5
Income Distribution, Political Instability and Growth

The idea we test in this chapter, which is based on Alesina and Perotti ( 1996), is at the same time simple and plausible: when income distribution is very unequal, the resulting tensions within a society induce a high level of political instability. This instability discourages investment and therefore generates a low rate of growth of the economy.

As pointed out in Chapter 2 two definitions of political instability can be adopted: socio-political instability (SPI) and executive instability, that is, the frequency of government collapses (EI). In Alesina and Perotti ( 1996) we adopt the first definition, and use two related indices of SPI. The first one is our own construction of an index based on a principal component analysis applied to a relatively small number of key variables. The second index is taken from Gupta ( 1990), which applies the same method to a larger set of political variables. The results obtained with the two models are fairly similar, indicating robustness to the choice of an index. Since in Alesina and Perotti ( 1996) we emphasize the first index, here we report the results obtained using the Gupta index, which is constructed as follows:
SPI = 1. 14 + 0.0007PROTEST + 0.0049RIOT
+ 0.0086STRIKE + 0.0000043DEATH + 0.13ASSASS
+ 0.0008ATTACK + 0.0033EXECUTION
+ 1.38SCOUP + 0.264UCOUP + 0.92DEM, (1)
where PROTEST is the number of political demonstrations against a government; RIOT is the number of riots; STRIKE is the number of political strikes; DEATH is the number of people killed in conjunction with any domestic political violence; ASSASS is the number of politically motivated assassinations; ATTACK is the number of politically motivated attacks on individuals; EXECUTION is the number of politically motivated executions; SCOUP is the number of successful coups; UCOUP

-36-

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