way to help the poor was to increase the size of the nation’s economic pie, and any attention on the small slice of the pie given to the poor would be a distraction from the bigger picture.

If the benefits of economic growth took time to reach the poorest and inequality were to grow, the work of Kuznets (1955) provided reassurance that this widening in income gaps would be only temporary and nothing to worry about. Kuznets, on the basis of US data over the period 19131948, suggested that after an initial period of economic growth in which there could be an increase in inequality, as economies became richer they became also more equal. As Piketty (2015) points out, for Kuznets it was enough to be patient, and before long growth would benefit everyone.

Piketty’s work shows unfortunately a more sobering picture. The sharp reduction in income inequality that was observed in almost all advanced countries between 1914 and 1945 – and that Kuznets picked up – stemmed essentially from the world wars and the violent economic and political shocks they entailed. Since the 1970s, income inequality has increased significantly in rich countries, especially in the United States, despite overall economic growth.

Even worse, not only overall growth may not reduce inequality, but inequality could hamper faster economic growth, as recently pointed out by a number of IMF studies (Berg and Ostry, 2011, Ostry, et al., 2014; Dabla-Norris et al., 2015).<sup>5</sup> Higher inequality could hamper economic growth by making it more difficult for lower-income households to stay healthy and accumulate physical and human capital (Aghion et al., 1999; Galor and Moav, 2004). Poor children may end up in lower-quality schools, leading to underinvestment in education and to lower labor productivity than it would have been in a more equitable world (Stiglitz, 2012). Increasing concentration of incomes could also reduce aggregate demand, undermining economic growth, because the wealthy spend a lower fraction of their incomes than middle- and lower-income groups (Dabla-Norris et al., 2015).

Even if mean growth explains a large portion of the income growth for the two poorest quintiles once pertinent factors are controlled for, there is still substantial noise. Just because the average elasticity of lower-income growth to mean income growth is close to 1 does not mean that some countries cannot have elasticities of 0.85, while others have elasticities of 1.15.<sup>6</sup> Furthermore, a number of variables in addition to mean growth influence the income of the poorest, both negatively and positively.

Just eye-balling the data, one can notice that something is amiss. Figure 2 plots the data from Dollar et al. (2016) covering a sample of 299 growth spells over the period 1967 to 2011 (see below for further details). One notices that while overall the observations could fit on a 45 degree

> 5 Kraay (2015) has recently questioned the robustness of these results. See also Brueckner and Lederman (2015) who argue that the relationship is negative on average but heterogeneous across countries.

> 6 In fact, the 95 percent confidence interval of the elasticity implied by Dollar and Kraay (2002: table 3, column 3) is 0.83 to 1.13.

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