Distributive Justice, Democracy and Growth
Keywords:income inequality, Democracy, economic growth
This paper argues that the effect of income inequality on economic growth depends on the level of democracy in a country and whether people believe that redistribution is an essential component of the democratic process. The paper uses the World Values Survey to focus on countries where the majority believe that taxing the rich and subsidizing the poor an essential component of democracy, and on countries where the majority believe that the rich do not buy elections in their country. Using the threshold estimation technique introduced by Hansen (1999), the analysis suggests the presence of a statistically significant threshold income inequality level, below which democracy does not have a statistically significant effect on growth, and above which an increase in the dose of democratization has a statistically significant negative effect on economic growth. The interpretation is that in countries where income inequality is high, and the majority believe that taxing the rich and subsidizing the poor is an essential component of democracy, a higher level of democratic governance allows people to support redistribution policies which can deter investment and economic growth.
Albertus, Michael, and Victor Menaldo 2014 “Gaming Democracy: Elite Dominance during Transition and the Prospects for Redistribution”, British Journal of Political Science 44(3): 575-603.
Alesina, Alberto, and George-Marios Angeletos 2005 “Fairness and Redistribution”, American Economic Review 95(4): 960–980.
—–, and Dani Rodrik 1994 “Distributive Politics and Economic Growth”, The Quarterly Journal of Economics 109(2): 465-490.
—–, and Roberto Perotti 1996 “Income Distribution, Political Instability, and Investment”, European Economic Review 40(6): 1203-1228.
Arellano, Manuel, and Stephen Bond 1991 “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations”, Review of Economic Studies 58(2): 277-297.
Barro, Robert 2000 “Inequality and Growth in a Panel of Countries”, Journal of Economic Growth 5(1): 5-32.
Carroll, Christopher 2000 “Why Do the Rich Save So Much?” in J. Slemrod (ed.) Does atlas shrug?: The economic consequences of taxing the rich London: Cambridge University Press, pp. 465-484.
Deininger, Klaus, and Lyn Squire 1996 “A new data set measuring income inequality”, The World Bank Economic Review 10(3): 565-591.
Forbes, Kristin J. 2000 “A reassessment of the relationship between inequality and growth”, The American Economic Review 90: 869-887.
Galbraith, James, and Hyunsub Kum 2004 “Estimating the inequality of household incomes: A statistical approach to the creation of a dense and consistent global data set” University of Texas Inequality Project Working Paper 22.
Galor, Oded, and Omer Moav 2004 “From physical to human capital accumulation: Inequality and the process of development”, Review of Economic Studies 71(4): 1001-1026.
Gimpelson, Vladimir, and Daniel Treisman 2018 “Misperceiving inequality”, Economics and Politics 30(1): 27-54.
Hansen, Bruce 1999 “Threshold effects in non-dynamic panels: Estimation, testing, and inference”, Journal of Econometrics 93(2): 345-368.
Perotti, Roberto 1992 “Income distribution, politics, and growth”, The American Economic Review 82(2): 311-316.
—– 1996 “Growth, income distribution, and democracy: What the data say”, Journal of Economic Growth 1(2): 149-187.
Persson, Torsten, and Guido Tabellini 1994 “Is inequality harmful for growth? Theory and evidence” The American Economic Review, 84: 600-621.