Equity, Savings, and Growth

Extract

In this paper, we develop a model of the micro-economic behavior of poor households that accounts for the episodes of equitable, poverty-reducing growth from low initial income levels in East Asia and for selected periods in other settings. The account does not depend on any impact of initial low inequality, or on the political process; while it does assume that poor households are liquidity constrained, this does not prevent their investing in the face of certain conditions. The model relies on a savings and investment boom among the poor that raises their income while contributing to overall economic growth. The boom is triggered by the emergence of new investment opportunities for the poor accompanied by strong demand for their relatively unskilled labor. These are factors which do tend to be associated with low income inequality and with a healthy distribution of productive assets, but they rely as much or more on reforms in economic and social conditions—especially those that create new investment opportunities for the poor and reduce labor market distortions—as on good initial conditions.

The working papers represent drafts that have been internally reviewed but are not official publications of the Institution.