DEBATING DEMOCRACY. The Effect of Chile’s Democratization on Income Inequality, a Synthetic Control Approach.

Abstract: How does democracy affect income inequality? Most would expect democracy to reduce income inequality. There is a general consensus that indeed democratizations in Europe during the nineteenth and early twentieth century did decrease income inequality. More recent democratizations, those countries that democratized during the 1970s-1990s, however, do not seem to have had the same effect. The body of literature that examines the relationship between these so called ‘third wave’ democratizations and income inequality is limited, and laden with controversies. This study aims to shed light on the issue by means of a case study on Chile, one of the countries that democratized in the third wave. The novel synthetic control method is employed to estimate the effect of Chile’s democratization on income inequality during 1985-2015. The results indicate that, even though income inequality has decreased since 2000, this decline is not attributable to Chile’s democratization. The main reason seems to be that the disproportionately powerful Chilean elite have been able to undermine redistributive policies under the new democracy. Despite its economic success, Chile’s income inequality levels remain among the highest in the world. However, there is certainly room for optimism. A new constitution is to be drafted over the following two years. For democracy to reduce income inequality, it is crucial that policymakers ensure social- economic- and political inclusion of all socioeconomic strata in the new constitution.