Growth income distribution and democracy what the data say
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Growth, Income Distribution and Democracy: What the Data Say. Roberto Perotti , Columbia University September 1995. Introduction. Main concern of the paper is to investigate relationship between income distribution, democratic institution and growth. Three main issues;

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Growth income distribution and democracy what the data say

Growth, Income Distribution and Democracy:What the Data Say

Roberto Perotti, Columbia University September 1995


Introduction

Introduction

  • Main concern of the paper is to investigate relationship between income distribution, democratic institution and growth.

  • Three main issues;

    • The reliability of the income distribution data

    • The robustness of reduced form relationships

    • Specification issues


Main approaches

Main Approaches

  • Fiscal policy (Alesina and Rodrik-1994)

    • FP1 : The economic mechanism

    • FP2 : The political mechanism

    • FP3 : The reduced/simple form

  • Socio-political instability

    • SP1 : Investment & growth correlate with social-political instability (+)

    • SP2 : Social-political instability correlate with equality (-)

    • SP3 : The reduced form


Main approaches cont

Main Approaches (cont.)

  • Imperfect capital market

    • ICM1 : Correlation growth and investment in human capital (+)

    • ICM2 : Correlation investment and equality (+)

    • ICM3 : The reduced form

  • “Endogenous fertility”

    • Similar to imperfect capital market but with extensive relationship with fertility (because investment in human capital and fertility are connected)


The distribution data

The Distribution data

  • Preliminary Problems when testing the theories:

    • The relevant distribution in several cases is of wealth rather than income

    • The effect of income distribution on growth depend on whole shape of distribution of income

  • “Middle Class” is used as appropriate measure of equality.

  • Most observations are obtained from two compilations: Jain (1975) and Lecaillon et al. (1984)


Growth income distribution and democracy what the data say

  • Data are based on household surveys. Non-household based data are adjusted.

  • Three South-east Asian “tigers” ; South Korea, Taiwan, and Korea have higher shares of middle class than most countries

  • Highest share of middle class : Denmark

  • Lowest Share of middle class : Kenya


Growth income distribution and democracy what the data say

Democracy effect seems to be not robust especially when a certain or some countries are excluded from the data


Conclusion of reduced form

Conclusion of reduced form

  • There is a positive association between equality and growth, although a good deal of it is coming from intercontinental variation;

  • This positive association is quantitatively much weaker, and statistically insignificant, for poor countries; however, this can be explained both on empirical and theoretical grounds;

  • There is some indication that the association between equality and growth is stronger in democracies; however, the democracy effect does not seem to be very robust;

  • Because of the high concentration of democracies in rich countries, it is virtually impossible to distinguish an income effect from a democracy effect in the relationship between income distribution and growth.


Fiscal policy approach

fiscalpolicyapproach

endogenous variables at a time

estimating different simple models

socialsecurityandwelfare,

healtandhousing,

publicexpedniture on education


Growth income distribution and democracy what the data say

GDP - per capita GDP in 1960

MSE - average years of secondary schooling of the male population, 1960

FSE- average years of secondary schooling of the female population, 1960

PPPI - PPP value of the investment deflator, relative to the U.S., 1960

MTAX - average marginal tax rate between 1970 and 1985 -> fiscal policy variable

MID - share in income of the third and fourth quintiles

GR: average yearly growth rate of per capita GDP, 1960-85


Political instability approach

politicalinstabilityapproach

  • twotypesofmeasurabedefinitionofinstability

  • exectuiveinstability i.e. frequencyofgovernmentturnovers

  • emphasizesphenomenaofsocialunrest i.e. politialassassinations, massdemonstrations etc.


Growth income distribution and democracy what the data say

LAAM, ASIA, AFR– dummyvariable for differentcountries

HOMOG - percentage of the population belonging to the main ethnic or linguistic group


Growth income distribution and democracy what the data say

SPI: index of socio-political instability, constructed as discussed in section 6

RICH - dummy variable for countries with values of GDP higher than $1,500.


Imperfect capital market and endogenous fertility approaches

imperfectcapitalmarketandendogenousfertilityapproaches

  • human capitalinvestmentdecision – secondatyschoolenrollment

  • Opportunitycost in developing countries


Conclusion

Conclusion

equalsocieties -> lowerfertilityratesandhigherratesofinvestment in education

unequalsocieties -> politicalyandsociallyunstable, lowerratesofinvestmentandgrowth

Data does not showthatmoreequalsocieties grow faster


References

References

  • Alesina, A. and R. Perotti (1995): Income Distribution, Political Instability, and Invest- ment, forthcoming, European Economic Review;

  • Alesina, A. and D. Rodrik (1994): Distributive Politics and Economic Growth, Quarterly Journal of Economics, 109, 465-90;

  • Banerijee, A. and A. Newman (1991): Risk Bearing and the Theory of Income Distribution, Review of Economic Studies, 58 211-35;

  • Barro, R. J. (1994): Democracy and Growth, NBER working paper No. 4909;

  • Galor, 0. and J. Zeira (1993): Income Distribution and Macroeconomics, Review of Economic Studies, 60, 35-52;


Growth income distribution and democracy what the data say

  • Jain, S. (1975): Size Distribution of Income: A Compilation of Data, World Bank, Washington, D.C.;

  • Lecaillon, J. et al. (1984): Income Distribution and Economic Development, ILO, Geneva;


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