Expert Commentary

How research covering more than 5,000 years sheds light on income inequality today

Analysis based on data spanning millennia reveals link between when governments were established and income inequality.

Income inequality
Sands of time. (Nidhil Amen / Unsplash)

King Menes unified Egypt around 5,000 years ago, making it among the world’s first central governments.

Millennia later, Namibia, on the southwest coast of Africa, was under German then South African rule until 1990, when its independent government was formed.

Egypt’s history of statehood is old and Namibia’s is new, yet both countries have this in common: relatively high levels of income inequality today.

Central governments that are very old or new tend to have higher inequality than those in the middle — a “just rightGoldilocks zone of lower inequality for countries with governments established sometime between Egypt and Namibia.

That’s the essential finding from a recent paper in Economic Modelling, “Statehood experience and income inequality: A historical perspective,” based on data covering more than 5,000 years.

“A key argument is that both newly established and older states tend to suffer from the persistence of poor governance, making it difficult to establish an egalitarian society,” author Trung Vu, a doctoral researcher in economics at the University of Otago in New Zealand, explained by email.

Countries in the Goldilocks zone, with intermediate statehood experience and relatively low levels of inequality, include Austria, Belgium, Germany, Japan and Switzerland.

Vu’s U: Statehood and inequality

Vu uses historical data spanning 3500 B.C. to the year 2000 to determine when 128 countries developed statehood.

Statehood happens when a central government is established that has the power to enforce laws and regulations, collect taxes, and perform other functions on behalf of a large number of people.

Some modern countries have had many kinds of central governments over the years — monarchies, dictatorships, representative democracies.

But statehood is not about what kind of government a territory has or had. It’s simply about the existence of centralized governance.

Vu then takes an average of Gini coefficients, a widely used measure of income distribution, for those 128 countries from 1960 to 2015. Italian statistician Corrado Gini developed the measure in 1912. It’s often produced on a 0 to 100 scale. A score closer to 0 indicates less inequality while a score closer to 100 indicates more inequality.

For Vu, a U-shaped relationship between historical statehood and income inequality emerges.

Central governments that are very old or new tend to have higher inequality than those in the middle. There are outliers. Peru, Guatemala and Mexico have relatively high inequality but are in the intermediate, Goldilocks zone. Slovakia and Finland have relatively little experience with statehood and relatively low inequality, according to Vu’s analysis.

The U.S., too, has a relatively new central government. Although income inequality in the U.S. has risen in recent decades, it’s still lower than in many other countries.

Still, the overall trend goes high-low-high, like a U.

“Understanding whether history casts a long shadow on current development outcomes is the first step toward managing the long-term legacy of history,” Vu wrote by email.

Institutions and income distribution

Separate researchers developed the historical data on statehood Vu uses, publishing their findings in a 2017 paper in the Journal of Economic Growth. Those researchers used a variety of secondary sources, including the Encyclopedia Britannica, academic journal articles and books, to determine when places established statehood.

Newer and older states tend to have higher income inequality because they lack institutional quality and stability, according to Vu.

Long-standing governments may suffer from institutional stagnation, he explained. Powerful bureaucrats emerge who manipulate established systems to their benefit, increasing inequality.

Newer governments, meanwhile, are susceptible to regime change, outside attack and internal corruption from officials who take advantage of laws that are not well established. Steady economic growth and equitable income distribution are difficult in a nation that is political unstable.

Countries in the Goldilocks zone tend to be more stable and less corrupt: “A unified society reduces conflicts and political instability, thus improving income distribution,” Vu writes in his paper.

Upending Kuznets?

Russian-American economist Simon Kuznets, writing in The American Economic Review in March 1955, offered a theory of a frown-shaped, or inverted-U relationship between economic development and income inequality.

The theory goes that income inequality in a country starts low, rises as economic development continues, then settles down again when the country develops a mature economy.

Today, the inverted-U is known as the Kuznets curve.

Kuznets wrote in his paper that his theory was based on “perhaps 5% empirical information and 95% speculation, some of it possibly tainted by wishful thinking.” (He went on to win the Nobel Prize in economics in 1971 for his work on how national economies grow.)

The Kuznets curve is “a story of adjustment over time, even though many of the empirical studies on [it] rely on cross-sectional data — a snapshot of cross-country variation at a particular time,” Dorian Owen, Vu’s academic advisor, explained by email. “Increases in inequality in developed economies post-1960 and the East Asian growth experience — with both increasing income per capita levels and reduced inequality — are often cited as counterexamples to the dynamics of adjustment assumed by the Kuznets curve, so the relevance of the Kuznets curve is contested.”

Vu noted by email that his findings do not necessarily contradict recent research supporting the Kuznets curve, adding that “there are many factors shaping the evolution of income inequality.” 

Also, Vu’s research looks specifically at statehood as a driver of inequality. He weighed experience with statehood for recent 50-year periods more heavily into the analysis than distant periods, because recent events are more likely than ancient history to affect today’s economies.

Vu also controlled for geographic characteristics as well as recent income levels, trade openness, development of governmental and financial institutions and human capital.

Those indicators are associated with a country’s economic development. But Vu is examining the relationship between statehood and inequality, not economic development and inequality.

Though Vu noted there is no way to rule out every factor other than statehood that affects inequality today, there is no other variable he considers that “completely absorbs the effects of state history on income inequality.”

For government officials and others working to reduce disparities, “curtailing income inequality requires treating the disease not just its symptoms,” Vu writes in his paper.

“Policymakers need to recognize the historical legacy that has a persistent influence on the environment within which current policies are designed, including, in some countries, potential resistance to reducing inequality,” Owen explained.

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