Inequality has taking center stage in the public policy debate. Just recently, at the World Economic Forum meeting in Davos, Switzerland, income inequality was one of the debated issues. 2020 Democrats have all pledged to reduce inequality, all while the right derides the “party of Davos,” the so-called global financial elite. In the spirit of the times, I have decided to compile my own set of data on inequality, specifically, to study a nation’s degree of income inequality in relation to the strength of their liberal democracy.

Before undertaking the study, I hypothesized that as a country’s level of democracy increases, its income inequality decreases. In theory, liberal democracy guarantees a certain degree of equality to its citizens, which then translates into fewer financial imbalances. For example, a liberal democracy protects civil rights and minorities; an employer cannot discriminate against workers based on race, gender, sexual orientation, or age. Thus, in a liberal democracy income inequality between workers is less pronounced than in authoritarian regimes where certain employees receive benefits while others do not. Liberal democracies also protect employees’ right to assemble and allow them to engage in collective bargaining with employers for fairer wages. They also require the rule of law, which curbs income inequality; the state cannot arbitrarily shut down businesses that go against its political interests (e.g. a company whose CEO supports the opposition party), nor can it favor cronies as the law safeguards the free market. All these measures enforce civic equality, which then induces lower income disparities. 

To test my hypothesis I ran a comparison between a country’s Democracy Index—a representation of a country’s level of liberal democracy, compiled by The Economist Intelligence Unit—and its Gini Coefficient, a common measurement of income inequality. The Democracy Index takes five elements of a country’s political system into account: electoral process and pluralism, the functioning of government, democratic political culture and civil liberties. A country scoring high on these sections has a high degree of liberal democracy; the judiciary is free of political interests, civil rights are respected, and government functions properly and transparently. A country’s Gini Coefficient represents the difference between perfect equality (i.e. 10% of people own 10% of the wealth; 90% of people own 90% of the wealth, etc…) and the level of equality of a given country. The larger the gap—that is, the closest the Gini Coefficient is to 1—the higher the inequality. If my hypothesis were to be proved correct, the higher a country’s Democracy Index the lower its Gini Coefficient.

I took the Democracy Index data from Gapminder [1] and the Gini coefficients from the World Inequality Database [2]. The Democracy Index only dates back to 2006, and some countries did not have Gini Coefficients in my dataset, so I ended up with 1487 observations between 2006 and 2017 for 127 countries. Then, I ran a regression on R to compare the two indexes, with my other variables being the country and the year effects. I created the following model:

Since my model is a comparison between the Democracy Index and the Gini Coefficient, I did not report year and country effects in my table. I ran my model in two different ways. In the first, I left missing Gini Coefficient values untreated. In the second, I treated missing Gini Coefficients: I assumed that unreported data represented a continuation of the previous year’s data (e.g. if Gini was 0.33 in 2006 and no Gini was reported for 2007, I presumed Gini stayed at 0.33). The results are reported in the following table:  

	Without N/A Treatment
	Coefficients	p-values
Intercept	33.72	0.00%
Democracy Index	-0.06	2.40%
Adjusted R-squared	96%
	With N/A Treatment
Intercept	38.15	0.00%
Democracy Index	-0.13	0.00%
Adjusted R-squared	95%

As the table demonstrates, in both cases the coefficient of the Democracy Index is negative and statistically significant (with a p-value of 2.40% without treatment and 0.00% with treatment). As the Democracy Index of a country grows, its Gini Coefficient falls.  

The results from the regression model strongly support my hypothesis: as a country’s degree of liberal democracy increases, income inequality diminishes. The independent rule of law, transparent government, protection of civil liberties, and lack of cronyism seem to reduce income disparities. Policymakers should take note: perhaps the best way to tackle inequality is to strengthen our democracies.

Links:

[1] https://www.gapminder.org/data/documentation/democracy-index/

[2] https://wid.world/news-article/gini-coefficients-available/