In this paper our target is to see if a relationship between inequality and economic growth exists and if it does, whether it is positive or negative. The functional aspects of inequality are more severe in developing countries, because if low-incomes are distributed unequally, the effects of inequality on aggregate economic performance are stronger. The theoretical grounds for expecting that in low-income economies inequality will be associated with economic growth are going to be presented first and then we are going to see some empirical studies that have been conducted referring on this issue.

An increase in per capita income, which means, economic growth, could be caused for 3 reasons. The first one is the fact that people accumulate wealth in time, they acquire skills, they become more productive and thus there is economic growth. Another reason is the fact that during the development process, a new sector that will be created in the economy will increase the demand for individuals with the appropriate skills for that sector. So while it is observed growth for

An argument that contradicts this study so far is that “high inequality might retard economic growth by setting up political demands for redistribution” . Redistribution policies are trying to redistribute existing wealth (land-reforms) or they are of the form of in income tax. Because government officials in developing are usually large land-owners or they often are elected because of large-land owners, they do not have the political will to impose such a policy. Furthermore even they had the political will the problem would be that in many countries property rights do not exist and even if they did there are loopholes through which an individual is still able to keep his entire landholdings, even after the imposition of land-ceilings. So governments usually prefer to impose policies such as the taxation on the rate of return which will reduce consumption but they will tend also to lower the rate of savings and investment, and consequently economic growth.

Moreover, technical progress can enhance inequality because it can be argued that labor-intensive technology is in favor of skilled workers. Of course, in time people will acquire skills and knowledge and inequality might decline. Industrialization, which is a feature of the early stages of development and economic growth, will bring profits only to people that have financial assets, entrepreneurial skills and access in credit markets and thus inequality will increase again (at least initially).

So, in low-income country a reduction in equality will decrease the volume of savings in the economy, and thus redistributive policies may bring down the rate of savings and therefore the rate of growth in the medium-run or even in the long-run. In contrast without redistribution, a small fraction of the population will continue to save, there will be economic investment, and finally economic growth.

Some topics in this essay:
, Deininger Squire, Alesina Rodrik, economic growth, relationship inequality, rate growth, capita income, relationship inequality economic, inequality economic growth, inequality economic, levels income, developing countries, rate savings, low levels, support hypothesis, growth associated increased, relationship savings income, associated increased inequality,