Inequality, Privatization and Democratic Institutions in Developing Countries

According to the existing theoretical literature there are several channels through which privatization of State-owned enterprises and assets may shape the distribution of income either increasing or decreasing the level of inequality. As a consequence, assessing the actual distributional impact of privatization becomes an empirical mat- ter. This paper is a rst attempt to empirically investigate the relationship between privatization and income inequality focusing on the role of democratic institutions in developing countries. Using an unbalanced panel of 80 countries in the period 1988-2008, we nd that privatization is negatively and signicantly correlated with inequality when democratic institutions are well consolidated, and positively when they are not. Our results, robust to dierent specications, measures of democ- racy and economic controls, suggest an interesting and not yet investigated policy implication for low or middle-income countries: only after having established ma- ture representative political institutions, privatization appears to be related to a reduction in income inequality.