Inequality and Governance

Andreas P. Kyriacou

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781134994656
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Governance matters for social welfare. Better governed countries are richer, happier and have fewer social and environmental problems. Good governance implies that public sector agents act impartially. It manifests itself in the form of equality before the law, an independent and professional public administration and the control of corruption.

This book considers how economic inequality – both interpersonal and interethnic – can affect the quality of governance. To this end, it brings together insights from three different perspectives. First, a long-run historical one that exploits anthropological data on pre-industrial societies. Second, based on experimental work conducted by social psychologists and behavioural economists. Third, through cross-country empirical analysis drawn from a large sample of contemporary societies.

The long-run perspective relates the inequality-governance relationship to societal responses in the face of uncertainty – responses that persist today in the guise of cultural traits that vary across countries. The experimental evidence deepens our understanding of human behaviour in unequal settings and in different governance contexts. Together, the long-run perspective and the experimental evidence help inform the cross-country analysis of the impact of economic inequality on governance. This analysis suggests the importance of both economic inequality and culture for the quality of governance and yields several policy implications.

1
Introduction

Economic inequality has been on the rise around the world over the last four decades. Facundo Alvaredo et al. (2018) show that income inequality has increased in almost all world regions since 1980, although at different speeds. The rising trend of income inequality has been attributed to a range of factors (for a summary, see Anthony Atkinson [2015] and François Bourguignon [2017]). In developed countries, these include technological change that is biased in favour of high-skilled workers, increased competition from countries with lower wages for unskilled workers, assortative mating, whereby individuals form relationships with people with similar incomes and, finally, the rise of single parent households. In developing countries, it is mostly seen as the result of changes in the sectoral composition of the economy due to economic development in line with Simon Kuznets’s (1955) seminal argument regarding the shift from agriculture to industry. The level of economic development also partly explains why economic inequality varies so much across countries. Based on the average value of the Gini index of disposable income over the period 1996 to 2016 – a measure that I will fully explain in Chapter 2 – economic inequality in Swaziland and Namibia, is almost two and a half times greater than that in Iceland and Denmark.¹

Large economic inequalities are bad news for a range of social, political and economic objectives. Kate Pickett and Richard Wilkinson (2009) relate income inequality across developed countries and within the United States to a range of health and social problems such as, life expectancy and infant mortality, mental illness and drug use, obesity, child well-being (including experience with conflict), academic performance, teenage births, homicides and imprisonment rates (see Wilkinson and Pickett [2017], for a recent survey of associated work). These authors identify increasing anxiety due to the greater salience of status in more unequal settings as a fundamental driver of many of these problems. Status, relative or positional concerns also help explain empirical evidence showing that inequality is associated with lower happiness levels in Western countries (for surveys, see Ada Ferrer-i-Carbonell and Xavier Ramos [2014] and Andrew Clark and Conchita D’Ambrosio [2015]).

Economic inequality can also affect democratisation and democratic political engagement. High levels of economic inequality may lead economic elites to oppose democracy because they are fearful of the redistributive pressures that are expected to emerge in the normal course of democratic politics (Carles Boix [2003], Daron Acemoglu and James Robinson [2006]). Within developed democracies, economic inequality may lead to unequal political participation. Drawing on a sample of industrialised democracies, Frederick Solt (2008) shows that higher levels of economic inequality reduce interest in politics, the frequency of political discussion and participation in elections of all but the wealthiest citizens. According to this author, this vindicates the relative power theory of political engagement, which holds that wealthier people can apply their superior resources to set the political agenda leaving poorer individuals to feel powerless and, as a result, to opt out of politics altogether (see, originally, Elmer Schattschneider [1960]). To the extent that poorer citizens are underrepresented when political priorities are being set, this can potentially translate into policies that are biased in favour of wealthier citizens setting in place a negative feedback loop between economic and political inequality (see Solt [2010] and Aina Gallego [2015]). In the words of Joseph Stiglitz (2012) writing on democracy in the United States, “the median voter … is richer than the median American. We have a biased electorate, tilted toward the top” (Chapter 5, subheading, “The evisceration of our democracy”, eBook, italics in the original).

Inequality is also inimical to economic growth. Andrew Berg et al. (2018) exploit a large number of country-year observations covering both developed and developing countries to show that higher net (after tax and transfer) inequality, as measured by the Gini index, is correlated with lower growth rates. Era Dabla-Norris et al. [2015] report similar findings based on the income shares of the top 20 and bottom 20 per cent. Berg et al. (2018) identify several channels, including imperfect credit markets and fertility. Poorer people have more limited access to capital and tend to have higher fertility rates. Because of this, they invest less in human capital to the detriment of economic growth. Another channel explored by these authors is income redistribution. A priori, inequality may lead to redistributive policies that may harm growth by dampening incentives to work and invest (see, originally, Arthur Okun [1975]). On the other hand, redistribution may promote growth insofar as it finances public spending in areas such as infrastructure, education and health. The authors do not find that redistribution is harmful to growth except when it is very extensive (top twenty-fifth percentile of all observations).

Most of the work analysing the consequences of inequality focuses on interpersonal inequality. But a growing body of work has turned its attention to the impact of economic inequality between ethnic groups. Such ethnic or horizontal inequalities as they are known, may lead relatively deprived groups to mobilise violently against the better off, thereby increasing the likelihood of civil war (Frances Stewart [2000]; Gudrun Østby [2008] and Lars-Eric Cederman et al. [2011, 2015]). Ethnic group inequalities have also been associated with transitions away from democracy. Christian Houle (2015) provides empirical evidence to support the argument that higher ethnic inequalities may lead to redistributive conflicts and, ultimately, the demise of democracy. This is especially likely if within-group inequalities are lower, since this increases cohesion within ethnic groups. Kate Baldwin and John Huber (2010) show that ethnic inequalities undermine public good provision and explain this by suggesting that income and ethnic differences are likely to make agreement over which public goods to provide more difficult. Alberto Alesina et al. (2016) focus instead on the link between ethnic group inequalities and economic development. Based on a cross-section of up to 173 countries, they show that income differences among ethnic groups are harmful for development.

In this book, I will turn my attention to the impact of economic inequality – both interpersonal and interethnic – on governance. As will be extensively discussed in Chapter 2, governance refers to the way public authority is exercised. Good governance implies that public sector agents act impartially or, in other words, without regards to personal relationships and preferences. It manifests itself in numerous ways including, an independent and professional public administration, equality before the law (including contract and property right enforcement) and, control of corruption or the misuse of public power for private or political gain. I focus on governance because a large and expanding body of work has linked good governance to a range of desirable social outcomes.

One notable outcome is economic development. An efficient public administration facilitates the cost-effective provision of public goods and, more generally, the formulation of sound policies and regulations to the benefit of sustained economic growth (Paolo Mauro [1995]; Peter Evans and James Rauch [1999]). Secure property rights and equality before the law encourage investments in physical and human capital and technology (Douglass North [1990]; Daron Acemoglu et al. [2005]; Stefan Voigt et al. [2015]). Control of corruption reduces the misallocation of resources that emerges either directly, because of the appropriation of public resources, or indirectly, due to sub-optimal public sector decisions (Andrei Shleifer and Robert Vishny [1993]; Pranab Bardhan [1997]). The quality of governance may also impact on income inequality. As I explain in Chapter 5, corrupt public officials may “shake down” poorer people for bribes and accept bribes from economic elites in exchange for policies that worsen the distribution of income. Moreover, voters are less likely to support redistributive programmes if they perceive the public sector to be biased, inefficient and corrupt.

Good governance has also been associated with greater reported happiness across countries perhaps because it implies fair treatment of individuals by the state (Jan Cornelis Ott [2010, 2011]). Good governance can, moreover, lead to better health, education and environmental outcomes (see Bo Rothstein [2011] for a review of related work and additional empirical evidence). Health and education policies are better designed and implemented, access to them is based on need rather than capacity to pay or personal connections, and more resources are available than would be in the presence of malfeasance. Better environmental outcomes emerge in part because of a more effective design of environmental policies and because good governance implies less corruption of public officials with the aim of circumventing environmental regulations.

To explore the relationship between inequality and governance, I will begin, in Chapter 2, by discussing how I define and measure each concept. To reiterate, governance refers to the exercise of public authority. As such, it is distinct from democracy, which is more concerned with access to public power. Democracy is a determinant of governance rather than governance per se. Governance is also related to, but distinct from, state capacity that is more concerned with government’s ability to raise taxes and includes tax compliance by citizens. To measure governance, I will turn to the World Bank’s World Governance Indicators. The advantages and disadvantages of these perceptions-based measures will be discussed. I then distinguish between structural and market inequality. The former emerges when some individuals or groups are endowed with more rights than others, while the latter emerges from market exchange. To measure economic inequality, I will focus on the distribution of income across individuals and ethnic groups. Moreover, I will also employ an indicator capturing perceived rather than actual inequality as well as a measure of (in)equality of opportunity. I will end Chapter 2 with a preliminary empirical analysis of the association between economic inequality and governance.

In Chapter 3, I consider the inequality-governance relationship in a long-run perspective going as far back as our hunter-gatherer ancestors. We will see that good governance as equality before the law, depends on the weakness of social stratification and ingroup favouritism or bias. Stratification and bias are societal responses to the existential uncertainty that emerges from the struggle for survival and reproductive success, as well as cognitive limits faced when trying to guess the intentions of others. I will identify four related factors affecting stratification and bias, namely, infectious disease, population growth, conflict and the nature of production. These factors, in turn, partly depend on the biogeographic conditions faced by social groups. When possible, I will make use of anthropological data on pre-industrial societies to flesh out some of the arguments. This analysis identifies the deep determinants of inequality and governance and, as such, reveals a set of exogenous variables that will be useful when considering the impact of inequality on governance in contemporary settings later on.

In Chapter 4, I review a range of insights that have emerged in the fields of social psychology and behavioural economics. The associated experimental evidence confirms the human tendency to favour ingroups – a tendency that can lead people to accept unethical behaviour from members of their group and endorse group leaders that discriminate outgroups. The evidence has also shown that the perceived legitimacy of social inequalities has a bearing on the salience of group boundaries between low and high status groups, as well as the degree to which low status groups abide by the law. Moreover, it has revealed that those endowed with power tend to view subordinates instrumentally, underestimate the individual merits of less advantaged people, and behave less ethically. Finally, the experimental evidence shows that individual expectations of corrupt behaviour by others may explain high and low corruption countries as alternative equilibria.

In Chapter 5, I examine the relationship between economic inequality and governance in contemporary settings based on cross-country data. This requires a discussion of the causal mechanisms through which inequality can affect governance which, in turn, emerges from an understanding of the behaviour of individuals arrayed across the income distribution. To isolate the impact of inequality on governance I review a set of potentially confounding variables and discuss the real possibility that the quality of governance can itself affect the degree of economic inequality. To account for such reverse causality, I rely on the long-run determinants of inequality identified in Chapter 3. The empirical analysis, based on a sample of up to 126 developed and developing countries, provides strong support for the expectation that economic inequality is bad for good governance. Moreover, I show that the impact of interpersonal inequality on governance is mediated by the level of democracy and, specifically, that the negative impact of interpersonal inequality on governance is stronger in more democratic settings.

The results reported in Chapter 5 ignore the confounding influence of a potentially crucial variable associated with both economic inequality and governance. This variable is culture. In Chapter 6, I will argue that the societal responses to existential uncertainty brought to light in Chapter 3, express themselves in contemporary settings as specific cultural traits that are inimical to good governance. These traits are related to both governance and economic inequality and, as such, their omission biases the empirical estimates reported in Chapter 5. I reconsider the impact of economic inequality on governance when accounting for culture and find that while both economic inequality and culture are relevant, the impact of culture may be stronger.

The analysis generates a series of policy implications that will be taken up in the concluding chapter of this book. I begin by defining the key variables and reviewing the available quantitative indicators that will be employed throughout the analysis.

Note

1 The first time an author is cited, I indicate his or her name and surname. In subsequent citations, only the surname is used.

2
Concepts, measures and correlations

Introduction

It is important at the outset to define the basic concepts that will be used throughout this book, namely, economic inequality and governance. What do I mean when I refer to good governance or the quality of governance? Good governance is defined as impartial governance or governance without regards to the personal preferences or relationships of those wielding authority. It manifests itself in the absence of corruption, a meritocratically selected and autonomous civil service and equality before the law. To measure governance, I will turn to the World Bank’s World Governance Indicators. These indicators aim to capture different facets of governance based on perceptions held by experts, citizens and entrepreneurs. They have both strengths and weaknesses that will be discussed.

When referring to inequality, I differentiate between structural and market inequality. The former emerges outside the market and describes a situation where individuals or groups are afforded differential treatment by the law, slavery being the most infamous example. Alternatively, market inequality refers to inequality in income and wealth that emerges in the context of market exchange. It can be the result of individual effort as well as a range of uncontrollable factors. Market or gross inequality can be modified by public policy in which case it becomes net income or wealth inequality across individuals or groups. I will measure inequality by way of alternative indicators including the Gini coefficient, the shares of income of different quintiles of the income distribution and a measure of (in)equality of opportunity.

After presenting and discussing the indicators that will be employed to measure good governance and inequality, I take a first step towards analysing the relationship between these two variables based on simple correlations. This analysis suggests that good governance is negatively associated with inequality, whether this is measured across individuals or groups or in terms of disposable income, perceptions o...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• List of figures
• List of tables
• Acknowledgements
• 1 Introduction
• 2 Concepts, measures and correlations
• 3 Insights from the past
• 4 Insights from social psychology and behavioural economics
• 5 Economic inequality and governance in contemporary societies
• 6 Culture, economic inequality and governance
• 7 Conclusion
• Appendix: country codes and samples
• References
• Index