The Impact of Political Competition and Institutions on Income Inequality in Developing Countries: An Empirical Analysis

Institutions are one of the primary sources of development disparities among countries. However, the choice and structure of economic institutions and the distribution of resources significantly depend on the degree of political competition and the structure of the prevailing political institutions. This research aims to examine the relationship between political competition, political institutions, and income inequality for 52 developing countries over the period 2000–2018. To examine the potential income-based heterogeneity, the sample is divided into two income groups: low- and lower-middle-income and upper-middle-income countries. Given the dynamic nature of the data and empirical models, the empirical analysis is conducted by applying the two-step system-GMM estimation method to address endogeneity and dynamic panel bias. The study presents three key findings. Firstly, higher levels of political competition, measured by a Polity-IV based composite index (POLCOMP), significantly and considerably reduce income inequality in the sample countries. Secondly, the impact of political competition on income inequality substantially depends on the type of prevailing political institutions. Specifically, political competition in parliamentary systems more strongly reduces inequality by enhancing legislative accountability and policy responsiveness. Thirdly, political stability is imperative for reducing income inequality, as it ensures policy consistency, efficient government, and long-term economic planning. The findings suggest that and higher level of political competition and strong institutions are vital for fostering the process of equal income distribution.