Equality, Participation, Transition: Essays in Honour of Branko Horvat

70 Determinants of Income Inequality
countries. Recent literature on the link between economic growth and
political economy (for example, Alesina and Rodrik, 1994; Perotti,
1991 and 1992; Persson and Tabellini, 1992) argues that the size of
transfers is determined by the political process: in short, by the gain
that the median voter expects from redistribution. Thus, the population
in countries in which assets are highly unequally distributed and
in which, consequently, inequality in original income is high, will
have an interest to vote for large social transfers. To the extent that
transfers reduce the incentive to accumulate wealth and to work hard,
either economic growth will be slow or democracy will be impossible
to achieve. The dilemma, familiar from the 19th century Europe, was
eloquently summarized by the Spanish statesman Canovas del Castillo:
rebutting those who complained about electoral fraud, he wrote: ‘To
have to choose between the permanent falsification of universal suffrage
and its abolition is not to have to choose between universal suffrage
and preservation of property’ (quoted in Ubieto et al., 1972: 731).
But if a country’s assets are relatively widely distributed and marketgenerated
inequality is moderate, then large, particularly cash, transfers
are not needed. Fast growth becomes compatible with democracy (as
the median voter does not have an interest to vote for high taxes) and
relatively equal distribution of income.
Annex – some data issues
In large cross-sectional analyses, the data – because of differences in
coverage, definitions, and sources – represent a particular problem. It is
therefore important to discuss them in some detail. Income distribution
data are generally thought to be among the least reliable types of
macroeconomic data. The problems that hinder comparability are
numerous. The most frequently mentioned are the following: How representative
are household surveys, on the basis of which income
inequality is estimated? What is the type of income (original, gross, or
disposable)? Who are the recipients (households, families or individuals)?
How are they ranked (by total household income or by household
per capita income or by equivalent household income)? In my Annex
Table 3 (not reproduced here), 31 I have indicated exactly the type of
income and recipient from which the Gini coefficients are calculated.
A general requirement, satisfied for all the countries, was twofold: the
data should be derived from household surveys, and the surveys
should be nationally representative.