Equality Benefits of Social Market Economies: Institution, Demand, and Growth

• In Event: Poster Session: Class and Inequality & Political Science Education
  In Poster Session: Poster Session: Class and Inequality

Abstract

(Dear Chairs: I ask you please to accept my paper as either a paper or a poster. My travel to the APSA meeting won’t be funded by my grant unless I give a paper or poster. I need to participate in the meeting. My paper is solid theoretically and empirically, showing that social market economies promote economic growth indirectly via their equalizing effects on inequality and poverty, as well as directly. The empirical results are very robust. Thank you for your consideration and work as the chairs. Best wishes, Taka Sakamoto.)

This paper examines the effects of SMEs on inequality and poverty and on economic growth. It draws on the Post-Keynesian perspective introduced by scholars of comparative political economy. The perspective argues that lower wages and wage inequality suppress aggregate demand, which in turn stagnates economic growth. I postulate that if SMEs are more redistributive, they should lead to lower inequality and poverty and further that they should lead to higher economic growth, if higher wages or equality promotes aggregate demand and if higher demand can promote economic growth.

To anticipate the empirical findings simply, SMEs produce lower inequality, and lower inequality increases GDP growth. SMEs also directly increase GDP growth. The results are essentially the same with poverty rates as a dependent variable.

I test my hypotheses going from SMEs to inequality and poverty and to economic growth in two ways—first, I use structural equation models (path analysis) to test those links, and second, I employ system-generalized method of moments (GMM). Structural equation analysis is useful, because it can analyze multiple dependent variables and associations as well as examine the effects of mediator variables, and thus mechanisms of causal relationships. I have three links that I need to test; 1) a link going from SMEs to inequality/poverty; 2) a link going from inequality/poverty to economic growth; and 3) a link running from SMEs to economic growth.

I then use system-GMM models to remove the effects of reverse causation that runs from economic growth to inequality/poverty and estimate the effects of SMEs and inequality/poverty on economic growth. I use system-GMM because it can estimate the effects of independent variables on a dependent variable by removing the effects of the dependent variable on independent variables. If system-GMM models support the findings of structural equation models, we can have more confidence in the findings. (Structural equation models cannot control for reverse causation.)

The regression analysis produces strong empirical support for the equalizing effects of SMEs on inequality/poverty, SMEs’ direct and indirect positive effects on GDP growth, and the indirect positive effects of lower inequality/poverty on GDP growth (via consumption and investment growth). First, SMEs directly produce higher GDP and indirectly lead to higher GDP via their effects on inequality/poverty. Second, lower inequality/poverty indirectly leads to higher GDP growth by promoting investment and consumption growth that in turn boost GDP growth. According to the results of system-GMM models, lower inequality/poverty directly increases GDP growth. In structural equation models, lower inequality/poverty increases GDP growth indirectly via its effects on investment and consumption growth.

Author

• Takayuki Sakamoto, Meiji Gakuin University