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

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  • Krieger, Tim
  • Meierrieks, Daniel

Abstract

In this contribution we study the relationship between income inequality and economic freedom for a panel of 100 countries for the 1971-2010 period. From a panel causality study we find that income inequality has a negative causal effect on economic freedom, while causation does not run in the opposite direction. We argue that the negative effect of inequality on economic liberty is due to the elite's political power stemming from its disproportionate control over a country's economic resources. The elite uses this power to curtail economic freedom to defend its economic interests by discouraging innovation, competition and protecting its rents. Running a series of dynamic panel estimations, we show that the negative effect of income inequality on economic freedom is robust to different sets of controls and estimation techniques. Finally, we show that the dynamics of the inequality-freedom nexus are to some extent conditional upon a country's political regime. When inequality is low, democracies enjoy comparatively higher levels of economic liberty, in line with the interests of a large middle-class. By contrast, economic freedom is lower in democracies (compared to strongly autocratic regimes with the same income distribution) when inequality is high. We argue that the latter finding corresponds to a system of political capitalism or captured democracy, where a powerful economic elite cooperates with politicians and bureaucrats for their mutual benefit.

Suggested Citation

  • Krieger, Tim & Meierrieks, Daniel, 2015. "Political capitalism: The interaction between income inequality, economic freedom and democracy," Discussion Paper Series 2015-09, University of Freiburg, Wilfried Guth Endowed Chair for Constitutional Political Economy and Competition Policy.
  • Handle: RePEc:zbw:wgspdp:201509
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    Cited by:

    1. Malte F. Dold, 2018. "Back to Buchanan? Explorations of welfare and subjectivism in behavioral economics," Journal of Economic Methodology, Taylor & Francis Journals, vol. 25(2), pages 160-178, April.
    2. Farzanegan, Mohammad Reza & Krieger, Tim, 2017. "The response of income inequality to positive oil rents shocks in Iran: Implications for the post-sanction period," Discussion Paper Series 2017-04, University of Freiburg, Wilfried Guth Endowed Chair for Constitutional Political Economy and Competition Policy.
    3. Dorsch, Michael T. & Maarek, Paul, 2020. "Economic downturns, inequality, and democratic improvements," European Journal of Political Economy, Elsevier, vol. 62(C).
    4. 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.
    5. Ryan H. Murphy & Colin O’Reilly, 2019. "Applying panel vector autoregression to institutions, human capital, and output," Empirical Economics, Springer, vol. 57(5), pages 1633-1652, November.
    6. Islam, Md. Rabiul, 2018. "Wealth inequality, democracy and economic freedom," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 920-935.
    7. 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.
    8. Mohammad Reza Farzanegan & Tim Krieger, 2018. "Oil Revenues Shocks and Inequality in Iran," Working Papers 1226, Economic Research Forum, revised 18 Sep 2018.
    9. 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.
    10. Mohammad Reza Farzanegan & Tim Krieger, 2018. "Oil Rents Shocks and Inequality in Iran," CESifo Working Paper Series 6876, CESifo.
    11. E. Wesley F. Peterson, 2017. "Is Economic Inequality Really a Problem? A Review of the Arguments," Social Sciences, MDPI, Open Access Journal, vol. 6(4), pages 1-25, December.

    More about this item

    Keywords

    income inequality; economic freedom; democratic institutions; political capitalism; middle-class; captured democracy;

    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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