Economic Openness, Democracy, and Income Inequality

Abstract

Scholars have studied effects of economic openness and democracy on national income inequality in two literatures. In democracy studies, scholars agree democracy reduces inequality but empirical evidence is ambiguous. In globalization studies, effects of economic openness on inequality are debated but have not been rigorously examined. This article is the first systematic statistical study of the effects of both economic openness and democracy on income inequality. These effects need to be studied together. The authors measure national income inequality from a comprehensive Gini coefficient data set. Economic openness is measured from trade flows, foreign direct investment inflows, and financial capital inflows. The period studied is 1960 to 1996, the unit of analysis is a country decade, and the sample includes 69 countries. The authors find that democracy and trade reduce income inequality, foreign direct investments increase income inequality, and financial capital does not affect income inequality. Policy implications are discussed.

Democracy and income inequality: revisiting the long- and short-term relationship

“…The issue of how institutions and types of political regimes influence the levels of inequality has received some research attention in the last couple of decades. Democracy is the main focus of research for Bollen and Jackman (1985), Lee (2005), Rodrik (1999) and Reuveny and Li (2003). The majority of these works claim that democracies tend to redistribute more towards the poor, consistent with the median voter model by Meltzer and Richard (1981), with decreasing inequality as a final result.…”

“…All rights reserved 4 horizontal alliances, and to parlay these into social movements and political parties, will be a key factor in determining whether they are able to push through comprehensive approaches to structural problems of asset inequality (McKay et al 2003). On the other hand, while the assumption that middle classes prefer higher redistribution could be valid (Reuveny and Li, 2003), this argumentation need not always hold especially since the interests of the lower and the middle classes do not always rest on the claims of increased redistribution and since they are not always compatible. According to Ringen (2007), the middle classes are interested in prosperity and efficiency but they are also interested in helping the lower classes as poverty threatens the established order and it is a nuisance in an otherwise well established middle class life.…”

“…Finally, a supplementary criterion used to purge the data was the quality ranking of studies, available from the WIDER dataset, which grossly confirms the criteria enumerated above 4 . In addition we have conducted a secondary transformation of the Gini data, as described in Reuveny and Li (2003). According to them, the usual practice is to transform a bounded variable (such as the Gini coefficient) into an unbounded one.…”

“…Section 5 presents the empirical results, Section 6 offers the discussion and Section 7 concludes. Reuveny and Li (2003) argue that policies in democracies will always be designed so that there is more redistribution going towards the middle and the poorer classes in the society, leading to lower levels of inequality. Indeed, a special strand of literature emerged in the early 1980s that tried to disentangle the link between democracy and inequality (especially through the redistributive channel) synthesized in the median voter model by Meltzer and Richard (1981).…”

Neo-liberal economic practices and population health: a cross-national analysis, 1980–2004

“…Neo-liberal thinking contends that economic freedom may improve political freedom and that, in conjunction with the benefits of increased trade, it lessens social ills in the long run (Friedman, 1962;Price et al, 1999). For example, one argument put forth by proponents of neo-liberalism is that increased levels of democracy coupled with freer trade may have equalizing effects on income distribution (Reuveny and Li, 2003). Democratic societies have more political participation by groups that may be underserved in less open societies, and these groups demand smaller income disparities.…”