The Fiscal Origins of Comparative Inequality levels: An Empirical and Historical Investigation

Produced by: 
Universidad de Chile
Available from: 
May 2022
Paper author(s): 
Andrés Irarrázaval
Poverty - Inequality - Aid Effectiveness
Fiscal Policy - Public and Welfare Economics

What explains exceptional inequality across Latin America, Africa, and India? By exploiting analytical, historical, and empirical tools, this research revisits the literature on inequality and long-term development. The findings challenge the colonial origins thesis, showing that significant inequality in Latin America, Africa, and India is not rooted in the colonial period nor explained by allegedly persistent “extractive” economic institutions. Instead, the empirical strategy that revises Acemoglu et al. (2001) instrument variable (IV) method, consistent with historical evidence, indicates that current inequality differences only materialised during the 20th century following divergent fiscal patterns. In Western countries, progressive fiscality led to tangibly lower inequality since the 1920s. Whereas in Latin America, Africa, and India, despite post-colonial convergence toward “inclusive” economic institutions, inequality persists through a regressive fiscal equilibrium. In these developing regions, limited democratic accountability has undermined the formation of the credible commitments necessary to raise substantial direct (i.e., progressive) taxes and the political pressure required to mobilize such resources towards redistribution.


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