Does Democracy Lower Inequality?

Hypothetically, it is naturally expected that democracy can reduce inequality, but this might not be the case, especially in societies where democracy is controlled by the wealthier population. Acemoglu, Johnson and Robinson (2001) say that there are numerous factors that cause huge differences in per capital income in numerous countries, and this makes it difficult for democracy to contribute to lower levels of inequality. Existing empirical literature indicate that is democracy leads to contradictory outcome depending on the approach deployed in the study. The impact of democracy on inequality tend to differ in different countries and this depends on the level of economic development as well as the policies that are implemented by the government. Since there are many types of inequalities, this paper will basically concentrate on income inequality since it is the most prevalent. This paper argues that democracy does not lower inequality and provides empirical evidence to support this claim. 

Any market system is always influenced by a larger political system. The extent of the impact of this political system on the market system is determined by the laws and policies imposed by the political regime. The laws and policies enacted by a political system are determined by the distribution of power and an aggregation of institutional and the preferences of the mobilized interests (Abad, 2013). In a free market, there will always be winners and losers and this implies that it is not possible for everyone to be equal. The most skilled population will always end up with more compared to those who lack any particular skill or the semi-skilled. Consequently, in an increasingly global economy, inequality is bound to be present as the most educated professionals will get all the well-paying white-collar jobs while the less educated and unskilled population do the less attractive living wage jobs. As this trend continues, the gap between the rich and the poor, which is the inequality level tends to widen. Therefore, democracy cannot lower inequality as it is only one of the factors impacting on inequality. The strongest factor influencing inequality is the redistribution of wealth in a society. 

According to Michael O’Sullivan who is the CIO for Credit Suisse, global wealth in Europe increased by 6.4% over the past decade thank to economic stability in the continent. The top ten nations in Europe which recorded the largest gains in absolute terms include France, Germany, Spain, and Italy, with Poland recording the largest gain of 18% (Davies, Lluberas, & Shorrocks, 2017). However, this does not imply that there is reduction in inequality since high property prices and market valuations may reduce the rate of economic growth in the future, taking into consideration that lower income holders fail to benefit from rapid economic growth.

The latest report published by Credit Suisse Research Institute indicated that the global wealth increased by 27% to $280 trillion compared to what it was ten years ago, increasing by 6.4% over the last 12 months (Davies, Lluberas, & Shorrocks, 2017). The United States is the leading country in terms of wealth gains and it has continued to perform well since the last global financial crisis. Furthermore, the Federal Reserve has played a key role in enabling employement to grow and the economy to flourish, but wealth inequity continues to be a prominent issue, a factor that indicates that democracy does not contribute to reduced inequality.   

Empirical literature has found no consensus on the relationship between democracy and inequality. Acemoglu, Johnson and Robinson (2001) argued that democracy has a negative effect on inequality, citing Europe of the 19^th century and 20^th century Latin America as case examples. In 1999, Rodrick in his study on the impact of democracy on wages and labor share produced evidence that democracy led to higher wages and labor share. Globally, inequality has been on an upward trajectory over the last three decades. This is despite the democratization of several previously autocratic nations such as Bhutan in 2008, Guinea in 2010, Tunisia in 2011 and many others in that period.

Previously democratic countries have also continually strengthened their democratic policies in that period. However, all these efforts towards democratization have not had a reducing effect on the ever-increasing rates of inequality with recent reports indicating that the richest 1% of the global population owns half of the world’s wealth. Scholars in their numerous studies described how the initial conditions in Latin America and the United States set the two countries on differing paths of inequality and democracy (Abad, 2013). Both studies describe Latin America as undemocratic and socially unequal while the United States is portrayed as both democratic and a socially equal society. This thesis has however been subject to challenge from several scholars.

Scholars have presented multiple sourced data showing evidence of increasing and decreasing inequality rates in Latin America over the past 500 years. Similarly, Abad (2013) presents evidence of substantial variation in inequality through time and across regions in Latin America of the 19^th century. The scholars look at different evidences suggesting that inequality in Latin America was no more than in the North. 

During the 2012 presidential campaigns in the US, the then President Barrack Obama used income inequality as one of his major campaign tools terming it the “defining issue of our time,” He argued that Americans had to make a choice between a nation where a “shrinking number of people do really well” and a country where each individual gets a fair chance of success (Hoynes & Patel, 2015). In his final state of the union address, the former president wondered how it would be possible to give everyone a fair shot in this new economy. The fact that inequality has been discussed on a national level in the strongest democracy in the world, the U.S., only solidifies the argument that democracy does not lower inequality. 

Another good example of democratization not impacting on inequality positively is in the case of the recent democratization of Arab nations (Arab Revolution) such as Libya. Despite the democratization of Arab countries like Libya, Egypt and the United Arab Emirates that were majorly caused by various forms of inequality, inequality levels in those countries are still not impressive (Hassine, 2014). The Arab spring countries draw a variation of income and inequality levels. For example, in Egypt inequality is high while the income per capita is low. In Yemen, income is medium while inequality is low. In Libya, both inequality and income are at medium levels. Democratization of these countries has had no significant impact on the levels of inequality. 

Conclusion

As has been clearly shown throughout this paper, democracy does not lower inequality levels in any way. The most compelling evidence is the fact that the strongest democracy in the world, the United States, still struggles with inequality even today. Most of the ancient theories linking democracy to lower levels of inequality have also been disproved by use of empirical evidence. The fact that democratization of Arab nations has also had no significant positive impact on inequality levels also further proves the point that democracy does not lower inequality. Other scholars such as Acemoglu, Johnson and Robinson also share the opinion that the impact of democratization of a society is not related to lower inequality levels of that society. As earlier stated, as long as the trend of professional jobs paying top dollars with odd jobs paying living wages continues, inequality is bound to be there in any society and the gap between the rich and the poor will only continue to widen. 

References 

Abad, L. A. (2013). “Persistent inequality? Trade, factor endowments, and inequality in Republican Latin America”. The Journal Of Economic History. 73(1). 38-78. 

Acemoglu, D., Johnson, S., & Robinson, J. A. (2001). The colonial origins of comparative development: An empirical investigation. The American Economic Review. 1369-1401

Davies, J., Lluberas, R., & Shorrocks, A. (2017). Global wealth report 2017: Where are we ten years after the crisis? Retrieved from https://www.credit-suisse.com/corporate/en/articles/news-and-expertise/global-wealth-report-2017-201711.html

Hassine, N. B. (2014). Economic inequality in the Arab region. Policy Research Working Paper 6911.

Hoynes, H., & Patel, A. J. (2015). Effective policy for reducing inequality. Cambridge: Mass