Good institutions and fair trade: A Road Map to Local and Global Social Harmony

The paper examines how legal, economic, political and social institutions fare
with different measures of inequality in a cross section framework. We
differentiate between institutions based on four categories which are legal,
economic, political and social. Among legal institutions, rule of law and control
for corruption have a stronger impact on inequality than voice and
accountability. We find that countries which practice democracy are less prone
to unequal outcomes especially when it comes to wage inequality and income
inequality whereas autocracy is associated with higher level of wage inequalities
but its impact on income inequalities are insignificant. Though under good
economic management, autocracies may redistribute incomes from the richest
to the poorest, more generally an autocratic set up violates the median voter
hypothesis. The results also show that political stability is more sensitive to
inequalities than democracy and autocracy which is to say that the countries
which are politically stable also form more equal societies. Though in a cross
section analysis, our results indicate average sample characteristics of countries
chosen which neutralise the single country case sensitivities and thus may have
captured the simple observational analogy that most democracies in the world
are also the ones which are politically stable and economically efficient whereas
most autocracies, unless they are lead by enlightened leadership eventually
suffer from unstable or repressed political systems. Economic institutions also
play an important role in alleviating global inequalities. Whether the
government is functioning effectively and whether it has a robust fiscal and
monetary policy seems to have stronger impact on inequality than regulatory
quality. Education for all, a proxy for social institutions, has a strong
redistributive power. Overall, political stability, control for corruption and rule
of law trumps any other institutional proxy in reducing inequalities in a
country. On the other hand, middle income group is most likely to benefit
from good functioning institutions than any other income group. Once
controlling for institutions, openness is associated with increased wage
inequalities across nations. However the results for trade policy are mixed.
Decrease in import taxes increase wage inequality, whereas decrease in export
taxes has an egalitarian effect. The results are applicable only to a larger sample
of developed and developing countries and highlight the bottle neck faced by
both developing and developed countries in WTO talks which have not been
successful as yet in further decrease in trade taxes. In case the situation
prevails, the paper calls for more South-South trade which would enable
developing countries to decrease the relative wage gaps among labour force.