Income Inequality and Economic Growth in Developing Countries: The Role of Saving

Abstract

This study carries out a qualitative exploration of some factors that can explain poor economic performance of Latin America in relation to another set of developing and successful countries composed by twelve Asian countries. This studies the relation between inequality, the saving rate and economic growth for each region. The evidence indicates that the former set has a poorer economic performance, which in turn is associated with lower saving rate and more elevated levels of inequality than the Asian economies. One possible explanation is that jointly with lower income inequality and aggregate saving rate these have more abundant labor force in Asia. These factors are favorable for an internal lower socioeconomic instability as the adoption of an export-led growth strategy, and so its insertion in the world economy. This promotes scale economies, and then higher possibilities of profitable investments, which in turn induce to both higher saving and economic growth. Differently, in Latin America there is not a clear comparative advantage of resources endowment. In particular labor force is not so abundant, so that its insertion in the world market was more limited. Besides, the social and economic instability associated with its high income inequality is harmful to save and invest, and then the economic growth of the region. Thus, in order to impulse saving and investment, economic policy recommendations are fiscal policies oriented to mitigate income inequality and to promote counter cyclical policies that allow reduce social and economic instability.