Statehood experience and income inequality: A historical perspective

Abstract

This study investigates the effects of accumulated statehood experience on contemporary income inequality. Previous studies reveal numerous “proximate” causes of income inequality, but little is known about the fundamental determinants of this widespread social concern. The novelty of this paper lies in the adoption of a historical approach that sheds light on the deep historical roots of cross-country differences in income inequality. The central hypothesis is that statehood experience, measured by the extended state history index, exerts persistent impacts on present-day income inequality. Employing data for 128 countries, I find strong and robust evidence of a U-shaped relationship between state history and income inequality. Accumulated statehood experience, up to a point, strengthens fiscal and legal capabilities, leading to a more egalitarian distribution of income. However, excessive state experience is associated with early emergence of extractive institutions and powerful elites, resulting in persistent inequality. Further analyses suggest that the distributional effects of state history are mediated through institutions.