Many argue that democracy itself is a primary cause of inflation. According to their theory, politicians must win support from the masses and engage in prolific spending to finance their popularity. A recent study investigates this hypothesis.
Researchers used data from developing countries over the past 50 years. Developing countries are especially prone to bouts of inflation. According to the data, since 1957:
The authors find that democracy can be a force for inflation if excessive inequality is present. Using Gini coefficients measures of the inequality of income distribution with 0.00 representing perfect equality and 1.00 representing perfect inequality researchers find that:
The inequality forces politicians to engage in inflationary spending to redistribute income. Inflation punishes wealth accumulations and alleviates debt, an attractive outcome to a country with a large poor population.
Furthermore, researchers argue that the findings help explain why different countries have had different inflationary experiences when establishing democracies. In Latin America, wealth distribution is very lopsided. Thus, their democracies engage in inflationary spending to redistribute income. In contrast, transition countries in Eastern Europe had Gini coefficients very close to 1.00 due to Soviet policies. Consequently, their democracies avoided inflationary policies.
Source: Raj M. Desai, Anders Olofsgard, and Tarik Yousef, Democracy, Inequality, and Inflation, Georgetown University, Edmund A. Walsh School of Foreign Service Working Paper, May 2002.
For text: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=313024
For more on Culture and Political Systems http://www.ncpa.org/iss/int
FMF Policy Bulletin\12 November 2002
