Amparo Castelló-Climent, Universidad Carlos III de Madrid ... - Ivie

Advanced Countries and 4 Transitional Economies. The availability of data for
a large amount of countries will avoid the sample selection bias that can be
present in Forbes’ results.
Due to the fact that there are very few observations on income inequality
variables, Perotti (1996) and Forbes (2000) choose a parsimonious specification
to analyse the relationship between income inequality and economic growth in
which the set of explanatory variables is quite reduced. In order to estimate a
more appropriate model that controls for a greater number of variables we need
to increase the number of observations in the sample. We have several possibilities.
One way is to include additional income inequality data that are not
classified as high quality. However, some regions such as Sub-Saharan Africa
will continue being underrepresented and, in addition, it will increase the measurement
error problem. An alternative way that does not suffer from such
shortcomings is to restrict the analysis to the relationship between human capital
inequality and economic growth. Restricting the analysis to this relation not
only implies increasing the sample up to 89 countries but also to broaden the
available period for most of the existing countries. The extension of the data
set will also enable us to use a different and more appropriate specification that
extends the set of explanatory variables in line with Barro’s (2000) equations.
Although in the recent years the endogenous growth models have contributed
in explaining the determinants of the long-run growth rates of the economies,
the empirical literature has included the convergence property derived from
the neoclassical growth model in the estimated equations. According to the
neoclassical growth model, on the one hand, conditioning for the variables that
determine the steady-state, the law of diminishing returns in the accumulation
of physical and human capital imply a lower growth rate the greater the level
of development of the country. On the other hand, the model predicts that a
change in the determinants of the steady state only affect the long run level of
per capital income, implying that these factors may influence the transitional
dynamics but not the long run growth rate.
The empirical analyses usually estimate a broaden version of the neoclassical
growth model that includes the convergence property as well as other variables
that determine the steady state. In this line, the model estimated in this section
will control for initial conditions variables and some variables, chosen by the
government or private agents, which characterize the steady state conditions.
The variables that account for the initial conditions are the level of per capita
income (lny) as well as its squared (lny 2 ). 13 The initial stock of human capital
is proxied by the average years of male secondary and higher schooling of population
aged 25 years and over (schoolm i,t−τ ). 14 The determinants of the steady
state include some variables that answer for government policies and other that
refer to optimal decisions by private agents. These variables include the ratio
of real government consumption expenditure net of spending on defense and on
13 The squared of per capita income is included because the evidence suggests that conditional
convergence is not linear.
14 Evidence also suggests that higher male levels of education accounts more for growth than
primary and female education.
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