Statistics on How Redistribution Supports Economic Growth

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Research

Study 1

"A 2014 working paper by IMF looked at this issue by comparing the Gini index (a measure of inequality) for countries before taxes and transfers and after taxes and transfers. Compare the difference between these and you get the level of redistribution in a country. What’s unique about this research is that prior attempts usually looked at limited proxies for redistribution, such as tax rates or social spending. By considering the statistical interrelations between growth, inequality and redistribution the paper found:

“…redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth. Thus the combined direct and indirect effects of redistribution — including the growth effects of the resulting lower inequality — are on average pro-growth.

...

"Indeed Ostry et al. (2014) find not only that redistribution has no direct effect on growth, but its indirect effect (through lowered inequality) is positive. Moving from the median level of redistribution to the 60th percentile of redistribution (a moderate but significant increase in redistribution) increases growth by 0.5%. Although it may not sound like a lot, this actually a great deal of extra growth, especially in a developed nations context, where growth tends to hover between 1 & 4 percent. Although these results are sensitive to statistical specifications, and may not represent the real state of play, it’s very interesting that we’ve moved from worrying about massive negative effects on growth of redistribution to wondering whether it might have a positive effect!" (https://medium.com/@sumdepony/redistribution-isnt-bad-for-economic-growth-evidence-from-the-imf-34c2c87877e9)

Source: I M F S T A F F D I S C U S S I O N N O T E: Redistribution, Inequality, and Growth. By Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides; https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf


Study 2

* Research Report: The Impact of Government Spending Levels on Medium-Term Economic Growth in the Oecd, 1960-85 Francis G. Castles, Steve Dowrick First Published April 1, 1990

URL = https://doi.org/10.1177/0951692890002002003

"Recent findings concerning the impact of government spending on economic growth have been as diverse as the theories underpinning them. Proceeding from a methodological critique of prior work in the field and drawing on a variety of methodological innovations suggested in recent studies, we seek to design rigorous tests using cross-section data from 18 OECD countries over four business cycles between 1960 and 1985. Government expenditure is decomposed into various categories and economic growth is corrected for cyclical disturbances. We also control for the effects of technological catch-up, institutional sclerosis and population growth along with the mediating influences of investment and employment. A variety of diagnostic statistical tests are applied, including tests for parameter stability across countries and across periods and tests for heteroscedasticity, functional form, outliers and endogeneity. We reject the hypothesis that government expenditures reduce economic growth and indicate some areas of social expenditures which may possibly tend to increase growth. We are also able to indicate the methodological assumptions and restrictions which have led to previous contrary findings."


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