By Pankaj Patel, Jonathan Doh, & Sutirtha Bagchi

Income inequality is a vexing and persistent problem in developed and developing countries alike. From Brazil to China to the United States, income inequality has grown in most jurisdictions, and this growth contributes to a range of negative economic and societal outcomes. Inequality is not only problematic from a societal perspective, but also has deleterious effects on economic growth and other dimensions of social progress. Inequality is associated with poor educational outcomes, corruption, health disparities, and urban/rural development gaps.  It also impedes aggregate economic growth and is associated with lower per capita income.

Most recently, Thomas Piketty’s book, Capital in the 21st Century, has renewed concerns about the impact of various economic policies on growing inequality and has underscored the divisive and corrosive aspects of inequality in modern society. Beyond the obvious concerns about fairness, equity, and justice, scholars and policymakers have focused on the question of whether income inequality is associated with economic growth, concluding that inequality has negative impacts on aggregate growth and per capita income. This is in part because it impedes entrepreneurial effort by lowering returns from human and financial capital in business start-up, increases the threshold to achieve self-employment, and is associated more broadly with pressures that coerce and constrain firms’ actions.  It also incentivizes alternative organizational forms that displace existing organizations, and leads to new political and regulatory risks that undermine firms’ performance or survival. As such, economists and policymakers have wrestled with the question of how to lessen inequality in both developed and developing economies, with little to show for those efforts.

In our article, we showed that in countries where entrepreneurship is encouraged, notably through lower regulations for business entry and where credit is more widely available, the negative relationship between inequality and income growth was reduced. More specifically, in a study of 92 countries from 2004 to 2014, we found that as income inequality increases, easing regulations that impede new business start-ups and facilitating access to credit from the financial sector, is positively associated with per capita economic growth. As such, enabling the ease of new business startups and widening access to credit from the financial sector can help to stimulate entrepreneurial activity that “blunts” the negative impact of inequality on growth.

In terms of practical and policy implications, our findings may provide some evidence that short of reversing inequality, something that has been shown to be especially challenging, national policy makers may mitigate some of its most egregious impacts through targeted policy interventions that reduce the regulatory burden on starting new businesses and provide greater capital to support business expansion. While these steps do not alleviate the burden of inequality, they do help to offset some of its negative impacts on personal income growth.

Reference:

Patel, P. C., Doh, J. P., & Bagchi, S. 2021. Can Entrepreneurial Initiative Blunt the Economic Inequality–Growth Curse? Evidence From 92 Countries. Business & Society, 60(2): 496–541.