Aurora Borealis
1 February 2013 CFA Institute Journal Review

Having Your Cake: Less Inequality Does Not Need to Mean Less Efficiency (Digest Summary)

  1. Sadaf Aliuddin, CFA

Economic growth is spurred when inequality of income distribution in a country is accompanied by equality of opportunity. In such situations, lower-income individuals have an incentive to work harder to improve their quality of life.

What’s Inside?

The author highlights the fact that income redistribution can carry a disincentive to invest for higher-income individuals in an economy. But equality of opportunity can spur growth in countries with an unequal distribution of wealth.

How Is This Article Useful to Practitioners?

Inequality in income distribution has a complex impact on the long-term growth patterns of a country. The author cites several researchers and emphasizes that inequality can lead to relatively higher economic growth because people have an incentive to work hard, which boosts productivity. One precondition for economic growth is enabling infrastructure, such as access to education for lower-income individuals, who can then equip themselves with the requisite skill set to move forward. The author further cautions that the inequality observed in most countries in recent times is distortive in nature and results in fewer opportunities for lower-income individuals. Furthermore, income redistribution can lead to disincentives for the rich as well as complacency for the beneficiaries.

The author provides a fairly long-term perspective for investors with regard to the growth prospects of economies.

Abstractor’s Viewpoint

A related subject is immigration from developing countries—where the opportunity for lower-income individuals to improve their quality of life is not readily available—to more-developed countries. Such lower-income individuals employ their skills and hard work in enabling economies and contribute to the economic growth and success of these more efficient countries.

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