The fact that a high inflation level, as an indicator of macroeconomic instability, harms the economic growth in these countries supports Stockman (1981). Similar results are obtained in other studies such as Iradian (2005), Chletsos and Fatouros (2016), Babu et al. (2016), Braun et al. (2019), using inflation as a control variable in the inequality-growth empirical literature. The effects of the other two control variables on growth are not clear, and the data scarcity problem in low-income countries limits forecasts. However, control variables do not change in either the sign of the income inequality or the channel variables, so when the results are evaluated together with the reduced model, more correct inferences can be made by considering the bad control problem. Table 20 presents the impact of innovation on growth, the positive channel for UHC from column (1) to column (2a).

1 The Effect of Income Inequality on the Channel Variables

The negative impact of inequality on human capital in these countries also supports the validity of the fertility channel expressed by De La Croix and Doepke (2003). In addition, Also, a remarkable result here is that the effect of fertility on economic growth is significantly lower than LLMC. Therefore, the increase in the fertility rate in low-income countries damages to economic growth more than in UHC. These results support studies suggesting that the strength of the relationship may be different in developed and developing countries (Berg et al., 2018; Castelló-Climent, 2010; Kremer & Chen, 2002).

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Therefore, the increase in the value of innovation encourages innovative activities and long-term growth (Foellmi & Zweimüller, 2006). Finally, differences in income distribution provide incentives for factors such as education, investment in physical capital, risk-taking, and hard work. africa gold capital Finally, the estimation results for positive channels suggest that inequality encourages growth are far from theoretical expectations regardless of the income level of countries. It is observed that income inequality does not promote human capital investment and innovative activities. Income inequality does not increase total savings in LLMC, contrary to the classical view, while significant positive effects in UHC indicate the importance of income level.

Income Inequality and Economic Growth

(Babu et al., 2016; Barro, 2000; Braun et al., 2019; Castelló-Climent, 2010; Chletsos & Fatouros, 2016; Gründler & Scheuermeyer, 2018; Iradian, 2005). In the models for the UHC, the lag of GDP per capita is also included african gold capital investment as a measure of the initial stage of development to take into account the convergence hypothesis. Therefore, it implies that the convergence tendency is more evident for this country group.

The earliest studies concluded that income inequality promotes economic growth by increasing savings (Bourguignon, 1981; Kaldor, 1955; Keynes, 1920; Lewis, 1954). Under the linearity assumption of the saving function, the total saving behaviour in the economy is independent of income and wealth distribution, independence disappears under a non-linear saving function (Stiglitz, 1969). The marginal propensity to save from profits is greater than the propensity to save from wages, and this is the https://www.liberty.co.za/ condition of stability. According to this view, known as the classical approach, the marginal propensity to save increases as wealth increases.

The Impact of Income Inequality on Economic Growth Through Channels in the European Union

• The effects of the other two control variables on growth are not clear, and the data scarcity problem in low-income countries limits forecasts.
• Empirical evidence shows that human capital has positive and significant effects on economic growth (except column 2a).
• It is observed that income inequality does not promote human capital investment and innovative activities.
• Therefore, the increase in the value of innovation encourages innovative activities and long-term growth (Foellmi & Zweimüller, 2006).
• On the other hand, Paul and Verdier (1996) object to the political economy approach on the ground that high inequality does not always require a high rate of redistributable taxation, and there may be conditions in which redistribution is not detrimental to economic growth.
• On the other hand, theoretical and empirical studies on the effect of income inequality on economic growth are relatively recent.

Therefore, examining countries with varying levels of development together may cause misleading results. The analysis is conducted using the System Generalized Moments Method by taking the 5-year averages of the data for the period 1980–2017. The fourth section includes the analysis results and growth estimates on the channel variable of inequality. Table 15 presents the effects of political instability on growth in LLMC from columns (1) to columns (2a). The political instability negatively affects economic growth in reduced models (columns 1 and 2) for both indicators, so it can be said that the increase in instability causes a waste of resources in line with the theory.

These results are supported since human capital stimulates economic growth in these countries. Therefore, according to the results here, the fact that the increasing fertility rate harms the economic growth supports both the theory and numerous studies in the literature, showing that the channel is valid. Table 5 shows the results of the credit markets imperfections channel.Footnote 23 The effects of income inequality and credits on education are analysed with two-stage estimations. The impact of inequality and credits on education is significantly negative (except column 2) and significantly positive (except column 6), respectively. These results indicate that as income inequality increases, human capital will decrease, but as financial development increases, human capital will increase. Thus, it provides evidence to the validity of the first stage of the credit markets imperfections channel.

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This finding supports many studies in the empirical literature, as stated in the section discussing the results for LLMC. Primary school enrolment used for human capital is positive in models where it is significant, but unlike LLMC, this finding is confirmed in fewer models. Table 20 shows that the effect of different human capital channel variables on economic growth is not significant for UHC; hence, when interpreted together with the results here, the importance of human capital in developing countries is revealed. The effect of inequality on political stability is significantly negative (except column 2), unlike LLMC, and these results are consistent with the theoretical view. Considering together with the results obtained for LLMC, it can be said that the relationship between income inequality and instability is not linear. Blanco and Grier (2009) stated that inequality can reduce political instability after a certain threshold.

While inequality does not affect redistribution in low-income countries, it positively affects developed countries. The inadequacy of democratic institutions in low-income countries can be considered one of their main problems, so achieving redistribution in https://www.easyequities.co.za/ these countries can be relatively difficult. Therefore, structural reforms should be implemented in these countries for the institutions that will provide democratic rights and freedoms and at the same time control the effective use of these rights and freedoms. Also, in these countries with low financial development, it may not be possible to collect taxes effectively and direct them to economic activities. Although the effect of political instability on economic growth is negative for both country groups, its relation to income distribution is different. When the two group estimates are interpreted together, the results imply that the relationship may not be linear, as Blanco and Grier (2009) stated.

Therefore, indirect impact needs to be scrutinized and policy recommendations need to be carefully designed. Table 18, from column (1) to column (2a), presents the effect of political instability on economic growth in UHC. For both indicators, it can be stated that political instability affects economic growth negatively, as in LLMC, so the increase in political unrest causes waste of resources. When interpreted together with the channel results in Table 9, the rise in income inequality in these countries increases political instability, and the increasing political instability harms economic growth. While the effect of inequality on redistribution is positive, the effect of redistribution on economic growth is not clear. However, in models where the redistribution is significant (columns 4 and 4a), the coefficient is positive, similar to LLMC.