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Faculty of Economics

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Palma, J. G.

Why the Rich Stay Rich. On dysfunctional institutions’ “ability to persist” (no matter what)


Abstract: This paper returns to the Ricardian tradition of understanding the distribution of income as the outcome of the political articulation of conflict between rentiers, capitalists, bureaucrats and labour ―in which history, politics and institutions matter as much (if not more) than economic ‘fundamentals’. Furthermore, as this conflict is by nature "antagonistic" it takes place in the arena of "the political"; i.e., it can never have a purely logical or rational solution. It is a story of choice in a world of multiple equilibria. In this tradition, in unregulated economies not only inequality but also economic underperformance arises mostly from the shift in distribution from operating profits to unproductive rents (especially “inefficient rents”; i.e., those that arise from market manipulation), affecting investment and productivity growth. The focus of the analysis is on how is it that the rich stay rich, no matter what! ―confirming the iron law of oligarchies: dysfunctional institutions tend to rebuild. In the case of Latin America, its élites' “ability to persist” relates to the fact that they have been able to enforce a style of political settlement that resembles what is statistics is called a ‘stationary process’, whereby the unbalancing impact of shocks tends to have only limited life-spans. That is, oligarchies are able to landscape new scenarios to continue achieving their fairly immutable rent-seeking goals. When in democracy, they have used three main channels for this: they have enforced ‘Buchanan’-style constitutional and legal straitjackets to restrict the scope of change and to debilitate the State; they have been able to reengineer their distributional strategies to suit the new scenarios; and they have cleverly absorbed elements of opposing ideologies (such as now accepting the need for ‘social protection’) to maintain theirs hegemonic. Their trump cards are ruthlessness in the first channel, and “jogo de cintura e jeitinho” (fancy footwork) in the other two. The analysis of these channels is the main subject of this paper.

Keywords: income distribution, inequality, poverty, Palma ratio, “reverse catching-up”, ideology, Gramsci, Foucault, neo-liberalism, ‘new’ left, institutional persistence, Latin America, Chile, emerging Asia, US, Western Europe

JEL Codes: D31 E12 E22 E24 N16 N36 O50 P16

Author links: Jose Gabriel Palma  


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