While some democracies adopt policies that systematically tend to favour the majority of the population and thus reduce inequality, others instead create policies that favour elites and the wealthy more broadly. Mike Albertus and Victor Menaldo find that the effect of democracy on redistribution is a function of the conditions under which countries transition to democracy. In democracies where elites have had little say in writing the social contract, redistribution is more likely.
A host of eminent political thinkers such as Aristotle, Alexis de Tocqueville, and James Madison have long equated democracy with fears that the masses will soak the rich. Recent research has built on this claim, theorising that democracies are more redistributive than autocracies because they enact regulatory and fiscal policies that tend to equalize market incomes and transfer wealth from the rich to the poor.
Anecdotal evidence seems to support these claims. While Scandinavian democracies such as Sweden have sustained generous welfare states despite serious economic crises and increased globalisation, several populist democracies in the developing world have indulged in radically redistributive policies. Consider Salvador Allende, who won the Chilean presidency in 1970 at the head of the Popular Unity coalition that included socialist and communist parties. Upon winning power he nationalised the copper industry, expropriating the Anaconda and Kennecott mines without compensating their North American owners. He also expropriated 60 percent of Chile’s agricultural land and nationalized over 150 firms, including more than half of Chile’s largest companies as well as the country’s banks. Allende also pursued huge increases in public spending and adopted price controls that benefited labour and the poor. Moreover, this example is not a historical quirk, as attested to by the populism of Chavez in Venezuela, Morales in Bolivia, Correa in Ecuador, and Kirchner in Argentina.
Yet a glance at most contemporary democracies, and a host of recent scholarship such as Thomas Piketty’s blockbuster, Capital in the Twenty-First Century, indicates that there is little systematic evidence that democracy produces these results. To the contrary, inequality has been increasing across many developed democracies for the last several decades. Most of the economic gains during this period have been concentrated among the top 10 per cent – and especially the top 1 per cent – of the income distribution. Many of us are familiar with the reasons behind this trend: increasing returns to technology, education, and capital arbitrage, alongside the decline of labour unions and the stagnation of the minimum wage in real terms.
Piketty’s book provides a wide range of evidence on the contemporary increase in inequality. Perhaps more troubling, and certainly more widely publicised, the long-term picture of inequality he presents suggests that capitalism is basically hardwired to exacerbate inequality. We disagree. In a recent article in the British Journal of Political Science (BJPS), we find that some countries adopt policies that systematically tend to favour the majority of the population and thus reduce inequality, whereas others instead create policies that favour elites and the wealthy more broadly.
Even though the globalisation of capital has made it difficult for governments of all stripes to levy progressive taxes to finance redistributive spending due to factors such as capital mobility and the increasing prevalence of international tax shelters, this has not stopped a subset of democracies from doing an end-run around these constraints to satisfy the redistributive demands of the median voter. The chief determinant of the broad difference between these two sets of democracies – and therefore the presence of factors such as labour unions and the ultimate returns to capital – is political institutions. These institutions fundamentally shape how policies that can help to ameliorate inequality are formulated.
We find that the effect of democracy on redistribution is a function of the conditions under which countries transition to democracy. When elites are able to manipulate the transition process in their favour, the policies adopted under a new democracy will favour them. This sows the seeds of future inequality. Yet unexpected moments of elite weakness may elicit pressure for democratisation, leading to a transition despite the inability of the elite to guarantee a credible commitment to their rights and interests under democracy. We find that democratisation induces greater redistribution when transition occurs in the wake of revolution or, alternatively, when elites are unable to impose a constitution that persists after transition. This is true whether we measure redistribution as progressive social spending (on education, health, and housing); spending on welfare and social insurance (on unemployment and disability insurance, health insurance and pensions, and welfare transfers); or taxes on income, profits, and capital gains, which proxies for the progressivity of the tax structure because the tax rates on these tax bases either increase with income or only apply to citizens at the upper-end of the income distribution.
Why is our conclusion at odds with Piketty’s? The chief reason is his focus on highly developed economies, which are not representative of most countries. The political and economic systems of countries such as France and the US reflect exceptional circumstances such as early industrialisation, which conspired to place them far ahead of the rest of the world on the development curve. This is relevant because many countries not only have differing rates of return on capital and labour income, but also use systematically different policy instruments to redistribute. It is perfectly conceivable that a country can tighten the screws on the capital account, limiting investors’ exit option, and allowing it to tax capital. Well-known examples include Venezuela and Argentina. Also, in more agricultural economies, land can be expropriated from large landowners and redistributed to the landless. For example, Peru systematically routed large landowners to drive income inequality down precipitously during the 1970s.
Governments can also turn to clever policies such as conditional cash transfers that reward poor families for educating their children. Mexico and Brazil have been successful at reducing inequality through this vehicle. The same is true of Indonesia. Indeed, over the past two decades, Brazil’s centrist and social democratic governments have been able to implement progressive social policies that have reduced inequality because the prior military dictatorship succeeded in raising taxes through various less-than-progressive means, including the value added tax.
The upshot, emphasized recently by Joseph Stiglitz, is that capitalism need not churn inexorably toward higher inequality. Indeed, we find that in democracies where elites have little say in writing the social contract, redistribution is more likely. Piketty is therefore correct about broad tendencies toward inequality, but for a different reason: most countries inherit elite biases from former periods of autocratic rule that hobble their capacity to counteract increasing inequality. In our BJPS article we find that, more often than not, constitutions under democracy that are inherited from dictatorship shape the rules of the political game in such a way that rightwing parties are likely to be more represented, the political system is more prone to gridlock, the military is more powerful, and local governments lack autonomy.
Indeed, since 1800, only 29 per cent of new democracies began with a constitution that they created themselves or inherited from a past episode of democratic rule in their country. Prominent examples after World War II include Greece, Argentina, the Philippines, and Mongolia. A total of 71 per cent of new democracies inherited a constitution that was designed under dictatorship and where outgoing elites dominated the transition process. Chile, Turkey, South Africa, Indonesia, and Thailand illustrate this more common scenario.
Perhaps the quintessential example of constitutional engineering that has served to prevent redistributive policies is Chile. There, a bicameral chamber with malapportionment and restrictions on leftwing parties were bequeathed by the Pinochet dictatorship to an elected government in 1989. Chile’s revived democracy also inherited a host of appointed senators in a bid to limit the power of ascendant, leftist political parties that could push for redistributive policies. In that vein, the 1980 constitution also prescribed a binomial electoral system tilted in former elites’ favour.
Many democracies, then, are flawed in ways that fundamentally prevent them from addressing inequalities. Elites are endowed with huge advantages that they can marshal under elected rule to shape the rules of the game and public policy. Before democratisation, they accumulate wealth, connections, and specialised knowledge about the economy and political system. While these advantages are often codified in a constitution imposed by outgoing elites on a new democracy before exiting, they are enforced by the lingering influence of elites over countries’ political, economic, and cultural institutions. These forms of elite influence can choke off egalitarian policies even in well-established democracies such as the United States and United Kingdom that democratised gradually and were never quite able to tame the disproportionate power of elites.
Note: This article gives the views of the authors, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Featured image credit: Delaina Haslam CC BY 2.0