (Kaldor, 1955). Secondly, income inequality promotes economic //satrix.co.za/ growth through innovation and R&D incentives. Initially, the innovation market is small, as only wealthy consumers purchase new products. The higher share of the rich in the population leads to an increase in the value of innovation. Therefore, the increase in the value of innovation encourages innovative activities and long-term growth (Foellmi & Zweimüller, 2006).

Income Inequality and Economic Growth

The fourth section motsepe investment platform includes the analysis results and growth estimates on the channel variable of inequality. Table 15 presents the effects of political instability on growth in LLMC from columns (1) to columns (2a). The political instability negatively affects economic growth in reduced models (columns 1 and 2) for both indicators, so it can be said that the increase in instability causes a waste of resources in line with the theory. This evidence for LLMC is not surprising and supports results from many studies in the empirical literature (Aisen & Veiga, 2013; Alesina et al., 1996; Barro, 1991; Barro & Lee, 1994; Fosu, 1992).

For both indicators, it can be stated that political instability affects economic growth negatively, as in LLMC, so the increase in political unrest causes waste of resources. When interpreted together with the channel results in Table 9, the rise in income inequality in these countries increases political instability, and the increasing political instability harms economic growth. While the effect of inequality on redistribution is positive, the effect of redistribution on economic growth is not clear. However, in models where the redistribution is significant (columns 4 and 4a), the coefficient is positive, similar to LLMC. Paul and Verdier (1996) stated that redistribution may not always be detrimental to growth.

Therefore, it implies that the convergence tendency is more evident for this country group. The result of the control variables in the growth estimates for UHC is slightly different from LLMC. Unlike LLMC, trade openness has a significant positive effect on economic growth in the former country group. Trade openness is more likely to stimulate technology and increase total factor productivity in developed countries than developing countries, so the positive impact on economic growth is not surprising. The estimates for the inflation rate are similar to those of LLMC, and the effect of the inflation rate on economic growth is significant and negative in all models.

This situation negatively affects investment by increasing coups, revolutions, and acts of violence in society, or more generally, political uncertainty and by threatening the property rights of individuals. A decrease in investments due to the deterioration of peace and stability in society will negatively affect economic growth (Alesina & Perotti, 1996). In the analysis, the countries are divided into two, low and lower-middle-income (LLMC) and upper-middle and high-income (UHC) based on the World Bank income classification. Thus, it is possible to identify whether the channel effect changed for country income levels. The average, standard deviation, minimum and maximum values of the variables are shown in the table. In summary, although the validity of many channels is theoretically mentioned, only one or a few of the channels are tested in the empirical literature.