Polarization, Politics and Property Rights: Links Between Inequality and Growth

We argue that social polarization reduces the security ofproperty and contract rights and, through this channel,reduces growth. The first hypothesis is supported by cross-country evidence indicating that polarization in the form ofincome inequality, land inequality, and ethnic tensions isinversely related to a commonly-used index of the security ofcontractual and property rights. When the security of propertyrights is controlled for in cross-country growth regressions,the relationship between inequality and growth diminishesconsiderably. This and other evidence provides support for oursecond hypothesis, that inequality reduces growth in partthrough its effect on the security of property rights.