Redistribution and development in Europe

What is it about?

This study examines the relationship between the redistributive effect of taxes and government transfers and human development and its different dimensions –health, education and economy– in 30 European over the period 1990-2021. Overall, the analysis suggests that increases in redistribution lead to an increase of development. The coefficient for a one-period lag is also found to be positive and significant, suggesting that the effects of redistributive policies show some persistence. Results are robust to different periodicities and specifications. When re-estimating the panel model for the different components of development, we obtained a positive association between redistribution and the health and economic dimensions of development, and a negative but non-significant association between redistribution and education -captured by the expected and the mean years of schooling. When replicating the experiment for different European regions, the greatest impact of redistributive measures is found in Northern Europe, as opposed to Southern Europe, where the impact on development is not found to be significant.

Featured Image

Photo by Agence Olloweb on Unsplash

Photo by Agence Olloweb on Unsplash

Why is it important?

While the relationship of inequality with economic growth has been analysed in detail, the link between redistribution and development has been scarcely studied, mainly due to the lack of homogeneous information regarding the actual impact of redistributive measures. In the present study, we use the “pre-post” approach to compute the effective impact of public redistributive measures. The recent availability of historical series on the distribution of income after taxes –freely accessible from the World Income Database (WID.world)– has allowed us to estimate the impact of redistributive policies as the difference between market and net Gini coefficients. This, in turn, allows us to analyse the effect that redistribution has on human development and its different components. The results obtained suggest the existence of a certain positive association between redistribution and development, despite the fact that the impact of increases in redistribution is fundamentally manifested in a rise in average disposable income. These findings are of special interest for the design of fiscal policies. In this regard, improvements in the selection of recipients of state transfers as well as in fighting tax evasion are key to ensuring that redistributive efforts have a greater reflection in promoting economic and human development.

Perspectives