Income Inequality and Economic Growth: A Critical Review

Abstract

Income inequality and economic growth has faced considerable discussion amongst the scholars in political economics literature. On one hand, it has been argued that income inequality stimulates economic growth through incentives to invest and create new businesses, on the other, the access to education, health and financial services are limited by inequality. This paper therefore aims to provide an overview of how current literature has attempted to answer the question on whether there is a relationship between income inequality and economic growth. This paper identifies factors that affect this relationship such as level of capital, human development, and institutions. Thirdly, the paper aims at identifying and establishing the ways the policy interventions can reduce the negative impacts of the income distributions on the growth of the economy. Studies show that the role of income inequality in growth rates also depends on some factors of economic development in countries. Future is needed in the form of policy that plays role in finding out the difference between level efficient and equitable.