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Symposium 2015

Virtual Library File - Redistribution, Inequality, and Growth

The Challenge

The first 'EU Social Justice Index', a comparison of all 28 member states of the European Union by the Bertelsmann Stiftung, shows that the concept of social justice is realized to very different exte ...

The first 'EU Social Justice Index', a comparison of all 28 member states of the European Union by the Bertelsmann Stiftung, shows that the concept of social justice is realized to very different extents within the EU. Whereas the opportunities for every individual to engage in broad-ranging societal participation are best developed in the northern European countries, many other EU countries show massive inequalities.

Such disparities are gaining new political weight in the light of recent research by the IMF and the OECD showing that equality is actually beneficial for economic growth. Social justice, it appears, is therefore no longer a goal worth pursuing for its own sake but it constitutes the very precondition for future economic success - a paradigm shift in economic thinking. A new social model that strives for both social justice as well as growth now seems desirable and achievable.  As a result, however, the growing divide in Europe in terms of social justice would have even more serious consequences with regard to economic growth. It could firmly establish a two-tier Europe.

In their earlier work, the authors of this paper documented a multi-decade cross-country relationship between inequality and the fragility of economic growth. Their work built on the tentative consensus in the literature that inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks, and thus that it tends to reduce the pace and durability of growth. A recently-compiled cross-country dataset that distinguishes market (before taxes and transfers) inequality from net (after taxes and transfers) inequality, allows them to calculate redistributive transfers for a large number of country-year observations. Their main findings are: First, more unequal societies tend to redistribute more. Second, lower net inequality is robustly correlated with faster and more durable growth, for a given level of redistribution. And third, 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.