Economic Openness, Democracy, and Income Inequality

TLDR

Scholars have examined how economic openness and democracy influence national income inequality, yet evidence on each factor remains ambiguous and their joint effects have not been rigorously studied. This article systematically investigates the combined effects of economic openness and democracy on income inequality. Using Gini coefficient data from 1960–1996, the authors analyze 69 country–decade observations, measuring openness via trade flows, FDI inflows, and financial capital inflows. They find that democracy and trade lower inequality, while foreign direct investment raises it and financial capital has no significant effect.

Abstract

Scholars have studied effects of economic openness and democracy on national income inequality in two literatures. In democracy studies, scholars agree democracy reduces inequality but empirical evidence is ambiguous. In globalization studies, effects of economic openness on inequality are debated but have not been rigorously examined. This article is the first systematic statistical study of the effects of both economic openness and democracy on income inequality. These effects need to be studied together. The authors measure national income inequality from a comprehensive Gini coefficient data set. Economic openness is measured from trade flows, foreign direct investment inflows, and financial capital inflows. The period studied is 1960 to 1996, the unit of analysis is a country decade, and the sample includes 69 countries. The authors find that democracy and trade reduce income inequality, foreign direct investments increase income inequality, and financial capital does not affect income inequality. Policy implications are discussed.