Polarization, politics and property rights: Links between inequality and growth

We argue that social polarization reduces the security of property and contract rights and, through this channel, reduces growth. The first hypothesis is supported by cross-country evidence indicating that polarization in the form of income inequality, land inequality, and ethnic tensions is inversely related to a commonly-used index of the security of contractual and property rights. When the security of property rights is controlled for in cross-country growth regressions, the relationship between inequality and growth diminishes considerably. This and other evidence provides support for our second hypothesis, that inequality reduces growth in part through its effect on the security of property rights.