Political Democracy and the Size Distribution of Income

Abstract

This paper reviews the major theoretical arguments that link political democracy with economic inequality. It then shows that previous empirical analyses of the linkage have produced inconclusive results because they have suffered from specification, measurement, and sample-composition problems. A nonrecursive model is proposed that overcomes many of these limitations. Using 2SLS and a new weighted 2SLS procedure, we find no evidence of direct effects of political democracy on income inequality, or vice versa. However, economic development influences both variables, while world-system position, Protestantism, and British colonial experience affects political democracy. Population age-structure and systematic measurement error induce changes in income inequality. The paper concludes with a discussion both of the flaws in prior arguments linking democracy with inequality, and of the political processes that undermine any such linkage. In democracies the poor have more sovereign power than the men of property; for they are more numerous and the decisions of the majority prevail. Aristotle, The Politics, 1962:237 Where one set of people possesses a great deal and the other nothing, the result is either extreme democracy [mob rule] or unmixed oligarchy or a tyranny due to the excesses of the other two. Aristotle, The Politics, 1962:173 Debate over the linkage between political democracy and social equality has a venerable history. At least since Aristotle, many have held that by reducing inequalities in the distribution of political power, democracy helps to reduce inequalities of wealth and status. Paralleling this view, it also has been argued that extreme inequalities in wealth undermine democratic political structures. At the same time, it has been suggested that democracy and inequality have no meaningful bearing on each other. This paper offers a fresh approach to the democracy-inequality linkage. We begin with a survey of the pertinent substantive arguments and the assumptions on which they are based. This is followed by a review of representative empirical studies which shows that those studies have generated inconclusive results. Further, there is no readily apparent way to resolve these differences, because, as we indicate below, the empirical studies have employed a variety of samples, measurement procedures, and model specifications. Finally, we report our own empirical analysis, which seeks to correct some of the major specification and measurement problems of previous work. This analysis is based on a more comprehensive data set than has been available in the past, and centers on 60 Western and Third World countries.