Journal Article | Brookings Papers on Economic Activity | spring 2009

Why Doesn't Capitalism Flow to Poor Countries?

by Rafael Di Tella and Robert MacCulloch

Abstract

We show that capitalism is far from common around the world. Outside a small group of rich countries, heavy regulation of business, leftist rhetoric, and interventionist beliefs flourish. We relate these phenomena to the presence of corruption, with causality running in both directions. The paper presents evidence that, within a country, those who perceive widespread corruption also tend to demand more regulation. As regulation is held constant within a country, this finding is hard to explain if one assumes that causality runs only from regulation to corruption. We also find that over time, increases in corruption in a country precede increases in left-wing voting. To explain our findings, we present a model where corrupt capitalists are disliked, and voting for left-wing policies is a form of punishment available to voters even in weak judicial systems. Evidence on emotions supports this explanation: the frequency with which people report experiencing anger is positively correlated with perceived corruption, but this relationship is significantly weaker when business is heavily regulated.

Keywords: Crime and Corruption; Voting; Economic Systems; Fairness; Governing Rules, Regulations, and Reforms; Emotions;

Citation:

Di Tella, Rafael, and Robert MacCulloch. "Why Doesn't Capitalism Flow to Poor Countries?" Brookings Papers on Economic Activity (spring 2009): 285–321.