Income Inequality and Economic Growth in Developing Countries: The Role of Savings
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In this study we carry out a qualitative exploration of some factors that can explain the poor economic performance of Latin America in relation to another set of developing and successful countries comprised of twelve Asian countries. We study the relation between inequality, the savings rate, and the economic growth rate for each region. The evidence indicates that Latin America has a poorer economic performance, which in turn is associated with the lower savings rate and more elevated levels of inequality in comparison with the Asian economies. One possible explanation is that together with lower income inequality and the aggregate savings rates, the labor force in Asia is more abundant than in Latin America. These combined factors are favorable for the lowering of internal socioeconomic instability and the adoption of an export-led growth strategy for insertion in the world economy. This export-led growth strategy promotes economies of scale, and thus offers greater possibilities of profitable investment, which in turn induces higher rates of savings and increased economic growth. In contrast, Latin America is lacking a clear comparative advantage in terms of resource endowment. In particular, the labor force is not abundant, so that its insertion in the world market is more limited. Besides, the social and economic instability associated with the region’s high-income inequality is harmful to savings and investment, as well as for the economic growth of the region. Thus, in order to dynamize savings and investments, economic policy requires fiscal policies oriented to the mitigation of income inequality and the promotion of counter-cyclical policies to reduce social and economic instability.
Abstract
In this study we carry out a qualitative exploration of some factors that can explain the poor economic performance of Latin America in relation to another set of developing and successful countries comprised of twelve Asian countries. We study the relation between inequality, the savings rate, and the economic growth rate for each region. The evidence indicates that Latin America has a poorer economic performance, which in turn is associated with the lower savings rate and more elevated levels of inequality in comparison with the Asian economies. One possible explanation is that together with lower income inequality and the aggregate savings rates, the labor force in Asia is more abundant than in Latin America. These combined factors are favorable for the lowering of internal socioeconomic instability and the adoption of an export-led growth strategy for insertion in the world economy. This export-led growth strategy promotes economies of scale, and thus offers greater possibilities of profitable investment, which in turn induces higher rates of savings and increased economic growth. In contrast, Latin America is lacking a clear comparative advantage in terms of resource endowment. In particular, the labor force is not abundant, so that its insertion in the world market is more limited. Besides, the social and economic instability associated with the region’s high-income inequality is harmful to savings and investment, as well as for the economic growth of the region. Thus, in order to dynamize savings and investments, economic policy requires fiscal policies oriented to the mitigation of income inequality and the promotion of counter-cyclical policies to reduce social and economic instability.
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