Thursday, December 10, 2015

Beyond Gini: Income Distribution and Economic Development

DUTT Pushan, TSETLIN Ilia
Read the working paper
INSEAD Working Paper 2015/99/EPS/DSC

In the literature on inequality and income development, the overwhelming focus is on the Gini coefficient, a single statistic for the entire income distribution. In this paper, we question this singular focus on the Gini coefficient and highlight how poverty and income shares of the bottom deciles impact economic development. In particular, we replicate Easterly [Easterly, William 2007. Inequality does cause underdevelopment: Insights from a new instrument, Journal of Development Economics 84, 755-776] and supplement his analyses with measures of poverty and differences in the income shares of the bottom two deciles. Our results show that compared to the Gini coefficient, these two measures are more strongly associated with lower per capita incomes, institutional quality and schooling. The Gini coefficient seems to matter less. At the very least, the causal link from inequality (as measured by Gini) to development outcomes is tenuous.