Distributive Justice, Democracy and Growth

This paper argues that the effect of income inequality on economic growth depends on the level of democracy in a country and whether people believe that redistribution is an essential component of the democratic process. The paper uses the World Values Survey to focus on countries where the majority believe that taxing the rich and subsidizing the poor an essential component of democracy, and on countries where the majority believe that the rich do not buy elections in their country. Using the threshold estimation technique introduced by Hansen (1999), the analysis suggests the presence of a statistically significant threshold income inequality level, below which democracy does not have a statistically significant effect on growth, and above which an increase in the dose of democratization has a statistically significant negative effect on economic growth. The interpretation is that in countries where income inequality is high, and the majority believe that taxing the rich and subsidizing the poor is an essential component of democracy, a higher level of democratic governance allows people to support redistribution policies which can deter investment and economic growth.