Economic equality and growth are important policy objectives, but the relationship between the two aims is complex. This column examines how the distribution of land ownership shaped Italy’s structural transformation after WWII. A relatively egalitarian agrarian economy corresponded with higher levels of economic growth, fostering a successful entrepreneurial model with flexible networks of small and medium-sized firms. Redistributive policies can spur economic growth while reducing inequality, but they need to be sizeable, targeted, and well-calibrated to make the path out of disadvantaged living conditions sustainable.
Understanding the relationship between economic growth and inequality is crucial, as both are key policy objectives. However, this relationship is complex and multifaceted. Policy and academic interest in inequality and its measurement has significantly grown over the last decade, with substantial advances in the quality and depth of empirical studies. Nevertheless, fully grasping the drivers and consequences of inequality remains challenging (Wills et al. 2020), underscoring the need to learn from historical experience.
Why inequality matters for economic growth
Easterly (2007) offers a compelling framework to interpret the relationship between inequality and growth, distinguishing between structural and market inequality. Structural inequality is rooted in historical events creating elites by means of non-market mechanisms, and perpetuated by wealth transmission. Market inequality is due to uneven market outcomes across individuals, firms, and geographical areas. On the one side, structural inequality has an unambiguous negative impact on growth. On the other side, unequal outcomes driven by market dynamics, like returns on heterogeneous skills and efforts, could to some extent ensure economic prosperity. In a similar vein, inequality of opportunity can be regarded as a key reason why a high level of income inequality could negatively affect economic growth (Ebeke and Aiyar 2019).
Since the causal relationship between growth and inequality can operate in both directions, the identification of either is challenging in empirical studies. As a result, research has often focused on the early stages of the development process, when inequality can mainly be considered as predetermined. During these initial stages of economic growth, wealth inequality is driven primarily by the distribution of land ownership. A substantial body of evidence suggests that this type of inequality hinders economic growth (Neves et al. 2016, Bartels et al. 2024).
The negative impact of wealth inequality on growth can be theoretically framed as an asymmetric information issue in credit and capital markets, which can impede fruitful investments in human or physical capital: when initial assets are distributed more equally, a larger share of the population has the opportunity to finance fruitful investments in entrepreneurial activities or in education (Banerjee and Newman 1991, 1993, Galor and Zeira 1993).
Figure 1 Initial land ownership inequality and economic growth in Italy, 1951–2001
The Italian case
Our recent research (Martinelli and Pellegrino 2024) contributes to this field. We tackle a particularly illuminating case: how initial land inequality affected economic growth in Italy in the second half of the 20th century. This period, especially the first two decades, marked Italy’s most intense phase of industrialisation and growth, when it transformed from a largely agrarian economy to one of the largest industrialised countries. The analysis allows us to assess how initial wealth distribution in the agrarian world contributed to shaping development and structural transformation in what is now an advanced economy.
We measure inequality of land ownership at the local level in Italy, using over 700 agrarian areas 1 in 1946–47, based on a coeval ad-hoc survey with high-quality standards. We analyse the impact of land inequality on several measures of economic performance from 1951–2001, namely private employment growth, population growth, and the growth of the employment share in manufacturing. Contrary to most of the related literature, our analysis has a subnational focus. The country’s relatively homogenous institutional features and centralised fiscal policies in this timeframe allow us to rule out explanations of the negative inequality-growth link based on nationwide policies. 2
We find that lower levels of land inequality at the beginning of the period are associated with higher rates of economic growth throughout the second half of the century. This finding holds, even controlling for a wide set of social and economic features of the agrarian zones and for two instrumental variables from independent sources (silt soil intensity and the massive land fire-sales redistribution associated with social unrest in the 1920s). 3
Notably, lower land inequality is also associated with the emergence of industrial districts, a distinctive feature of Italian entrepreneurship. Industrial districts are flexible networks of small to medium-sized firms operating in the same branch and areas, characterised by a large extent of network externalities. Their growth was associated with industrialisation and regional catch-up of previously underdeveloped areas in the centre and northeast of the country, especially after the 1970s crisis of Fordist-style large manufacturing in the initial areas of Italian industrialisation (the so-called ‘industrial triangle’ in the northwest).
Credit constraints and poverty traps
Further insights come from the decomposition of inequality. An inequality index, typically the Gini index, summarises in one number the wealth distribution across the entire population. But the same Gini index can be obtained by levels of inequality originating from the lower or the upper segments of the wealth distribution. Lower-tail inequality is driven by income differentials between the very poor and the middle classes, whereas upper-tail inequality is driven by the magnitude of income gaps between the middle classes and the very rich.
We find that the effect of inequality on growth is driven by the compression of resources of the lower-middle income class, while the relative share of wealth of the poorest segment of the population is not associated with growth. In other words, while an additional unit of value transferred to the poorest segment does not significantly drive growth, a marginal increase in value to the lower-middle class does.
This finding suggests the indivisibility of investment assets: opportunities stemming from wealth are often inaccessible below a certain threshold, and only substantial transfers can sustainably lift individuals out of poverty by enabling effective investments. To illustrate with a simple example, providing the value of half a cow to an indigent peasant may boost temporary consumption, whereas transferring the entire cow’s value could support a long-term investment, boosting income in the long-run (Balboni et al. 2022, Kinnan et al. 2020). Our findings suggest that a similar process takes place in the transition from agriculture to industry.
Overall, our research strengthens the claim that lower inequality in initial endowments across the population is associated with higher growth performance, particularly during periods of structural transformation. This finding is arguably due to the existence of credit constraints and poverty traps. Redistributive policies might spur economic growth while reducing inequality, but they need to be sizeable, targeted, and well-calibrated to make the path out of disadvantaged living conditions sustainable.
Source : VOXeu
