Income Inequality, Democracy, and Public Sector Size

This study synthesizes and tests explanations of how public sector size and democracy affect income inequality. The results, based on unbalanced panel data for 64 developing and developed countries and a total of 341 observations from 1970 to 1994, show that a strong interaction between democracy an...

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Bibliographic Details
Published in:American sociological review 2005-02, Vol.70 (1), p.158-181
Main Author: Lee, Cheol-Sung
Format: Article
Language:English
Subjects:
Administrative Organization
Bureaucracy
Civil society
Comparative Analysis
Consumption
Democracy
Democratization
Developed countries
Developed Nations
Developing Countries
Economic development
Economic growth
Equity
Fairness
General studies. Ideologies
Gini coefficient
Government Role
Gross domestic product
Hegemony
Income
Income Distribution
Income Inequality
Income taxes
Industrial democracy
Industrial Societies
Industrialized nations
Inequality
Institutionalization
LDCs
Lower Class
Panel data
Political development
Political institutions
Political parties
Political sociology
Politics
Public Sector
Society
Sociology
State
State Policy
Tax policy
Taxation
Urban areas
Urban population
Welfare state
World Bank
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Summary:This study synthesizes and tests explanations of how public sector size and democracy affect income inequality. The results, based on unbalanced panel data for 64 developing and developed countries and a total of 341 observations from 1970 to 1994, show that a strong interaction between democracy and public sector development explains within-country income inequality. Public sector expansion translates into worse distributional outcomes in nondemocracies or limited democracies because the state is more inclined to support the development of particular core industries or client populations in urban formal sectors through targeted taxation or transfer systems. On the other hand, the larger public sector size leads to better distributional outcomes in fully institutionalized democracies because the democratic political mechanisms enable the state institutions to be more responsive to the demands of lower classes and more committed to achieving better distributional outcomes. This study demonstrates that democracy is associated with inequality as an institutional background that converts the effects of public sector size on inequality from positive to negative by strengthening the hegemony of equity orientation within state institutions.
ISSN:0003-1224
1939-8271
DOI:10.1177/000312240507000108