Inequality and Growth Reconsidered: Lessons from East Asia

East Asian economies have experienced rapid growth over three decades, with relatively low levels of income inequality, and appear to have also achieved reductions in income inequality. We argue that policies that reduced poverty and income inequality, such as emphasizing high-quality basic education and augmenting labor demand, also stimulated growth. Closing two virtuous circles, rapid growth and reduced inequality led to higher demand for, and supply of, education, Moreover, low levels of income inequality may have directly stimulated growth. We present cross-economy regression results that are consistent with a positive causal effect of low inequality on economic growth and with low inequality of income as an independent contributing factor to Fast Asia's rapid growth. We conclude that policies for sharing growth can also stimulate growth. In particular, investment in education is a key to sustained growth, both because it contributes directly through productivity effects and because it reduces income inequality.