This paper m a product of the Poverty and Human Resources Division, Policy Research Department -- is part of a larger effort in the department to monitor progress in reducing poverty in the world. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Andrea Ramirez, room N8-036, telephone 202-458-5734, fax 202-522-1153, Internet address mravallion@worldbank.org. December 1996. (36 pages) The Policy Research Working Paper Series disseminates the findings of work in prowess to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries bey represent

Evidence from a broad panel of countries shows little overall relation between income inequality and rates of growth and investment. However, for growth, higher inequality tends to retard growth in poor countries and encourage growth in richer places. The Kuznets curve—whereby inequality first increases and later decreases during the process of economic development—emerges as a clear empirical regularity. However, this relation does not explain the bulk of variations in inequality across countries or over time.

Abstract: At any positive rate of growth, the higher the initial inequality, the lower the rate at which income-poverty falls. It is possible for inequality to be sufficiently high to result in rising poverty, despite good underlying growth prospects at low inequality.

this article were received from Nancy Birdsall, Bill Easterly, Paul Isenman, Ravi Kanbur, Aart Kraay, Branko Milanovic, Giovanna Prennushi, Dominique van de Walle, Nicolas van de Walle, Michael Walton and seminar participants at the World Bank. These are the views of the author, and need not reflect those of the World Bank or any affiliated organization. 1.

Abstract not found

I document in this paper a puzzle that has not received previous attention in the literature. In 1980-98, median per capita income growth in developing countries was 0.0 percent, as compared to 2.5 percent in 1960-79. Yet I document in this paper that variables that are standard in growth regressions -- policies like financial depth and real overvaluation, and initial conditions like health, education, fertility, and infrastructure generally improved from 1960-79 to 1980-98. Developing country growth should have increased instead of decreased according to the standard growth regression determinants of growth. The stagnation seems to represent a disappointing outcome to the movement towards the "Washington Consensus" by developing countries. I speculate that worldwide factors like the increase in world interest rates, the increased debt burden of developing countries, the growth slowdown in the industrial world, and skill-biased technical change may have contributed to the developing countries' stagnation, although I am not able to establish decisive evidence for these hypotheses. I also document that many growth regressions are mis-specified in a way similar to the Jones (1995) critique that a stationary variable (growth) is being regressed on non-stationary variables like policies and initial conditions. It may be that the 1960-79 period was the unusual period for LDC growth, and the 1980-98 stagnation of poor countries represents a return to the historical pattern of divergence between rich and poor countries.

This paper explores the propositions that, income inequality is relatively stable within countries; and that it varies signi®cantly among countries. A new and expanded data set provides broad support for both propositions. Drawing on a political economy and capital market imperfection arguments to explain the intertemporal and international variation in inequality, the empirical analysis shows that the predicted variables associated with the ®rst argument (a measure of civil liberties and the initial level of secondary schooling) and the second argument (a measure of ®nancial depth and the initial distribution of land) are indeed important determinants of inequality. This paper explores two propositions regarding income inequality. They are: ®rst, income inequality is relatively stable within countries; and second, it varies signi®cantly across countries. 1 To illustrate, note that the Gini coef®cient in India remained almost constant for forty years (1951±92) with mean 32.6 and standard deviation 2.0. 2 In contrast, the variation in Gini coef®cients across countries is large: 61.9 in Honduras in 1968 compared with 17.8 in Bulgaria in 1976. If substantiated, these propositions have potentially signi®cant implications

This paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they, or their offspring, may make it up the income ladder. This “prospect of upward mobility” (POUM) hypothesis is shown to be fully compatible with rational expectations, and fundamentally linked to concavity in the mobility process. A steady-state majority could even be simultaneously poorer than average in terms of current income, and richer than average in terms of expected future incomes. A first empirical assessment suggests, on the other hand, that in recent U. S. data the POUM effect is probably dominated by the demand for social insurance.

In unequal societies, the rich might bene t from shaping economic institutions into their favor. This paper analyzes dynamics of institutional subversion focusing on one particular institution, public protection of property rights. If this institution is imperfect, agents have incentives to invest in private protection of property rights. With economies of scale in private protection, rich agents have a signi cant advantage in such an environment: they could expropriate other agents using their private protection capacities. Ability to maintain private protection system makes the rich natural political opponents of full protection of property rights provided by the state. Such an environment does not allow grass-roots demand to drive development of new market-friendly institutions (such as public protection of property rights). The economy as a whole is stuck in a 'bad ' long-run equilibrium with low growth rate, high inequality, and wide-spread rent-seeking. Russian `oligarchs ' of 90s, few politically powerful agents that controlled large stakes of the newly privatized property, were a major motivating example for this paper.

are very grateful to Preston McAfee and three anonymous referees for useful comments on the previous