The Political Economy of Inequality in Late-Industrialized Countries: Trajectories from Industrialization to Inequality

This paper examines the variation in levels of inequality between late-industrializing countries in Latin America and East Asia from the 1960s. Latin American countries have more advanced welfare states, higher social spending, and more abundant left power resources than their East Asian counterparts. Yet, economic inequalities are much greater in the former than in the latter. The differences between these two regions in distributional outcomes are surprising given their historical and political similarities, such as a long colonial history and authoritarian military rule. In order to answer these ongoing puzzles that cannot be fully explained by existing research, this paper provides a causal story to explain the discrepancy of inequality in the two regions.

   This article argues that types of industrialization make a huge difference in the levels of inequality. It has two main theoretical claims. Firstly, I argue that authoritarian leaders in both regions faced a set of incentives that shaped the probability of them adopting inward-looking or outward-looking industrialization in the initial instance. Contrary to the existing literature which considers the choice of openness and closeness as exogenously given, this research argues that it is a rational decision of a dictator to fulfill his interests, under political and economic impasse such as lack of resources and public support. By developing a simple formal model, this article directly theorizes the choice of dictators. Secondly, this choice has a subsequent path dependent effect on the progressivity of welfare policies and labor market policies. Inward-looking industrialization produces social policies that favour small and narrow insider coalitions, which in turn lead to higher levels of inequality, and vice versa. By providing clear theoretical mechanisms connecting industrialization to inequality, this paper explains the institutional trajectories of different types of industrialization on inequality.

   These claims are tested in an panel data analysis of fifteen Latin American and East Asian countries from the 1960s. Using a newly constructed original data set, the findings show that countries adopted outward-looking industrialization have more liberal economic structures, flexible and unregulated labor markets, and minimal welfare spending. By contrast, countries with inward-looking industrialization have more protective and inefficient economic structures, bifurcated and highly regulated labor markets, and generous but highly stratified welfare states. As a result, labor market institutions and welfare policies conditionally affect inequality depending on the types of industrialization. Whereas labor market institutions and welfare spending exacerbate inequalities in Latin America, they are linked to relatively low levels of inequality in East Asia. 

   This paper makes important theoretical and empirical contributions. This research broadens empirical scope of the comparative studies of inequality by incorporating two regions that have been traditionally under-explored. In addition, against the Katzensteinian approach positing a positive relationship between openness and the expansion of welfare state, this article finds theoretical and empirical evidence that closeness is related to higher levels of welfare spending and more protective labor market institutions in the context of developing countries.