Question

Why do high levels of inequality reduce growth in relatively poor countries, but encourage growth in richer countries?

Answer 1

In poor countries, the high level of income inequality cause more people to live in poverty and it becomes very difficult for these class of people to come out of poverty and participate in main stream of economy. So, the opportunities created by the invisible hands, will not be grabbed by the these people due to lack of skills. Besides, there is a lack of investment in human capital development, causing lack of human resource pool in the poor country and the whole economy suffers due to the income inequality.

In contrary to this, a rich country has the income inequality, but there is a large size of the middle class who earns an income that can help them make investments upon skill development, and education. It makes them ready to the new opportunities catered by the technological advancements. So, there are skilled labor force available to work and help economy grow. So, income inequality in rich country does not inhibit the growth.

So, it is the level of income earned by the lower class or middle class of the country that affects the level of growth. As per the research, if income is more than $2000, then income inequality helps in growth of the economy, otherwise it inhibits the growth.