Therefore, the increase in the value of innovation encourages innovative activities and long-term growth (Foellmi & Zweimüller, 2006). Finally, differences in income distribution provide incentives for factors such as education, investment in physical capital, risk-taking, and hard work. Finally, the estimation results for positive channels suggest that inequality encourages growth are far from theoretical expectations regardless of the income level of patrice motsepe trading platform countries.
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This study aims to explain whether the positive and negative channels expressed in the theory on the effect of income inequality on economic growth play a significant role in different income group countries. Therefore, the purpose of this study is to emphasise that https://fnb.co.za/ income inequality might have an indirect effect on economic growth depending on the income level of countries, rather than identifying the direct effect of income inequality on economic growth. The first stage estimates how income inequality affects the proxies of channel variables, and the effects of these variables on economic growth are examined in the second stage. The study results indicate that the relationship between income inequality and economic growth is quite complex. Although there is evidence that greater inequality has detrimental effects on economic growth, it appears that this inference cannot be generalised when countries’ income levels are taken into account. According to the estimation results, regardless of the income level of the countries, while inequality increases the fertility rate, it affects human capital negatively, both directly and through credit market imperfections.
1 The Effect of Income Inequality on the Channel Variables
It can be argued that low-income countries do not have the level of democracy to support the median voter theory, so the results are not surprising. Finally, the effect of inequality on the fertility rate is consistent with theory and is significantly positive in all estimations. As seen in Table 4, while robust results are obtained for the political instability channel, the results for the political economy channel are different; however, https://www.psg.co.za/ the effect is not significant for most models.
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- Therefore, the increase in the fertility rate in low-income countries damages to economic growth more than in UHC.
- 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.
- The negative effect of inequality on economic growth is due to increased social protection expenditures.
- The marginal propensity to save for the rich people in UHC is higher, so total savings increase as inequality increases.
In contrast, its effect on saving rate is insignificant in all estimates similar to Odedokun and Round (2004). The underdeveloped financial systems in low-income countries may also be the cause of the negative effect (Braun et al., 2019). Therefore, evidence of the validity of these positive channels in these countries cannot be obtained. In addition, the coefficients of the GDP per capita variable used in the estimation of all channels have the expected sign in almost all of them and are significant. These results indicate that https://personal.nedbank.co.za/ the income level of countries is essential to interpret the relationship between variables. These results obtained for the innovation and saving channel are also supported by different proxies, as seen in Table 8.
The Impact of Income Inequality on Economic Growth Through Channels in the European Union
There are explanations about positive effects (Tobin, 1965), negative effects (Stockman, 1981) or no effects (Sidrauski, 1967). Inflation is also preferred as the explanatory variable of growth in empirical studies examining the impact of income inequality on economic growth. (Babu et al., 2016; Barro, 2000; Braun et al., 2019; Castelló-Climent, 2010; Chletsos & Fatouros, 2016; Gründler & Scheuermeyer, 2018; Iradian, 2005). In the models for the UHC, the lag of GDP per capita is also included as a measure of the initial stage of development to take into account the convergence hypothesis. Therefore, it implies that the convergence tendency is more evident for this african gold capital country group.