Endogenous Liberalization and Within-Country Inequality: A Theoretical and Empirical Analysis

We theoretically model and empirically investigate a societyâs liberalization decision and its impact on income inequality. The motivation is that a blanket conclusion that globalization increases inequality within countries can be misleading. In the paper, the decision of the society rests on the pre- and post-liberalization utilities of different segments, and, complying with stylized facts, the economyâs structure follows Kuznetsâ predictions on industrialization and urbanization. Our findings support the line of research which emphasizes the importance of country-specific factors in prescribing policies. In particular, countries are more likely to open up when relative productivity of migrant ex-rural workers to those of initial urban workers in manufacturing, β, is high, and the societyâs tastes for the agricultural goods, α, are not particularly strong. Following liberalization, the income distribution too improves if α is low and β is high. Empirical results show that open economies, ceteris paribus, have 3- 4 higher Gini points than closed economies. In developing countries except Sub-saharan Africa, β can offset this stand-alone effect just after the switch if the switch is made with a minimum β value of 0.67 â 0.89, while in Sub-saharan Africa, this standalone effect can be offset in 10-15 years after the switch. Overall, however, the β effect cannot surpass the stand-alone effect in the whole sample, which implies that the median country has made a âwrongâ switch.Liberalization, Industrialization, Income Inequality, Political Economy

Romes without Empires: Urban Concentration,Political Competition, and Economic Growth

Many developing economies are characterized by the dominance of a super metropolis. Taking historical Rome as the archetype of a city that centralizes political power to extract resources from the rest of the country, we develop two models of rent-seeking and expropriation which illustrate di?erent mechanisms that relate political competition to economic outcomes. The "voice" model shows that rent-seeking by different interest groups (localized in di?erent specialized cities/regions) will lead to low investment and growth when the number of such groups is small. The "exit" model allows political competition among those with political power (to tax or expropriate from citizens) over a footloose tax base. It shows that when this power is centralized in relatively few urban nodes, tax rates would be higher and growth rates lower. Our empirical work exploits the connection between urban wealth (with the political power it affords) and national soccer championships. By using a cross-country data set for 103 countries for the period 1960-99, we ?nd strong and robust evidence that countries with higher concentrations in urban wealth¨Cas proxied by the number of di?erent cities with championships in national soccer leagues¨Ctend to have lower long-run growth rates.

Romes without Empires: Urban Concentration, Political Competition, and Economic Growth

Many developing economies are characterized by the dominance of a super metropolis. Taking historical Rome as the archetype of a city that centralizes political power to extract resources from the rest of the country, we develop two models of rent-seeking and expropriation which illustrate different mechanisms that relate political competition to economic outcomes. The "voice" model shows that rent-seeking by different interest groups (localized in different specialized cities/regions) will lead to low investment and growth when the number of such groups is small. The "exit" model allows political competition among those with political power (to tax or expropriate from citizens) over a footloose tax base. It shows that when this power is centralized in relatively few urban nodes, tax rates would be higher and growth rates lower. Our empirical work exploits the connection between urban wealth (with the political power it affords) and national soccer championships. By using a cross-country data set for 103 countries for the period 1960-99, we find strong and robust evidence that countries with higher concentrations in urban wealth-as proxied by the number of different cities with championships in national soccer leagues-tend to have lower long-run growth rates.

State Owned Enterprises and Redistribution: An Empirical Analysis

In the past decade many developing economies started to privatize their state owned enterprises. Recently, however, this process seems to have slowed down in some economies and have completely been stalled in others. Here we formalize the view that this is so because these enterprises are major instruments of income redistribution and, in economies with significant degrees of income inequality, segments of the population that benefit from this redistribution would use whatever political power they may have to oppose its abandonment. We find strong and robust empirical support for this hypothesis using cross-country data on the relative size of the state-owned-enterprise sector and different measures of inequality. We also find support for the propositions that dictatorships as well as democracies use this redistributive tool and that left-wing governments tend to redistribute more than right-wing governments through state owned enterprises.state-owned enterprises, inequality, redistribution, political economy

Institutions and Economic Growth: A Systems Approach

In a simultaneous equations with error components framework, we analyze the institutions-growth relationship. We address individual heterogeneity in cross-country production functions, and endogeneize factor inputs in order to disentangle the direct and indirect effects of institutions on growth. We find that the effects of political freedom on total factor productivity and human capital are positive and significant, but they are negative and significant on physical capital and labor force growth. Economic freedom, on the other hand, has positive and significant effects on total factor productivity, physical and human capital, and labor force growth. The total effects of both freedoms on growth are positiveInstitutions, Growth, Simultaneous Equations, Error Components

State-Owned Enterprises, Political Ideology, and Redistribution

Many economies have undergone the process of privatizing their state-owned enterprises. Recently, however, this process has slowed down in some economies and has been completely stalled in others. Here we formalize the view that this is so because these enterprises are major instruments of income redistribution and, in economies with significant degrees of income inequality, segments of the population that benefit from this redistribution would use their political power to oppose its abandonment. We find strong empirical support for this hypothesis using cross-country data on the relative size of the state-owned-enterprise sector. We also find robust evidence that left-wing (vis-à-vis right-wing) governments are associated with greater redistribution in more unequal societies. Further, this effect is non-linear, implying that redistribution becomes more costly at higher levels of inequality. We also find the same result for authoritarian (vis-à-vis democratic) governments.

Intersectoral Size Differences and Migration: Kuznets Revisited

We offer a specific channel on Kuznets' hypothesis: intersectoral urban-rural size differences result in an intersectoral income inequality, increasing the national inequality; this, in turn, prompts an intersectoral migration, which works as an equilibriating mechanism, decreasing the inequality in due course. The theoretical predictions yield a recursive triangular system, in which we test, i) how the sectoral size differences influence the agricultural income, ii) how a change in agricultural income acts on migration, and iii) what happens to the income distribution as a result of migration. We find a very strong support for the theoretical predictions and the Kuznets hypothesis.Kuznets hypothesis, intersectoral size differences, inequality, migration