Inequality, Privatization, and Democratic Institutions in Developing Countries

Abstract

Privatization of state-owned enterprises in low- and middle-income countries is regarded as an indispensable first step for the consolidation of national accounts, the development of financial markets, and the improvement of firms’ efficiency. However, privatizations may also have a relevant distributional impact, particularly in developing countries, where proceedings from privatization may be a sizable resource for redistribution. This article is a first attempt to investigate the relationship between privatization and income inequality, focusing on the role of democratic institutions. We find that an increase in privatization proceeds is correlated with a reduction in income inequality in countries where representative political institutions are mature.