Inequality, Fiscal Capacity and the Political Regime: Lessons from the Post-Communist Transition

Christopher J. Gerry () and Tomasz Marek Mickiewicz ()

No wp831, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan Stephen M. Ross Business School

Abstract: Using panel data for twenty-seven post-communist economies between 1987-2003, we examine the nexus of relationships between inequality, fiscal capacity (defined as the ability to raise taxes efficiently) and the political regime. Investigating the impact of political reform we find that full political freedom is associated with lower levels of income inequality. Under more oligarchic (authoritarian) regimes, the level of inequality is conditioned by the state’s fiscal capacity. Specifically, oligarchic regimes with more developed fiscal systems are able to defend the prevailing vested interests at a lower cost in terms of social injustice. This empirical finding is consistent with the model developed by Acemoglu (2006). We also find that transition countries undertaking early macroeconomic stabilisation now enjoy lower levels of inequality; we confirm that education fosters equality and the suggestion of Commander et al (1999) that larger countries are prone to higher levels of inequality.

Keywords: income inequality; democracy; oligarchy; fiscal capacity; economic reform; transition (search for similar items in EconPapers)
JEL-codes: D31 H21 P26 P35 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pol
Date: 2006-07-01
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