Colonization, Institutions and Inequality. A Note on Some Suggestive Evidence

What is the kind of institutions that affect economic inequalities? Using a database on national income inequality for 73 non-European countries, we show that 'good governance' not only contributes to the level of income but also to a more equal distribution by increasing the income share of the middle class. Beside this effect of the quality of capitalist institutions, we also find an inverted U relationship between inequalities and the extent of European settlement. We finally find a large and robust correlation between the pre-colonial population density and the present equality of income distribution. We argue that this latter correlation may have to do with institutional dimensions that are not captured by usual measures of institutional quality in available databases. Countries which were more densely populated in 1500 have indeed worse 'governance' but give larger income shares to the poor. They had more structured pre-colonial States, more often resisted to colonisation, and more often adopted a mixed economic system. Many of them in fact ended with a more equal land distribution. The equality in the distribution of landholdings does appear as an important determinant of the overall equality of income and of poverty which is independent from 'usual' governance issues.