Wealth Distribution and Political Conflict in the Model of Transition from Stagnation to Growth

Does more equal distribution of wealth corresponds to faster growth; specifically, in the era of industrialization? Does high inequality hamper the adoption of reforms that contribute to the development of the industrial sector? In the present paper, we demonstrate that the lack of consensus about the role of inequality in the long-run growth could be attributed to not considering the fundamental differences between land inequality and capital inequality, and the differential effects they exert on the process of political struggle accompanying industrialization in mostcountries worldwide. We propose a two-sector unified growth model, in which the speed of industrialization depends on the outcome of political conflict between the heterogeneous interest groups, differing with respect to capital and land ownership, over the adoption of reform of the modern sector. The growth of productivity in the modern sector is possible only if the supporters of this reform manage to overcome the resistance of its opponents in the process of lobbying their interests. The distribution of capital and land is crucial in this process since it determines the structure of agents' incomes and, hence, their political preferences and incentives to invest in lobbying for (or against) the reform. We demonstrate that higher concentration of land ownership hampers development of the modern sector, while higher concentration of capital ownership within the landless agents increases political support of pro-growth reforms and intensifies industrialization. Moreover, the strength of the latter effect is increasing with the accumulation of the aggregate capital. Finally, our model explains the non-monotonous dynamics of political conflict intensity, which corresponds well with structural changes and GDP per capita growth observed in historical data.