State-Owned Enterprises, Political Ideology, and Redistribution

Many economies have undergone the process of privatizing their state-owned enterprises. Recently, however, this process has slowed down in some economies and has been completely stalled in others. Here we formalize the view that this is so because these enterprises are major instruments of income redistribution and, in economies with significant degrees of income inequality, segments of the population that benefit from this redistribution would use their political power to oppose its abandonment. We find strong empirical support for this hypothesis using cross-country data on the relative size of the state-owned-enterprise sector. We also find robust evidence that left-wing (vis-à-vis right-wing) governments are associated with greater redistribution in more unequal societies. Further, this effect is non-linear, implying that redistribution becomes more costly at higher levels of inequality. We also find the same result for authoritarian (vis-à-vis democratic) governments.