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Abstract
The experience of some Central American countries shows that persistent income inequality can provoke social unrest, political instability, and macroeconomic imbalances. Pursuing higher growth, however, does not entail a tradeoff between less inequality and higher growth. In theory, less inequality can foster better social cohesion and promote political stability—essential ingredients for higher growth. Stability and social cohesion thus help promote long-lasting growth-enhancing economic reforms and avoid short-term populist policies that could threaten macroeconomic stability. Some studies have shown that countries with less income inequality have had longer growth spells than countries with wide disparities (Ostry, Berg, and Zettelmeyer 2012).
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