Is Inequality a Destiny? A New Institutionalist Approach

The degree of income distribution has significant impacts on nations’ development. The effects are normally adverse, since inequality tends to be correlated to socio-political instability; inhibition of private savings; lower economic performance and more restrictions on the exercise of citizenship; among other complex issues. Globally, inequality has risen severely during the last four decades. After the 2008 financial crisis, it continued to grow among developed and emerging nations (World Inequality Lab, 2017). However, the increase of inequality follows different speeds, which indicates that nationwide institutions and policies matter in shaping it. In Latin America, particularly, the income distribution level is the one of the less functional in the world. Partly due to the last commodities boom (2000–2014) and some governmental initiatives, such as new welfare and labor policies, poverty and inequality rates (measured by the Gini coefficient) have declined in the region, especially in the Southern Cone countries (ECLAC, 2016). Nevertheless, not only this trend seems to be unsustainable nowadays, but also recent studies are showing problems with how income distribution has been estimated. This more accurate approach suggests that inequality levels are higher than previously measured and that there has been little change in these levels over time (World Inequality Lab, 2017). The long and persistent inequality history presents an interesting object of study in political economy. In this sense, there is a certain consensus that the economic determinism for inequality does not explain it all. Therefore, the paper, based on the new institutionalism approach, starts from the premise that the political process is central in getting functional institutions oriented to development and, in this case, better income distribution. Politics and political institutions reflect differences in political power sharing and determine what economic institutions a country has. The question is what are these institutions (political and economic), understood as rules of the game that set “constraints” on human behavior (North, 1990), that inhibit income distribution in developing nations? According to Acemoglu and Johnson (2008; 2012; 2015), economic and political institutions (institutions for short) are crucial to countries’ sustainable growth as well as to equal societies. However, their framework can generate positive or negative effects. Extractive political institutions, for instance, concentrate power in the hands of a few that reinforce extractive economic institutions to hold power and, ultimately, the resources extraction from the many by the few. The bulk of the social science literature has emphasized normative and prescriptive guidelines, such as progressive tax rates, quality education for poor families and redistributive pension systems. Nevertheless, it seems more productive, first, to understand why nations ‘get it wrong.’ Therefore, the inquiry aims at exploring comparatively the relationship between inequalities resilience and the political institutions in one of the most unequal country in the world, Brazil, that generate the dysfunctionality of their economic institutions. To do so, the paper employs process tracing to map and discuss how institutional framework has been set in this region with focus on the inequality dimension.