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

  • 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)
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
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


endogenous variables at a time

estimating different simple models



publicexpedniture on education

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
  • twotypesofmeasurabedefinitionofinstability
  • exectuiveinstability i.e. frequencyofgovernmentturnovers
  • emphasizesphenomenaofsocialunrest i.e. politialassassinations, massdemonstrations etc.
LAAM, ASIA, AFR– dummyvariable for differentcountries

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

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
  • human capitalinvestmentdecision – secondatyschoolenrollment
  • Opportunitycost in developing countries


equalsocieties -> lowerfertilityratesandhigherratesofinvestment in education

unequalsocieties -> politicalyandsociallyunstable, lowerratesofinvestmentandgrowth

Data does not showthatmoreequalsocieties grow faster

  • 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;
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;