Political economy and income inequality: how did trade liberalization and changes in political and economic freedom affect the middle classes across the world?

Figures & data

Table 1. Correlation coefficients.

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)
(1) Average class income	1
(2) Political freedom	0.627	1
(3) Rule of law	0.722	0.682	1
(4) Limited government	−0.532	−0.399	−0.550	1
(5) Regulatory efficiency	0.553	0.531	0.682	−0.308	1
(6) Open markets	0.531	0.637	0.686	−0.287	0.607	1
(7) Trade freedom	0.525	0.525	0.460	−0.255	0.378	0.430	1
(8) Manufacturing tariffs	−0.576	−0.537	−0.510	0.367	−0.429	−0.420	−0.688	1
(9) All tariffs	−0.596	−0.561	−0.524	0.378	−0.450	−0.438	−0.728	0.960	1

Figure 1. Size of middle class in largest economies in different income categories.

ARG: Argentina, AUS: Australia, BRA: Brazil, CAN: Canada, CHL: China, COL: Colombia, DEU: Germany, ESP: Spain, ETH: Ethiopia, FRA: France, GBR: Great Britain, GHA: Ghana, IDN: Indonesia, IND: India, IRN: Iran, ITA: Italy, KAZ: Kazakhstan, MEX: Mexico, MYSL Malaysia, NGA: Nigeria, PAK: Pakistan, PHL: Philippines, POL: Poland, RUS: Russia, THA: Thailand, TUR: Turkey, UGA: Ugands, USA: Uganda, USA: United States, UZB: UZBEkistan, ZAF: South Africa.

Figure 2. US net national income per capita and share of class quintiles.

Table 2. Impact of trade liberalization on average class incomes.

	(1)	(2)	(3)	(4)
Measurement	In levels	In levels	In logs	In logs
Constant (Upper class)	20,856*	21,913*	10.09*	10.21*
Upper middle class	−9.704*	−10,171*	−0.647*	−0.633*
Mid middle class	−12,624*	−13,239*	−0.967*	−0.947*
Lower middle class	−14,731*	−15,455*	−1.283*	−1.258*
Lower class	−17,235*	−18,093*	−1.836*	−1.805*
Trade liberalization
Manufacturing tariffs (Upper class)	−754.74*		−0.862*
All tariffs (Upper class)		−922.99*		−0.944*
Trade liberalization * Upper middle class	327.46*	401.50*	−0.084*	−0.094*
Trade liberalization * Mid middle class	433.43*	530.95*	−0.114*	−0.127*
Trade liberalization * Lower middle class	512.22*	627.27*	−0.138*	−0.154*
Trade liberalization * Lower class	609.78*	746.28*	−0.150*	−0.170*
Adj. R^2	0.201	0.215	0.507	0.530
N	7064	7064	7064	7064

*Denotes 95% statistically significance.

Table 3. Impact of political and economic freedoms on average class incomes.

	(5)	(6)	(7)
Measurement	In logs	In logs	In logs
Constant (Upper class)	9.129*	9.206*	7.266*
Upper middle class	−0.654*	−0.632*	−1.034*
Mid middle class	−0.971*	−0.938*	−1.488*
Lower middle class	−1.282*	−1.239*	−1.900*
Lower class	−1.800*	−1.742*	−2.500*
Trade liberalization
Manufacturing tariffs (Upper class)	−0.299*
All tariffs (Upper class)		−0.350*
Trade freedom			0.020*
Trade liberalization * Upper middle class	−0.084*	−0.099*	0.004
Trade liberalization * Mid middle class	−0.117*	−0.139*	0.005*
Trade liberalization * Lower middle class	−0.144*	−0.172*	0.006*
Trade liberalization * Lower class	−0.179*	−0.217*	0.006*
Political freedom (Upper class)	0.321*	0.302*	0.322*
Rule of law (Upper class)	0.605*	0.610*	0.602*
Limited government (Upper class)	−0.157*	−0.152*	−0.197*
Regulatory efficiency (Upper class)	0.136*	0.127*	0.161*
Open markets (Upper class)	0.002	0.000	−0.027
Political freedom * Upper middle class	−0.039	−0.045	−0.029
Political freedom * Mid middle class	−0.061	−0.070	−0.046
Political freedom * Lower middle class	−0.088*	−0.098*	−0.067
Political freedom * Lower class	−0.151*	−0.165*	−0.121*
Rule of law * Upper middle class	−0.003	−0.002	0.000
Rule of law * Mid middle class	−0.006	−0.004	−0.001
Rule of law * Lower middle class	−0.002	−0.001	0.004
Rule of law * Lower class	0.014	0.016	0.024
Limited government * Upper middle class	−0.093*	−0.092*	−0.104*
Limited government * Mid middle class	−0.131*	−0.128*	−0.146*
Limited government * Lower middle class	−0.165*	−0.162*	−0.184*
Limited government * Lower class	−0.216*	−0.212*	−0.239*
Regulatory efficiency * Upper middle class	0.001	−0.001	0.009
Regulatory efficiency * Mid middle class	−0.001	−0.005	0.010
Regulatory efficiency * Lower middle class	−0.001	−0.005	0.014
Regulatory efficiency * Lower class	0.006	−0.000	0.024
Open markets * Upper middle class	−0.009	−0.010	−0.013
Open markets * Middle mid class	−0.009	−0.010	−0.013
Open markets * Lower middle class	−0.013	−0.014	−0.018
Open markets * Lower class	−0.043	−0.044	−0.046
Adj. R^2	0.799	0.805	0.791
N	7064	7064	7064

*Denotes 95% statistically significance.

Figure 3. Impact of freedoms for varying levels of development.

L: Lower-income countries; LM: Lower middle-income countries; UM: Upper middle-income countries; H: High-income countries.

Figure 4. Impact of freedoms for varying levels of development – continued.

L: Lower-income countries; LM: Lower middle-income countries; UM: Upper middle-income countries; H: High-income countries.

Table 4. Impact of freedoms on average class incomes for varying levels of development.

Country group	Lower income countries	Lower-middle income countries	Upper-middle income countries	High income countries
Tariffs * (Upper class)	0.030	0.063	0.130*	−0.100*
Tariffs * Upper middle class	0.034	−0.027	−0.067	−0.013
Tariffs * Mid middle class	0.049	−0.068	−0.162*	−0.025
Tariffs * Lower middle class	0.071	−0.114*	−0.253*	−0.032
Tariffs * Lower class	0.118*	−0.202*	−0.410*	−0.047
Political freedom * (Upper class)	0.282*	0.301*	0.393*	−0.194
Political freedom * Upper middle class	0.273*	0.237*	0.296*	0.130
Political freedom * Mid middle class	0.264*	0.208	0.248*	0.223
Political freedom * Lower middle class	0.252*	0.177	0.202	0.342*
Political freedom * Lower class	0.227	0.104	0.114	0.460*
Rule of law * (Upper class)	0.018*	0.018	−0.315*	0.407*
Rule of law * Upper middle class	−0.448*	−0.013	−0.412*	−0.025
Rule of law * Mid middle class	−0.442*	−0.019	−0.433*	−0.046
Rule of law * Lower middle class	−0.449*	−0.006	−0.434*	−0.060
Rule of law * Lower class	−0.447*	0.043	−0.369*	−0.052
Limited government * (Upper class)	−0.100*	0.102*	0.020	−0.071*
Limited government * Upper middle class	−0.072	0.009	−0.068	−0.040
Limited government * Mid middle class	−0.046	−0.026	−0.109*	−0.059
Limited government * Lower middle class	−0.020	−0.063	−0.150*	−0.076*
Limited government * Lower class	0.013	−0.143*	−0.224*	−0.090*
Regulatory efficiency * (Upper class)	−0.254*	−0.342*	−0.267*	0.243*
Regulatory efficiency * Upper middle class	−0.244*	−0.349*	−0.332*	0.003
Regulatory efficiency * Mid middle class	−0.238*	−0.354*	−0.363*	0.003
Regulatory efficiency * Lower middle class	−0.225*	−0.353*	−0.384*	0.002
Regulatory efficiency * Lower class	−0.194*	−0.333*	−0.388*	−0.040
Open markets * (Upper class)	0.152*	0.141*	−0.022	−0.005
Open markets * Upper middle class	0.123*	0.104*	0.073	0.011
Open markets * Mid middle class	0.113*	0.093*	0.118*	0.014
Open markets * Lower middle class	0.107*	0.072	0.152*	0.019
Open markets * Lower class	0.094	0.001	0.163*	0.007
Adj. R^2	0.934
N	7064

*Denotes 95% statistically significance.

Data availability statement

The data that support the findings of this study are available from the following resources available in the public domain: The World Bank’s micro household survey: https://www.worldbank.org/en/programs/lsms. The World Bank Poverty and Equity Database: https://datacatalog.worldbank.org/dataset/poverty-and-equity-database. UN Comtrade database: https://comtrade.un.org/. Political freedom from the Freedom House: https://freedomhouse.org/. Economic freedom from the Heritage Foundation: https://www.heritage.org/index/