An econometric analysis of the relationship between inequality and growth

Abstract: In this paper, the role of inequality in growth economics is investigated. Barro (2000) found a positive interaction between inequality and GDP on the growth rate, using data for 1960-2000. This paper focuses on a robustness check of his results due to a revision of the Ginis from Deininger and Squire (1997) in the WIID2 dataset. My regressions cover the same time periods and include additional data from the Fraser Institute in line with the theories proposed by Barro. The findings are: When not controlling for fertility, (1) a lower degree of income inequality enhances growth, therefore reducing inequality increases growth and (2) there is a positive interaction between income dispersion and GDP on growth, thus more inequality increases growth in rich countries and reduces growth in poor countries. When controlling for fertility, (3) the relationship between inequality and growth disappears altogether. Unlike Barro, I find that income inequality is only significant if fertility is absent. Thus, reducing child birth is the key to higher growth.