Income Distribution, Political Instability and Investment
This paper successfully tests on a sample of 72 countries for the periods 1960-85 and 1970-85 the following hypotheses. Income inequality, by fueling social discontent, increases socio-political instability. The latter, by creating uncertainty in the politico-economic environment, reduces investment and therefore economic growth. As a consequence, income inequality and economic growth are inversely related. We measure socio-political instability with a composite index which captures the occurrence of more or less violent phenomena of political unrest. Our hypotheses are tested by estimating a two equation model in which the endogenous variables are investment and our variable of socio-political instability. Our results are robust to sensitivity analysis on the specification of the model and are essentially unchanged when the model is estimated using robust regression techniques.
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