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Most efforts to trace the effects of
income inequality on growth have focused on redistribution.
However, empirical investigation has not substantiated
either the positive association of income inequality with
redistribution or the negative association of redistribution
with economic growth. The authors analyze the effects of
inequality in the broader context of social polarization.
They argue that social polarization, whether rooted in
income inequality or in ethnic tension, makes large changes
in current policies (including those guaranteeing the
security of contract and property rights) more likely under
a wide range of institutional arrangements. The resulting
uncertainties in the policy and contractual environment
hinder growth. They find strong empirical support for both
parts of this argument. The policy implications of their
argument are quite distinct from those of arguments that
inequality reduces growth by increasing pressures for
redistribution. If redistributive policies per se were to
blame for the low growth resulting from inequality,
governments that seek to mitigate income inequality must
inevitably confront a tradeoff between equity and growth.
If, on the other hand, the insecurity of property rights
slows growth in unequal or otherwise polarized societies,
governments that commit over the long run to particular
redistributive policies incur less risk of slowing economic
growth. Fiscal redistribution that reduces inequality may
actually increase growth by reducing the risks of political uncertainty.
