Inequality and Unsustainable Growth: Growth: Two Sides of the Same Coin? (IMF 2011)
"Over the long run, sustained growth is central to poverty reduction. The rapid growth seen in much of the world over the past few decades—notably, but not only, in China and India—has led to an unprecedented reduction in poverty. And, in general, increases in per capita income tend to translate into proportionate increases in income of the poor. As Dollar and Kraay (2002) memorably put it, ―Growth Is Good for the Poor.‖ All the more reason, then, to place sustainability of growth at the center of any poverty reduction strategy.
The recent global crisis—and the impact this is having on economic activity, jobs, and the poor—is thus rightly spurring a renewed focus on the drivers of growth, including possible links between income inequality, crises, and growth sustainability. Piketty and Saez (2003) underscore the sharp rise in income inequality in the United States in the past two decades and its return to levels not seen since the late 1920s. A number of analysts have investigated how this may have contributed to the crisis. Rajan (2010) points to the political and economic pressures that led high-income individuals to save, low-income individuals to sustain consumption through borrowing, and financial institutions and regulators to encourage the process. Kumhof and Rancière (2010) detail the mechanisms that may have linked income distribution and financial excess, arguing that the same factors may have been at play in both the Great Depression and the Great Recession. Meanwhile, recent events in Tunisia, Egypt, and elsewhere in the Middle East underscore the importance of better understanding the complex relationship between growth, income distribution, and crises."