Economic development and income inequality: the role of political institutions and directed technological change in modern economies

Abstract

The process of economic growth and its distributional e ects have major welfare consequences, creating advanced and developing economies. Modern growth theory highlights the role of capital ac- cumulation, human capital and technology in explaining cross-country economic and income variations. Forefront research exploring these questions emphasizes the primary importance of the institutional factor in determining technological progress and leading to di erent economic growth outcomes. This thesis aims at bringing its feasible contribution to the on-going research on income inequality and eco- nomic growth by considering the fundamental causes of structural, technological and political features of economic organisation. The rst part of the thesis investigates how institutions and policies, as important determinants of economic incentives, may condition economic growth and income inequality. Based on a comprehensive critical assessment of related literature, we rst develop a conceptual discussion on how institutional quality may in uence the e ciency of redistribution policy speci cally associated with human capital accumulation. We identify political rivalry as the main factor negatively a ecting the decisive role of political institutions and consequently distorting e cient redistribution policy. Given these theoretical insights, we next study the e ects of political rivalry on human capital accumulation and income inequality in a framework of an endogenous growth model with elements of new political economy. Our results suggest that while non-distortionary redistribution via public education equalizes income levels and increases human capital accumulation, political rivalry produces negative outcomes in all dimensions of considered economic interactions. The key conclusions of the theoretical model are then tested in a cross-sectional empirical study. Our ndings clearly indicate that, for speci c groups of countries with similar income and geographical location characteristics, political rivalry has indeed a negative e ect on educational investments, individual learning choice, GDP per capita and income inequality. In the second part, the topics of economic growth and income inequality are investigated from a di erent perspective, namely that of analysing recent changes in the composition of employment, wage structure and aggregate production, which represent an important part of the process of mod- ern economic development. More speci cally, we use a standard directed technological change model, extended by complementarities between intermediate goods in production and internal costly invest- ments, to examine the behaviour of economic growth rate, technological-knowledge bias, skill premium and industrial structure. While our analysis suggests that equilibrium growth rate is directly a ected by costly investments and complementarities, the latter also in uencing equilibrium technological- knowledge bias and industrial structure, equilibrium skill premium is determined solely by workers' productivities. This may imply that the persisting increase in wage inequality observed in several de- veloped countries over the last decades may have been due to increases in productivity advantages of skilled workers favoured by technological development. We then extend our analysis by quantitatively associating empirical facts on the technology and skill structure to the degree of gross substitutabil- ity/complementarity between technological goods. This estimation exercise also allows us to quantify the long-run relationship between the Tobin-q and both the degree of complementarity between tech- nology goods and the complexity e ect of horizontal R&D, through the impact of the last two factors on the long-run economic growth rate. Our estimation and calibration exercise suggests the existence of a moderate degree of gross complementarity between technological goods and of an elastic relationship between the Tobin-q and key technology parameters.