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Political capitalism: The interaction between income inequality, economic freedom and democracy

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  • Krieger, Tim
  • Meierrieks, Daniel

Abstract

We study the relationship between income inequality and economic freedom for a panel of 100 countries for the 1971–2010 period. Using a panel Granger non-causality approach, we reject the null hypothesis of Granger non-causality running from income inequality to economic freedom, but not vice versa. From a series of dynamic panel estimations we show that the effect of income inequality on economic freedom is negative and robust to the inclusion of additional controls. In particular, inequality is negatively associated with those components of economic freedom related to international trade, domestic market regulation as well as the rule of law and property rights protection. We argue that the negative effect of inequality on economic freedom is due to the economic elite converting its economic power into de facto political power to defend its economic interests; these interests run counter to economic freedom, discouraging innovation and competition as well as protecting the elite's rents. Finally, we show that economic freedom decreases with income inequality even in democratic countries, suggesting that democratic institutions do not prevent economic freedom from eroding. We argue that the latter finding corresponds to a system of political capitalism or captured democracy, where a powerful economic elite can nevertheless exercise de facto political power by cooperating with politicians and other decision-makers for their mutual benefit.

Suggested Citation

  • Krieger, Tim & Meierrieks, Daniel, 2016. "Political capitalism: The interaction between income inequality, economic freedom and democracy," European Journal of Political Economy, Elsevier, vol. 45(C), pages 115-132.
  • Handle: RePEc:eee:poleco:v:45:y:2016:i:c:p:115-132
    DOI: 10.1016/j.ejpoleco.2016.10.005
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    Cited by:

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    7. Chambers, Dustin & O'Reilly, Colin, 2022. "Regulation and income inequality in the United States," European Journal of Political Economy, Elsevier, vol. 72(C).
    8. Islam, Md. Rabiul, 2018. "Wealth inequality, democracy and economic freedom," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 920-935.
    9. Dold, Malte & Krieger, Tim, 2019. "The ideological use and abuse of Freiburg's ordoliberalism," Discussion Paper Series 2019-04, University of Freiburg, Wilfried Guth Endowed Chair for Constitutional Political Economy and Competition Policy.
    10. Ryan H. Murphy, 2019. "The long‐run effect of government ideology on economic freedom," Economic Affairs, Wiley Blackwell, vol. 39(1), pages 101-114, February.
    11. Marta Marson & Matteo Migheli & Donatella Saccone, 2021. "New evidence on the link between ethnic fractionalization and economic freedom," Economics of Governance, Springer, vol. 22(3), pages 257-292, September.
    12. Dawood Ashraf & Muhammad Suhail Rizwan & Barbara L’Huillier, 2022. "Environmental, social, and governance integration: the case of microfinance institutions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 837-891, March.
    13. Ouattara, B. & Standaert, S., 2020. "Property rights revisited," European Journal of Political Economy, Elsevier, vol. 64(C).
    14. Megan V. Teague & Virgil Henry Storr & Rosemarie Fike, 2020. "Economic freedom and materialism: an empirical analysis," Constitutional Political Economy, Springer, vol. 31(1), pages 1-44, March.
    15. Bahamonde, Hector & Trasberg, Mart, 2021. "Inclusive institutions, unequal outcomes: Democracy, state capacity, and income inequality," European Journal of Political Economy, Elsevier, vol. 70(C).
    16. Mohammad Reza Farzanegan & Tim Krieger, 2018. "Oil Rents Shocks and Inequality in Iran," CESifo Working Paper Series 6876, CESifo.
    17. Nguyen Ngoc Thach & Bui Hoang Ngoc, 2021. "Impact of Economic Freedom on Corruption Revisited in ASEAN Countries: A Bayesian Hierarchical Mixed-Effects Analysis," Economies, MDPI, vol. 9(1), pages 1-16, January.
    18. Robert A. Lawson & Ryan Murphy & Benjamin Powell, 2020. "The Determinants Of Economic Freedom: A Survey," Contemporary Economic Policy, Western Economic Association International, vol. 38(4), pages 622-642, October.
    19. Dold, Malte & Krieger, Tim, 2017. "Competition or conflict? Beyond traditional ordo-liberalism," Discussion Paper Series 2017-02, University of Freiburg, Wilfried Guth Endowed Chair for Constitutional Political Economy and Competition Policy.
    20. Vítor Castro & Rodrigo Martins, 2021. "Economic liberalization, political regimes and ideology," Kyklos, Wiley Blackwell, vol. 74(4), pages 463-487, November.
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    22. Ali, Qamar & Raza, Ali & Narjis, Saadia & Saeed, Sahrish & Khan, Muhammad Tariq Iqbal, 2020. "Potential of renewable energy, agriculture, and financial sector for the economic growth: Evidence from politically free, partly free and not free countries," Renewable Energy, Elsevier, vol. 162(C), pages 934-947.
    23. Mohammad Reza Farzanegan & Tim Krieger, 2018. "Oil Revenues Shocks and Inequality in Iran," Working Papers 1226, Economic Research Forum, revised 18 Sep 2018.
    24. E. Wesley F. Peterson, 2017. "Is Economic Inequality Really a Problem? A Review of the Arguments," Social Sciences, MDPI, vol. 6(4), pages 1-25, December.

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    More about this item

    Keywords

    Income inequality; Economic freedom; Democratic institutions; Political capitalism; Middle-class; Captured democracy;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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