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Alberto Alesina and Dani Rodrik (1994)Distributive Politics and Economic GrowthMacroeconomic TheoryMaster in Economics2010/11Prof. Jos TavaresNOVA SBELus Fonseca 425Miguel Aguiar 398with

Distributive Politics and Economic GrowthMotivatingWhy is this issue important?What are the consequences of the initial wealth distributions?

How does inequality affect the political process?

How does inequality affect economic growth?

Explain differences in growth between countriesEx: Asian and South American countries after World War II

The ModelKey features:Individuals differ in their endowments

Growth is driven by expanding capital stock

Long run growth is endogenous

Growth ModelGrowth ModelGrowth ModelGrowth ModelGrowth Model

FactorsPerfect competition in factor marketsEach factor is remunerated at its marginal productivity

10acrescentar que labor nao acumulavel e capital acumulavelFactorsIndividuals0

Pure CapitalistWorkerMencionar bem que 0 mais capital e quanto maior, menos capital12IndividualsMPLMPK - Tax

Individuals

MPLMPK - TaxEconomic Growth

Economic Growth

We have to analyze what are the effects of the tax on capital on the growth rate!

Ba-a-a-art, come here!

What is the growth-maximizing tax rate then?Economic Growth

Easy, Lisa!Im here!Economic Growth

With a 0% tax rate, there is no productive government spending and so, no production and no growth!

Economic Growth

When the government starts taxing capital, its spending on services raises the productivity of factors!

Economic Growth

But, there is a point at which we reach a maximum, because

Economic Growth

then, the tax becomes too high and after-tax return to capital decreases too much and disencourages capital accumulation, the main driver of growth!

Economic Growth

A very high tax rate can really harm economic growth.

Economic Growth

Economic Growth

Veryl-l-l-low! (Hic) High! Economic Growth

Economic Growth

Why does he want that?

Well, Mr. Burns consumes exclusively out of his capital stock, so, his welfare is maximized when that capital stock grows at the maximum rate.Excellent!!

Economic Growth

Economic Growth

Policy Choice

What tax rate shall I set? Mr. Burns told me to set a low one But everyone else told me to tax him morePolicy Choice

My fellow citizens, thank you for electing me! I promise I will choose a tax rate that will maximize your welfare!

For Mayor Quimby to follow on his promise, he needs to choose a tax-rate that is closest to the preferences of his voters.Policy Choice

This implies that Mayor Quimby will not choose the tax rate that maximizes economic growth! Let us see why!

Policy Choice0

Homer Simpson is the median voter!

Way to go, Homer!Inequality0

Groundskeeper Willie is the new median voter!

But what would happen in Springfield if we had different endowments?For example, what if we had more inequality?

Por elenco a aparecer depois do balo33Inequality0

Groundskeeper Willie is the new median voter!

Por elenco a aparecer depois do balo34Inequality0

Principal Skinner is the new median voter!

And what if we had a more equal Springfield?

Por elenco a aparecer depois do balo35Inequality0

Principal Skinner is the new median voter!

He will prefer a lower tax rate than Mr. Simpson, leading to higher economic growth for Springfield than before!

Por elenco a aparecer depois do balo36Inequality0

Principal Skinner is the new median voter!

We can now see how different initial factor endowments affect the political process and consequently, the growth rate of an economy!

Por elenco a aparecer depois do balo37Inequality

Let us now start from a perfectly egalitarian society, where everyone has the same labor/capital share.

Hey! Thats great! Homer would be as rich as Mr. Burns!0

Conclusions

So, the main conclusion of the model is:

The more unequal is the distribution of income and wealth, the lower is the rate of growth of the economy.

What can we do to have higher growth rates?

It all depends on the capital endowment of the median voter! The more he has, the lower the tax, the higher the growth!Conclusions

An interesting question is: can this majority voting rule lead to the maximum possible economic growth?

No! Maximum growth is attained only if the median voter is equivalent to the pure capitalist, like Mr. Burns. But there are always workers with labor income which will prefer a tax rate higher than the growth-maximizing.Conclusions

Alesina and Rodrik also stress that this model can be applied to democracies

and also to dictatorships, because their decisions too are influenced by social demands and conflicts!

Empirical ApplicationsAlesina and Rodrik used land distribution and Gini index dataFound significant negative relationship between these and subsequent growth

Clarke (1993) has supported the robustness of these resultsWith different inequality measures and specificationsDemocracies and non-democracies alike

Persson and Tabellini (1991) argued that this inverse relationship does not hold for non-democracies

Possible ExtensionsAllow for social mobility and stategic voting

Effects of political pressure groups and elites

Non-uniform endowments distributions