7
Conclusions

We conclude by summarizing the main results and puzzles of this literature and by indicating which are, in our view, the next steps in this area of research. Several results appear fairly robust. First, political instability is harmful for growth, and to some extent low growth fosters political instability. This result is not overly sensitive to different measures of political instability. Second, income inequality is harmful for economic growth, but the exact channels linking these two variables are less clear. One possible channel is political instability and mass violence. We presented evidence consistent with the hypothesis that income inequality creates social discontent which in turn fuels unrest, violence and political instability. The latter has negative effects on growth. Evidence on the other political channel, fiscal redistribution, is for the moment less clear. Part of the problem is the variety of different policy instruments that can be used to achieve the desired redistribution.

Third, there is no evidence suggesting that democratic institutions are not conducive to growth. A variable 'democracy' which identifies those countries with relatively free competitive elections is not correlated with growth. A variable that captures the extent of 'civil liberties' may, in fact, be positively associated with growth; namely, more individual liberties enhance growth.

Several issues are still open. First, the role of political instability deserves a closer look, along several dimensions. Thus far, we have considered two definitions of instability, socio-political and executive instability. At least another concept seems to be potentially relevant, one that has to do with 'legislative instability'. In fact, variables like the number of parties in a coalition and dummies for coalition governments and for majority governments are economically and statistically significant in explaining inflation and the share of transfers in GDP. This suggests that legislative instability could play an important

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