Does The Distribution of Income Respond to the Development of Institutions?

Abstract

The study aims to measure the impact of institutional factors on income distribution. Panel data for the period (2002-2018) were collected for 12 countries characterized by low levels of institutions, namely Argentina, Bolivia, Brazil, Colombia, Costa Rica, Dominican Republic, Ecuador, Honduras, Kazakhstan, Peru, El Salvador, and Turkey. The fixed effects model (FEM) was adopted. The model used took into account the impact of institutional quality indicators issued by the World Bank (control of corruption, government effectiveness, political stability, quality of regulation, rule of law, and voice and accountability). The model took the effect of other variables, such as the government spending ratio, unemployment rate, and trade openness, on the income shares held by (the poorest 40%, middle 40%, and richest 10%). The results showed the response of the income distribution to institutional variables was weak, as all the calculated elasticities were less than one. However, it was found that the most dominant institutional variables in the distribution of income in favor of the richer class are (control of corruption, Regulatory quality, and the rule of law). While it was found that the institutional variables whose distributional impact is in favor of the poor are (government effectiveness, Regulatory quality, and rule of law). The effective variables in the distribution of income in favor of the middle class were (government effectiveness, and rule of law). On the other hand, we found thatthe unemployment rate and trade openness have a negative effect, and government expenditure has a positive effect, on the share of income held by the poor and middle class. While trade openness has a positive effect, and government spending has a negative effect, on the share of income held by the rich.