Abstract
Introduction
Rising income inequality in both developed and developing economies has received significant attention in the past few years. One crucial area of study in economic development is the relationship between inequality and economic growth. Due to the recent increase in inequality indicators in a majority of the countries, this subject has regained attention as a heavily discussed topic in current literature (Neves et al., 2016; Topuz, 2022). Piketty (2014) points out that increases in income shares for the top 1% or 0.1% of the population have been the main cause of rising inequality in many advanced economies since 1980. It seems that a growing interest in comprehending the cause and effects of income inequality has arisen recently in both industrialized and developing economies (Benhabib et al., 2017; Brueckner & Lederman, 2018; Kennedy et al., 2017; S.-C. Lin et al., 2009; Y.-C. Lin et al., 2014; Madsen et al., 2018; Piketty, 2014). Over the past three decades, the rich-poor income gap has widened in the majority of OECD countries (Cohen & Ladaique, 2018). According to Cingano (2014) in the OECD region, the income gap between the top 10% richest and the 10% poorest of the population grew from 7:1 to roughly 10:1 from 1980s to 2014. Figure 1 depicts the world map of change in the wealth Gini coefficient indicator from 1980 to 2020. As it is shown, wealth inequality has witnessed a significantly increased in most nations, encompassing about 70% of the global population (Motahar & Mamipour, 2025a; WID, 2021).

Wealth Gini coefficient (changes from 1980 to 2020).
Since fostering economic growth is the primary aim of economic policy (Mankiw, 2020), it is crucial to examine how inequality indicators affect growth. Atkinson and Bourguignon (2000) pointed out that in the latter half of the 20th century, numerous economists regarded differences in distribution as less significant compared to the overall growth of economic output (Motahar & Mamipour, 2025b). This perspective was largely influenced by the widely accepted notion of an inherent trade-off between growth and equality (Okun, 2015). The prevalent theory was that redistributing wealth from the wealthy to the less affluent could impede growth, arguing that higher taxes and subsidies might distort economic incentives, ultimately resulting in a disadvantage for all. This impact needs to be investigated empirically and comprehensively with the latest methodologies and improved datasets.
Several theoretical researches have investigated the interrelationship between inequality indicators and economic growth through different channels, though their results were inconclusive (Dudzevičiūtė & Prakapienė, 2018). The empirical literature also offers contradictory results, reinforcing the ambiguity in the theoretical models’ conclusions (Cartone et al., 2021; Ferreira et al., 2022; Halter et al., 2014; Neves et al., 2016; Neves & Silva, 2014; Pierdzioch et al., 2022). There are several possible explanations for the contradictory empirical findings related to the inequality-growth relationship. These include the lack of comparable data, oversight of the non-linear nature of the relationship and neglecting the heterogeneity of countries. This paper tries to address these deficiencies. Specifically, this paper tries to answer the following questions: What is the most important inequality indicator predicting economic growth considering the heterogeneity of the countries and the nonlinearity of relationship between the variables?
To address this question this paper benefits from the latest Machine Learning (ML) techniques especially because the relationship between inequality and growth is neither universally agreed upon nor clearly defined (Shen & Zhao, 2023), and their connection may be complex (Mo, 2000; Motahar & Mamipour, 2025a). Data-driven ML approaches are advantageous as they dispense with the need for a pre-established model, opting instead to automate the process of uncovering insights from data. Figure 2 shows the research steps in a schematic form. First, the countries are clustered into groups using an unsupervised ML algorithm called the K-Means method. By clustering them into more homogenous groups, their heterogeneity is accounted for leading to more accurate outcomes. Then, a ML technique, namely XGBoost, attempts to determine which inequality measure predicting GDP per capita holds the highest feature importance for each country cluster. Finally, the Granger causality test is conducted to determine whether the obtained inequality variables from the previous step are also statistically significant impacting growth as well as a robustness check method.

Research design.
This research adds to the body of literature in several ways:
Traditional research often grouped countries’ data together, potentially leading to inaccuracies due to heterogeneity. Following Motahar and Mamipour (2025a), this study addresses this by clustering nations into four distinct groups according to inequality metrics and macroeconomic characteristics. This approach results in more homogeneous country groups, improving the precision of estimations. It also aids in identifying subgroups with similar patterns, reducing estimate variability, and providing economic insights into the countries’ similarities and disparities. This method, a first in the field, offers an improvement over Fixed Effect models which might not capture all time-invariant characteristics.
ML methods are increasingly integrated into the statistical toolkit of economists. In our exercise, ML techniques offer several advantages over the classical statistical regression methods. ML approach is well-suited, especially when an extensive collection of covariates (p) are highly correlated, as is the case here. Also, ML data-driven approaches are beneficial since they do not require a predefined model; instead, they seek to automate discovery from data. These models are particularly advantageous for us because there isn’t a universally accepted model that defines the connection between inequality and growth. As many researchers have pointed out, this relationship can be complex (Motahar & Mamipour, 2025a).
Income inequality has been predominantly used as the single index for economic inequality, and on top of that, net Gini has been almost always exclusively used as the single indicator of income inequality. However, at least two other major indicators of economic inequality must be examined as well, namely poverty and wealth inequality. Interestingly, some recent papers have found these two virtually ignored indices to be even more impactful on economic growth compared to income inequality (e.g., Bagchi & Svejnar, 2015; Marrero & Servén, 2022). On top of that, each of these three inequality indices has various measures. For instance, Gini is not the only measure of income inequality; other measures exist, such as Atkinsons and Palma. This paper examines 33 measures of income inequality, poverty, and wealth inequality to select the most relevant variable for each group. To the best of our knowledge, this is the first research on this topic that examines inequality measures comprehensively to this degree.
Our study utilizes extensive datasets from various sources for 150 countries (1980–2020). It includes 33 inequality measures and 12 control variables, forming the most comprehensive panel in this field. Scholars largely agree that wealth, rather than income, more accurately reflects inequality’s impact on growth. Despite this, empirical research has predominantly used income measures due to data limitations. Occasionally, wealth distribution was approximated using land distribution. Contrarily, our paper employs the World Inequality Database for direct, comparable wealth inequality data, circumventing the need for proxies. Table 1 summarizes the deficiencies in the literature and the way this paper attempts to address them.
The Research Gaps and Main Contributions of the Current Study.
Literature Review
Theoretical Review
Theoretical studies have identified various pathways through which income inequality influences economic growth (Motahar & Mamipour, 2025a). Mdingi and Ho (2021) believe in the promoting impact of inequality on growth. Additionally, Kaldor (1955) and Kalecki (1971) contend that inequality leads to increased capital accumulation, which ultimately fuels economic growth. From the perspective of incentives, inequality may also positively affect growth (Bradbury & Triest, 2016; Katz, 1986). In other words, income inequality motivates people to put in additional effort and to take financial risks or further their education in order to reap greater rewards later on. Additionally, they are urged to move to more productive industries in order to boost economic expansion (Cingano, 2014).
Alternatively, researchers have identified several growth-dampening transmission channels for inequality (Luo, 2023). The two most important variables in contemporary economies mediating the inequality-growth relationship are human capital accumulation and career choices (Galor, 2011; Galor & Zeira, 1993; Neves & Silva, 2014). Income inequality may hinder the development of human capital and economic progress. Researchers have shown that, in the face of fixed expenditures related to education investments and flaws in the credit system, individuals’ choice of vocation is significantly influenced by the distribution of their income. Table 2 summarizes the growth promoting and dampening channels of inequality. It should be noted that this study evaluates the overall effect of inequality on growth.
Overview of Channels That Enhance or Hinder Growth Due to Inequality.
From socio-political point of view, according to some academics, growing socio-political turmoil brought on by extreme economic inequality could impede growth (Alesina & Perotti, 1996; Mdingi & Ho, 2021; Venieris & Gupta, 1986). Income inequality can result in strikes, criminal activity, and other growth-dampening outcomes. Inequality could also undermine democracy (Stiglitz, 2013). Stiglitz (2013) asserts that a greater concentration of wealth corresponds to a greater concentration of power, which might skew policies toward benefiting the wealthy. Inequality may also lead to lower growth by creating a deficit in consumption and demand (Bertola et al., 2005). Political economy models also show that redistributive measures generally result in decreased efficiency for the sake of equity consequently leading to slower growth (Banerjee & Duflo, 2003). In general, theoretical literature review highlights the ambiguity of the inequality-growth relationship and a need for more research in this area.
Empirical Review
The conflicting findings found in empirical literature echoes the theoretical literature’s inconclusive assessment of inequality’s impact on growth (Baselgia & Foellmi, 2022; Halter et al., 2014). Empirical literature’ findings can be categorized into negative, positive, and no or non-monotonous relationship. Due to space limitations, these finding are summarized in Table A1 in Appendix 1.
Numerous eminent researchers conclude that growth and inequality are positively correlated. H. Li and Zou (1998) through dividing public spending into consumptive and productive services, expand the Alesina and Rodrik (1994) approach. Their model uses both fixed- and random-effect estimators and predicts that growth is positively impacted by income inequality. Forbes (2000) examined the reduced-form of inequality-growth relationship in 45 different nations from 1995 to 1966 and concluded with a positive relation between income inequality and growth. Scholl and Klasen (2019) utilized the methodology outlined by Forbes, applying it to a dataset comprising 122 countries from the years 1961 to 2012 (Motahar & Mamipour, 2025b). Using estimation techniques such as Fixed Effect, Generalized Method of Moments, and Instrumentalized Variables, they discovered a positive inequality-growth interrelationship; However, considering the heterogeneity of the countries, this overall conclusion might be inaccurate as this positive coefficient in the regression was mainly driven by the pre-communist countries.
On the other hand, Alesina and Rodrik (1994) found a negative impact from inequality on growth. Other researchers found no or non-linear relationship between the two variables. Utilizing 2SLS and GMM approaches and US data from 1929 to 2013, Benos and Karagiannis (2018) concluded that growth is unaffected by changes in inequality. Furthermore, Castelló-Climent (2010) observed the positive and negative effects of inequality on growth in developed and less developed countries, respectively. As it is depicted in Table A1 Appendix 1, inequality-growth relationship is a topic of intense debate in the literature. The conflicting empirical findings concerning the relationship between inequality and growth can be explained by various factors, including heterogeneity, non-linearity, the absence of comparable data, and the reliance on proxies (Motahar & Mamipour, 2025a).
Heterogeneity, Non-linearity, Data Limitation, and Proxies
Although there is a widespread use of vast cross-country datasets, the heterogeneity is ignored in a major part of the literature. The majority of research to date has concentrated on utilizing fixed-effect estimators to eliminate unobserved time-invariant components and GMM estimators to handle endogeneity. While estimation methods may address endogeneity, they often overlook the variation in parameters, a consideration that is reasonable given the differences in socioeconomic and institutional aspects among countries, like economic policies and technological advancements (Hailemariam & Dzhumashev, 2019). The substantial diversity observed in how inequality affects growth across nations suggests that neglecting this heterogeneity and drawing conclusions from average relationships could lead to erroneous policy implications for specific countries (Voitchovsky, 2005).
Another reason behind this fragmented picture on the inequality-growth link derives from ignoring the complexity and non-linearity of their relationship. Benhabib et al. (2017), Brueckner and Lederman (2018), B.-L. Chen (2003), S.-C. Lin et al. (2009), and Y.-C. Lin et al. (2014) highlighted a non-linear relationship between the two elements. In particular, an inverse U-shaped linkages have been discovered by B.-L. Chen (2003) and Banerjee and Duflo (2003). Their research indicates that the common practice of assuming a linear relationship between inequality and growth in empirical studies contradicts the theories suggesting a non-linear connection. Despite economic theory supporting a non-linear link between inequality and growth, this aspect has been largely overlooked in many empirical investigations. On the contrary, following Motahar and Mamipour (2025a), this study utilizes ML techniques capable of discerning intricate patterns within the data.
The absence of consensus in the literature on the relationship between income inequality and economic growth can largely be attributed to limitations in the available data, as previously conducted studies are constrained by the lack of comparable inequality data across different times and places (Atkinson & Brandolini, 2006; Neves et al., 2016; Neves & Silva, 2014). As Atkinson and Brandolini (2015) point out, many studies rely on time series with discontinuities in inequality data, which can significantly impact empirical findings. These limitations in earlier research have led to potential measurement errors and challenges in controlling for time-invariant variables, particularly due to the inadequacy of the time dimension for panel data estimations. This article, however, utilizes a comprehensive and current dataset from various sources, encompassing 150 countries from 1980 to 2020.
Another explanation for the literature’s lack of consensus is that while wealth distribution is typically the basis for theoretical reasoning, almost all empirical studies employ income instead of wealth distribution because of data due to unavailability of data for all countries. Aghion et al. (1999) believes that in empirical studies, the utilization of proxies is imperative due to the inadequacy of data pertaining to wealth distribution in numerous countries. The prevalent methodology adopted by researchers is to employ data on income inequality as a substitute for wealth inequality.
There are exceptions, such as the studies by Alesina and Rodrik (1994) and Deininger and Olinto (1999), which use land holding as a proxy for wealth inequality. However, as Alesina and Rodrik (1994) observe, land is just one aspect of wealth and doesn’t fully align with their model’s definition of capital. Following Motahar and Mamipour (2025b), this article overcomes these limitations by utilizing the World Inequality Database, which offers direct and comparable information on wealth inequality, removing the necessity for proxies.
Moreover, even when studying the impact of income inequality on growth, empirical studies often use the disposable income Gini coefficient. However, public discussions frequently focus on the income shares of top earners. The Gini coefficient, sensitive to changes in the middle of the income distribution, might underrepresent variations in the tails (Atkinson et al., 2011; Juuti, 2020). Therefore, incorporating measures like top income shares and decile ratios (e.g., the Palma ratio) is vital for a broader understanding of income inequality. This article aims to bridge these gaps by analyzing 33 indicators related to income inequality, poverty, and wealth inequality.
Research Methodology and Data
The methodology employed in this study involves using an unsupervised Machine Learning algorithm followed by a supervised one to investigate the relationship between inequality and economic growth. Firstly, the K-means algorithm (Davidson & Ravi, 2005; Likas et al., 2003; Y. Li & Wu, 2012) is utilized to cluster countries into more homogenous groups. Secondly, the XGBoost algorithm (T. Chen & Guestrin, 2016), is employed to identify the most important inequality measures for each cluster of countries. Finally, following Baltagi (2008), Hood et al. (2008), and Hurlin (2004) a panel Granger causality is applied to test the significance value of the relationship and as a robustness check method.
K-Means
In order to achieve homogeneous groups compared with hierarchical methods, following Gordon (1999), the K-means clustering technique as the most well-known clustering method is utilized to separate the observations into a predetermined number of clusters (K) in order to minimize the squared Euclidean distance from the center of the cluster (Equation 1). The reasons for the algorithm’s popularity are its ease of interpretation, simplicity of implementation, speed of convergence, and adaptability to sparse data (Dhillon & Modha, 2001). This unsupervised learning process involves categorizing countries based on common attributes to reveal internal relationships within the unstructured dataset, as follows in Equation 1:
Where:
XGBoost
At the next step, in order to find the most influential feature among the 33 inequality indicators, following T. Chen and Guestrin (2016), the eXtreme Gradient Boosting (XGBoost) is employed as a model-free ML predictive method in a panel framework spanning from 1980 to 2020. This technique is attributable to the attainment of a proficient implementation of the gradient boosting framework. XGBoost is recognized as a scalable and comprehensive tree-boosting system, extensively utilized and acknowledged for its top-tier performance in regression applications (Zhang & Zhan, 2017; Zheng et al., 2017). This method addresses overfitting, non-linear relationships and feature interactions. XGBoost is an ensemble of regression trees (CART). XGBoost distinguishes itself from the traditional gradient boosting framework introduced by Friedman (2001) by incorporating a regularized objective into its loss function. This method combines the principles of
Decision Tree: A decision tree constructs a model that forecasts the label by analyzing a sequence of if-then-else true/false feature queries, aiming to determine the fewest number of questions required to evaluate the likelihood of making an accurate decision. Decision trees are applicable for classification, where they predict a category, or for regression, where they estimate a continuous numerical value. In the straightforward example below, a decision tree is employed to predict a house’s price (the label) based on its size and the number of bedrooms (the features; NVIDIA, 2025) (Figure 3).

A decision tree regression example.
Gradient Boosting: The concept of gradient boosting originates from the notion of enhancing a single weak model, such as decision trees, by integrating it with several other weak models to create a robust model overall. Gradient boosting is an advanced form of boosting where the sequential creation of weak models is structured as a gradient descent algorithm applied to an objective function. This method aims to reduce errors by setting specific targets for the subsequent model. These targets are determined by the error gradient concerning the prediction, which is why it is called gradient boosting (Chen & Guestrin, 2016).
Gradient Boosting Decision Trees (GBDTs) work by sequentially training a series of shallow decision trees, where each new tree is trained to correct the errors of the previous one. The ultimate prediction is derived from a weighted combination of all the individual tree predictions. While “bagging” is used to reduce variance and prevent overfitting, GBDT’s “boosting” approach focuses on reducing bias and avoiding underfitting (NVIDIA, 2025). The primary goal is to minimize a specified loss function by sequentially adding models that correct the errors of the preceding models. The steps involved in XGBoost regression include:
1. Initialization: Start with an initial prediction, usually the mean of the target variable for regression tasks and define the learning rate (η), which controls the contribution of each new tree.
2. Building Trees: Add decision trees sequentially, each attempting to correct the residual errors of the previous trees. Each tree is built using the following steps:
2.1. Compute Residuals: Calculate the residuals (errors) for each data point based on the current model’s predictions.
2.2. Fit a Tree to Residuals: Train a new decision tree to predict these residuals. The gradient (the first derivative of the loss function) provides the direction in which the loss is increasing most rapidly, while the Hessian (The second derivative of the loss function) provides curvature information about the loss surface, helping to make more precise and faster updates.
2.3. Update Predictions: Adjust the predictions by adding the new tree’s predictions, scaled by a learning rate parameter.
3. Objective Function: in line with Motahar and Mamipour (2025a), we define an objective function that includes both the loss function (measuring model fit) and a regularization term (penalizing model complexity) to prevent overfitting. The objective function for XGBoost can be expressed as:
where
Further equations and their description are brought in the Table 3.
XGBoost Equations and Descriptions.
Considering the aforementioned methodology, XGBoost regressions excel in managing nonlinearity, using decision trees. Each tree partitions the data space into regions, enabling complex, piecewise constant approximations of the relationships between variables without the need to specify a functional form. This tree-based approach allows XGBoost to flexibly adapt to the data structure, capturing intricate patterns and interactions. Unlike traditional econometric methods that often require predefined functional forms and extensive feature engineering to handle nonlinearity, XGBoost’s method of building and combining trees iteratively corrects errors, effectively modeling complex nonlinear relationships and improving predictive performance.
Finally, in line with the approach outlined by Ma et al. (2020), the next phase involves utilizing XGBoost Feature Importance to quantify the contribution of each variable to the model’s predictive accuracy. Feature Importance in XGBoost assesses how significantly each individual variable influences the model’s prediction, indicating the utility of a particular variable in the context of the current model and its predictive capability.
Granger Causality
To capture the complexity of relationship between inequality and growth, the XGBoost method is employed due to its ability to model intricate relationships and interactions between variables. However, to infer a statistically significant relationship between the identified inequality measure and economic growth the Granger causality test is utilized. The rationale behind this choice is twofold: Firstly, the purpose of machine learning (ML) methods such as XGBoost is primarily predictive, in this research focusing on identifying and ranking the importance of features that contribute to accurate predictions. However, to make inferences regarding the impact of one variable on the other, econometric panel regression methods, such as Granger causality tests, are necessary, verifying whether the variables highlighted by XGBoost have a statistically significant impact (Varian, 2014). Secondly, the use of XGBoost in this research represents the exploratory phase, where complex patterns and relationships are uncovered without imposing a specific functional form. The Granger causality test, on the other hand, represents the confirmatory phase, where the key findings are tested in a more constrained and traditional econometric framework. This means the Granger causality test serves as a complementary validation tool. This dual approach reinforces the robustness and reliability of the findings across different methodological paradigms.
The Granger causality test involves comparing two models: the first model considers only the past values of
The subsequent stage of the Granger causality test entails comparing the models’ residual sum of squares (RSS) utilizing the Fisher test.
Next, two hypotheses are tested.
A recent version of Granger-causality developed by Juodis et al. (2021) is utilized. Granger causality developed by Juodis et al. (2021) exhibits several advantages over its previous versions. A significant one being that it enables panel, and not just time-series Granger tests. Additionally, this method accounts for cross-sectional heteroscedasticity and allows for multivariate Granger tests, without reducing the degrees of freedom. Furthermore, it allows for cross-sectional dependence, making it a more comprehensive and robust Granger causality test.
Data
The inequality data comprises the three groups of economic inequality indicators including income inequality, poverty, and wealth inequality for 150 countries from 1980 to 2020. The World Income Inequality Database (Atkinson & Brandolini, 2001; Deininger & Squire, 1996; WIID, 2021), serves as the main source of income inequality for this study. Table 4 depicts different inequality indicators, corresponding descriptions and sources.
Inequality Variables.
As depicted in Table 4, for net and market Gini, the new and expanded dataset (SWIID), developed by Solt (2016, 2020) is used in this paper. The dataset contains a number of crucial elements that are missing from other data sources that have been used in earlier research. Specifically, Atkinson and Brandolini (2006) recommendations have been included into the most recent version of the SWIID, greatly improving it and offering the most comparable data available for researchers studying income disparity across large countries (see Solt, 2016). The six poverty indicators used in this paper, which include poverty gap ratios and poverty headcount ratios at thresholds of $1.9, $3.2, and $5.5 per day, were all extracted from the World Bank 2021 database. It is the only reliable dataset on poverty having worldwide coverage. For wealth inequality, the WID is utilized.
It should be noted that WID seeks to measure income and wealth distributions primarily through the use of tax statistics, which is often met with skepticism from economists due to the individuals’ incentives to minimize their tax liabilities. Because of this, studies that use tax data to try and determine wealth distributions may be impacted by the inherent biases in the data. But WID data source solved this problem by building their datasets with a wealth of data on capital and non-capital assets. This method not only allayed some of the well acknowledged issues with tax data, but it also enabled the writers to incorporate income from capital into their analyses of wealth distribution and income. Following Motahar and Mamipour (2025a), this paper also employs 12 control variables as presented in Table 5.
Results and Discussion
Clustering
The K-means algorithm involves data input in the form of a matrix, where feature values are recorded in their corresponding columns and each row corresponds to a data point to be categorized into clusters. This study employs a total of 45 features, comprising 33 inequality and 12 primary macroeconomic features, as presented in Tables 4 and 5. Each country, however, has 41 time series observations for each feature that must be consolidated into a single value for each feature to be used in the K-means model. Thus, the average time series values for each feature is computed for each country. Another input value for the K-means model is the K, that is, number of clusters. There isn’t a conclusive way to figure out K. To determine the ideal number of clusters that minimizes differences within the group, it is sometimes suggested to run many cycles of computations for various values of K to select the optimal number of clusters that minimizes deviations within the group (Jain, 2010). The elbow criteria is an additional method that evaluates the proportion of variation explained in relation to the number of clusters. In this method, the number of clusters should be selected where adding another cluster does not significantly improve information gained. Plotting the number of clusters against the proportion of variation explained by them, in particular, will result in an angle in the graph and a drop in marginal benefit at a given point. Figure 4 shows the optimal number of clusters. It should be noted that the ML technique and time trend have been considered in this study. In this section, averaging 41 observation has been mentioned, though this was only for the clustering part of this analysis and not the main methodology, which is finding the most significant feature for each cluster of countries using XGBoost method.

Optimal number of clusters.
As the clustering results are seen in Figure 3, no clear-cut number of clusters fulfilling the elbow criterion exists. The preliminary calculations were made with the agglomerative method to evaluate the values of K, resulting in
Table 6 depicts the K-means clustering results based on the specifications mentioned above. Note that each cluster has a centroid which is an imaginary location representing the center of that cluster in a 45-dimensional space of the features.
Countries Within Each Cluster Along With Their Distances From the Centroids (DC).
The first cluster mainly comprises developed countries based on the International Monetary Fund (IMF) list of advanced economies, although there are some discrepancies between the two lists. Qatar, for instance, is part of the first cluster despite not being classified as an advanced economy by the IMF. The second cluster could be referred to as the developing world, as it mainly includes emerging economies, though Myanmar, Bangladesh, and Cambodia are considered low-income countries by the IMF. The third cluster could be characterized as underdeveloped countries, with the most significant mismatch being India, which the IMF categorizes as a developing country, unlike our clustering. Remarkably, the K-means method has created a fourth cluster of countries consisting solely of pre-communist countries. However, some countries such as Tajikistan or Armenia, were previously part of the Eastern Bloc but are located in other clusters. China is the largest economy in the fourth cluster.
The clustering analysis reveals a significant discovery: countries within each cluster share similarities not only in terms of development features but also in their inequality measures. This implies that clustering analysis solely based on macroeconomic features or alternatively inequality measures would yield virtually similar results. To validate this, we adjusted the weight of control variables incrementally by 0.1 from 0.1 to 1 and then again by 1 from 1 to 10. We observed that the K-means clustering outcome remained relatively consistent with the reported results above, which did not involve weight adjustments. Obviously, some discrepancies were present in this analysis as well, as seen in the case of the US, which, despite being a developed country, exhibits a significantly higher level of inequality in comparison to the average level observed in other developed countries. In short, these findings indicate that developed countries with some exceptions are also similar to each other in terms of economic inequality and the same rule applies to the developing, underdeveloped and pre-communist countries.
Feature Importance
In Table 7, to benchmark the accuracy of different ML methods, we present the out-of-sample forecast performance with our data that is used to predict GDP per capita growth. As indicated in the first column, we use Mean Squared Out-of-sample Error (MSE), Mean Absolute Out of-sample Error (MAE) and R squared as error metrics. C denotes cluster.
Statistical Error Measures of the Employed Models.
Due to its accuracy, XGBoost is the selected methodology for the feature importance evaluation in this research. It should also be noted that this research deliberately refrains from employing PCA since the method assumes that the data is linearly related to its principal components. Other than that, PCA may not preserve the interpretability of the features.
Here by utilizing XGBoost method, without the restriction to predefine any model, GDP per capita growth is regressed on various inequality measures one-by-one, along with control variables, within a panel data framework to find the most important feature for each cluster that forecasts growth. The list of inequality measures and control variables are as in Tables 6 and 7, respectively. In the XGBoost model, there are model-related parameters (hyperparameters), such as tree depth and the number of trees, which determine the structure and complexity of the model. Finding a set of optimal hyperparameter values (hyperparameter tuning) is vital to improving an ML model’s overall performance, as a lack of hyperparameter tuning can lead to inaccurate results and higher prediction errors. Following Motahar and Mamipour (2025a), this research utilizes the grid search tuning approach to determine the best hyperparameter configuration for the XGBoost model, employing the GridSearchCV tool from the Scikit-learn library in Python. The grid search method systematically examines all possible combinations of predefined hyperparameters to find the configuration that results in the lowest root mean square error on the validation dataset. The parameters of the estimator utilized in this process are optimized by performing cross-validation on a parameter grid. In accounting for each country’s institutional particularity, we assigned country code variables. These variables have been transformed into a categorical parameter using a one-hot encoding method. A binary of 1 or 0 value shows the new categorical column constructed based on the previous categorical value. After model tuning, each feature’s split weight and average gain are generated, and then normalized to calculate the weight- and gain-based relative importance scores, respectively. The scores measure the relative contribution of each feature to the accuracy of the predictive model in XGBoost, with higher scores indicating greater relative importance.
Figure 5 presents the feature importance of all our inequality measures for each cluster. In this figure the inequality features are divided into three groups: income inequality, poverty, and wealth inequality measures, represented in orange, red, and crimson, respectively. The feature with the highest feature importance has a green tick beside it. For clusters I and II, it can be observed that almost all the wealth inequality measures are among the top most influential factors in the XGBoost analysis, with wealth Gini and wealth share of top 1% being the most important factors. These results align with the findings of many earlier studies demonstrating the theoretical superiority of wealth disparity over income inequality as a term for assessing the influence of inequality on growth (Aghion et al., 1999).

Feature importance of inequality measures in each cluster.
According to empirical works by Alesina and Rodrik (1994), Birdsall and Londoño (1997), and Deininger and Olinto (1999), when both measures of inequality are taken into account, the coefficient on the income Gini is frequently no longer significant. In another study, Bagchi and Svejnar (2015) examined the impact of all three categories of inequality simultaneously. Their results suggest that when proxies are included for wealth inequality, income inequality, and poverty in one regression panel, the former remains significant while the other two measures become insignificant. Their panel mainly consisted of developed and developing countries.
In the third cluster, though, disposable Gini is the most influential factor on economic growth. As this cluster mainly consists of underdeveloped African economies, it is not surprising that income inequality plays a major role here since it is extremely high in this region (WID, 2021). In the fourth cluster, XGBoost finds several income inequality measures such as ge1, Palma ratio, and income share of top 20% more important than wealth inequality measures. This finding could be explained by the low rates of wealth inequality in the fourth cluster (WID, 2021). This might be because state-owned rental buildings were quickly sold off once socialism ended, leading to extremely high rates of homeownership in the pre-socialist countries (Ronald, 2008). Further investigation on the interpretation of the results for the third and fourth clusters is required.
To assess the robustness of the results obtained, the random forest algorithm has been utilized, and it yielded comparable outcomes with XGBoost. The most important feature remained consistent in all the clusters, even when the time lags of the variables were varied (Motahar & Mamipour, 2025a). Additionally, we conducted separate analyses including all 33 inequality measures in the model simultaneously as well as individually alongside the control variables, but this did not substantially alter our findings. This is because XGBoost is generally robust in handling multicollinearity issue These consistent findings indicate that the identified feature is a robust predictor for the target variable, and its importance is not unduly influenced by the choice of algorithm, time lag, or inclusion of additional inequality measures. It is worth noting that since the inequality measures are highly correlated, all reflecting economic inequality level across countries, it is not surprising that significant difference in the feature importance of these measures on growth is not observed.
In the end, it should be noted that poverty measures in the first and fourth clusters, in contrast to the second and third ones, have a low feature importance level. This could be attributed to the very low poverty levels in the developed and pre-communist countries. Other than that, the main finding of this research could be the following: Wealth inequality measures, namely wealth Gini and wealth share of the top 10%, are the only inequality indicators that have a relative feature importance of above 5% in all the four clusters. This result is in line with the earlier discussed literature such as Bagchi and Svejnar (2015), finding wealth inequality the most significant economic inequality index impacting economic growth.
Granger Causality
XGBoost is a purely predictive approach; therefore, a significant relationship between the previous step’s variables and the target variable cannot be necessarily inferred. The series must be stationary in order for the causality results to be valid. The results indicate that wealth Gini and top 1% wealth are stationary in their corresponding clusters, while the disposable Gini and Palma are nonstationary at level. Therefore, the first-difference of the latter two variables was employed. Besides, the employed Granger method allows for cross-sectional dependence. In the case of heteroscedasticity, the method developed by Juodis et al. (2021) is used. The Granger non-causality test was performed four times, to examine whether there is a Granger causal relationship between the wealth Gini of the first cluster, the top 1% share of wealth of the second, the disposable Gini of the third, and the Palma ratio of the fourth with their corresponding GDP per capita growths. The results are depicted by Table 8.
Granger Causality Tests Results.
The results imply that in all four clusters, the corresponding inequality measures have granger caused GDP per capita growth with a significance level of 10%; meaning that a significant relationship among the variables could also be inferred.
Conclusion and Policy Implications
This study employed Machine Learning techniques to investigate, between 1980 and 2020, how inequality forecasts growth in a sample of 150 nations. By considering several inequality measures, the nonlinearity and complexity of the relationship among the variables, and the heterogeneity of the countries in the panel, the empirical approach departs significantly from the conventional panel data models that are commonly used in the literature. A major finding of this study indicates that countries within each cluster share not only similar development factors but also show remarkable homogeneity in their level of inequality.
The paper’s most notable discovery is that wealth inequality tends to be a comparatively significant inequality index impacting GDP per capita growth for all the country clusters. Previous empirical investigations encompassing both developing and developed nations have consistently demonstrated a detrimental association between wealth inequality and economic growth. Because of this it can be concluded that policy debates on the impact of inequality on growth should prioritize wealth redistribution rather than income redistribution and poverty reduction, since wealth exerts a more pronounced influence on growth compared to income inequality and poverty, especially in the developing and developed world.
In terms of social policy implications, the results of key inequality indicators forecasting economic growth under heterogeneity and nonlinearity assumption, suggest that the focus of debate on forecasting economic growth would be attributed more to wealth distribution rather than income distribution when wealth inequality is the most significant economic inequality index impacting economic growth. This urgency is further underscored by the substantially elevated levels of wealth inequality prevalent across all countries, with the global average income Gini coefficient resting at approximately 0.39, while the corresponding average wealth Gini coefficient stands significantly higher at 0.76. This accentuates the reality that wealth accumulation is considerably more concentrated at the upper echelons than mere income generation. Further research in this area is obviously needed, especially on estimating the impact of the significant inequality measures found in this paper on the growth for each country cluster.
