Economic Growth,Inequality,and the Economic Position of the Poor in 1985

Abstract

The “trickle-down” theory argues that wider income differences are good for economic growth, that growth is good for the poor, and therefore that widening income disparities benefit the poor. The theory thus fulfills Rawlsian principles of justice. The purpose of this article is to present a preliminary evaluation of the correctness of this theory. Income data for 21 countries were obtained from the Luxembourg Income Study, for the period 1985–95. The results of the analysis show no clear connections between inequality and economic prosperity. The wider the inequality, the worse is the absolute income of the poor. In this respect the theory is falsified. However, the trickle-down theory is partly correct in arguing for the beneficial effects of economic growth for the poor: the absolute income level of the poor is dependent on what is happening in the national economy, while the incidence and depth of poverty in advanced countries are not so much associated with economic factors as a result of national social policy programs.

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