Inequality, extractive institutions, and growth in nondemocratic regimes

We borrow the term “extractive institutions” from Acemoglu et al. (2001, 2002). Acemoglu et al. (2002, p. 1235) use the term to refer to institutions that “concentrate power in the hands of a small elite and create a high risk of expropriation for the majority of the population”. We also consider institutions to be extractive when the property rights of citizens are not protected and the ruler in power can expropriate a large share of citizens’ wealth.

Based on the Polity IV dataset (Center for Systemic Peace 2012), we classify the political regime of a country as follows. First, following Persson and Tabellini (2009), the regime of a country in a given year is classified as a nondemocracy if the score of the polity2 variable from the Polity IV dataset is less than zero and as a democracy otherwise. Then, we define a country as a nondemocracy if the periods of nondemocratic rule are longer than those of democracy between 1960 and 2005. The measure of inequality is the simple average of the Gini coefficients from 1960 to 2005, as provided by the UNU-WIDER World Income Inequality Database (UNU-WIDER 2008). Note that controlling for different definitions of inequality, resulting from different units of observation and the definition of income, among others, does not change the results. Per-capita income is obtained from the Penn World Table 8.0 (Feenstra et al. 2015).

The measure of inequality is the same as in Fig. 1. The measures of governance quality are from the Worldwide Governance Indicators (Kaufmann et al. 2011).

Acemoglu and Robinson (2000) and Bourguignon and Verdier (2000) also consider an environment in which the elites’ policy choices affect their hold on power and analyze how inequality affects those choices. Acemoglu and Robinson (2000) provide a model in which elites attempt to prevent revolution by making concessions to citizens, such as temporary income redistributions or franchise extensions. Income inequality increases the citizens’ incentive to revolt and thereby affects the elites’ concessions. Bourguignon and Verdier (2000) propose a model in which the ruling elites choose a fraction of the poor to receive educational subsidies. Inequality affects the elite’s policy choices through the financial burden of the educational subsidies and the threat of income redistribution.

We restrict political participation to the old generation for simplicity. This restriction does not play any crucial role in the following analysis.

North and Weingast (1989), analyzing the institutions of seventeenth-century England, argue that a parliament limiting the ruler’s behavior can make the ruler commit credibly to giving up the option of confiscation. Wright (2008) also argues that authoritarian regimes wanting to facilitate private investment will establish legislatures so as to commit credibly to restricting expropriation. Congleton (2011) points out that even kings in the Middle Ages agreed to establish council or parliament constraining royal taxation to expand their tax base.

In Online Appendix A, we present an extension of the model in which the policy is determined through bargaining between the ruler in power and citizens. In this environment, the ruler’s taxation is constrained by the bargaining power of citizens.

A similar formulation is used in Grossman and Noh (1994) and Overland et al. (2005). In both studies, as in this article, a ruler derives utility from his or her own consumption and faces the probability of losing power. The ruler’s probability of retaining power depends on the expected utility of a representative producer in Grossman and Noh (1994) and on the level of domestic capital in Overland et al. (2005). We refer to this probability [given by (5)] as the “survival probability,” as in Grossman and Noh (1994).

Acemoglu and Robinson (2006, p. 25) state that “The citizens are excluded from the political system in nondemocracy, but they are nonetheless the majority and they can sometimes challenge the system, create significant social unrest and turbulence, or even pose a serious revolutionary threat.”

The negative relationship between a ruler’s survival probability and the share of opposing citizens can be interpreted in several ways. First, when the opponents of a ruler arm themselves, the rebel force will be stronger if it is larger. Second, even if a ruler commands a strong standing army that can repress antigovernment demonstrations, the more citizens participating in a demonstration, the larger is the cost of repression for the ruler. This is because a large number of victims of repression may result in sanctions from the international community, which can bring about the ruler’s downfall. Third, since the per capita cost of participating in antigovernment demonstrations declines as the number of participants increases, demonstrations are more likely to take place when more citizens oppose the government. Tullock (1974) and Kuran (1989) analyze such a strategic complementarity in the theory of revolution. Fourth, if the leaders of a military coup need a pretext for replacing an incumbent ruler, low public support for the incumbent is perfect for it.

For example, this cost includes losses associated with the inefficient allocation of government posts to members of the ruler’s family or the resources used to conceal the misappropriation of tax revenues.

Therefore, we do not consider the dynamics of income inequality, as it is beyond the scope of this study.

We assume an interior solution, which exists when \(\zeta\) is sufficiently large.

This formulation is based on the models of clientelism developed in Robinson and Torvik (2005) and Robinson et al. (2006).

Note that it is suboptimal for the incumbent ruler to choose an institution such that \(\psi \left( {\bar{\tau }} \right) > 1 + \xi /2\) and \(\psi \left( {\bar{\tau }} \right) < 1 - \xi /2\). If \(\psi \left( {\bar{\tau }} \right) > 1 + \xi /2\), the survival probability and payoff of the ruler will be zero. If \(\psi \left( {\bar{\tau }} \right) < 1 - \xi /2\), the ruler can increase \(\bar{\tau }\) without reducing his or her survival probability.

This mechanism is similar to the probabilistic voting model (Lindbeck and Weibull 1987; Dixit and Londregan 1996; Persson and Tabellini 2000). In the probabilistic voting model, the less dispersed the distribution of citizens’ political preferences, the more the politicians must be concerned about their welfare since the fraction of supporters is more responsive to the policy choice.

To ensure the interior solution \(p\left( {\bar{\tau }^{*} \left( \xi \right);\xi } \right) < 1\), the parameter \(\chi\) must be sufficiently small. Note that \(p\left( {\bar{\tau }^{*} \left( \xi \right);\xi } \right) < 1\) when \(\chi = 1\).

Online Appendix B also provides an intuitive explanation on these results.

Note that the distribution of relative human capital remains unchanged through generations regardless of the shape of distribution in the initial period.

We provide more detailed explanations in Online Appendix D.

According to Deininger and Squire (1996), the average Gini coefficient is 0.342 in South Korea (1953–1988), 0.335 in Indonesia (1964–1993), 0.296 in Taiwan (1964–1993), and 0.401 in Singapore (1973–1989).

Deiniger and Squire (1996) report that the mean of Gini coefficients is 0.573 in Brazil (1960–1989), 0.518 in Chile (1968–1994), 0.515 in Columbia (1970–1991), and 0.480 in Peru (1971–1994).

Although the hazard rate of an equal-income economy is less than that of an unequal-income economy in the range where relative income is small, we do not consider this to be a serious problem in terms of our results. The equilibrium institution is affected by the level of the hazard rate around the relative income of the threshold citizen. It is natural to think that autocratic rulers need less political support than democratic leaders. Hence, the relative income of the threshold citizen would exceed the average. Figure 4 shows that the range where the negative relationship between inequality and the hazard rate holds includes the mean.

Our focus is not on quantitative predictions but on whether the mechanism of the model is robust to an alternative shape of the income distribution.

This negative relationship between inequality and political stability is consistent with Alesina and Perotti (1996).

We do not calculate the equilibrium survival probability since we would need to specify the values of \(n\) and \(\chi\).

See Hill (1969).

See Stone (1965) and Hill (1969) for more details on the crisis situations faced by aristocrats and their causes.

Acemoglu et al. (2005b) provide empirical evidence that the expansion of Atlantic trade contributed to economic growth in the Western world. They argue that in countries with better access to Atlantic trade, the large profit they accrued enhanced the political power of merchant classes, which brought about an institutional change to protect property rights.

For the average Gini coefficients in these countries, see footnote 21.

In 1976, 62% of sub-Saharan African countries, 63% Middle East and North African countries, and 100% Central and East Europe/Former Soviet Union countries were classified as “Not Free.”