Recent years have witnessed increased polarization in income levels both among countries and among various income groups and classes within countries. Rapid and steady growth in developing countries is clearly necessary to close their income gap with the advanced industrial countries and improve standards of living. There may be some scope for raising income through reallocation of existing resources, but restoring rapid growth depends in large part on raising the rate of capital accumulation.
Experience shows that while rapid growth as such may not lead to a significant improvement in income distribution in the short to medium term, it is indispensable for attaining a more balanced pattern of distribution in the longer term. More importantly, policies can be designed so as to strengthen the forces making for greater equality while promoting growth and absorbing the surplus labor that prevails in many developing countries.
The ability of market mechanisms and locally-based initiatives to provide for the economic well-being of those persons at the low end of the income distribution is questionable. In practice, much of the concern for distributional issues is lost in the transition from an academic or policy discussion to the implementation of local economic development programs (Leigh 1995). While there is some evidence that economic growth will benefit low income workers (Bartik 1991), there is also a possibility that explicit local redistribution policies may create local comparative disadvantage (Bartik 1992).
More work is needed to understand the distributional characteristics of private markets. If greater responsibility for the economic welfare of citizens defaults to the community level, it becomes important to focus attention on income distribution at the scale of local labor markets. Further, to the extent local economic development policy can affect the activity levels of targeted production sectors, it also has an effect on distributional patterns. Thus, it becomes important to understand the implicit distributional biases of local policy in its promotion of selected economic activities, and to question whether explicit distributional objectives can be incorporated into local economic development programs.
Other important factors influencing the distribution of income are the institutional structures that organize wealth. Institutions are the entities that engage in transactions, own assets, and incur liabilities (Pyatt 1988, 1991). Conventional institutional specification is as households, enterprises, and government. Within this general framework, institutional accounts can be disaggregated in considerable variation to permit the study of policies (development strategies, tax systems, laws) that influence distributional patterns. For example, SAM research has disaggregated household accounts by landholding status (Adelman et al. 1988; Lewis and Thorbecke 1992), while other research disaggregated forest enterprises by land tenancy group (Marcouiller et al. 1995).
Thus, the process of wealth accumulation consists of two parts: the generation of income through productive activities, and its distribution to households. This