As wealth continues to concentrate among the rich, economists question the effect of such inequality on economic growth. CGEG Director, Jan Svejnar and Sutirtha Bagchi of Villanova University examined the effects of wealth inequality, publishing their results in a study recently accepted by the Journal of Comparative Economics. Their findings were as follows: wealth inequality affects growth, but more importantly, so does the nature of that wealth. Wealth earned through political connections can hamper the economy, whereas other types did not have as significant an effect.
Using Forbes magazine’s data on global billionaires, Svejnar and Bagchi were able to examine the data of billionaires from 23 countries from the years 1987 to 2002. More importantly, this data allowed them to examine wealth rather than income; while income inequality had little effect on growth, a higher proportion of billionaire wealth corresponded to slower economic growth in that country. They “estimate that a 3.72 percent increase in the level of wealth inequality would cost a country about half a percent of real GDP per capita growth”. The bottom line is that “when wealth and power becomes concentrated in the hands of a few, those business and political elites often influence government policy in a way that hurts the broader interest.” For more details on the study, read the full Washington Post article here. or download the PDF of the article here.