Constraints on Democracy: Capital Mobility and Political Inequality

“Today, an oligarchy is taking shape in America of extreme wealth, power and influence that literally threatens our entire democracy, our basic rights and freedoms, and a fair shot for everyone to get ahead.” (Biden via Liptak et al., 2025) Following US President Biden’s foreboding farewell address and the shameless concentration of billionaires at President Trump’s inauguration, fears of an impending oligarchy have exploded in American political discourse. (e.g., Bekiempis, 2025)

However, empirical evidence suggests that oligarchy and wealth-based political inequality have already been realities in the United States for at least several decades. Consider Gilens and Page’s (2014) seminal paper, “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens,” which examines 1,779 policy outcomes in the US from 1981 to 2002, measuring support across interest groups and voter income percentiles. After controlling for the preferences of interest groups and elite voters, the authors found no relationship between public policy outcomes and the preferences of median-income voters.

While this might be expected in the US, where legalized political bribery is the order of the day (Edsall, 2018), wealth-based differential representation unfortunately extends across the developed world. Evaluating 25 European countries from 2002 to 2010, Peters and Ensink (2015) found that the preferences of high-income citizens are systematically overrepresented when it comes to government spending, while those of low- and middle-income citizens are underrepresented. This result is particularly concerning given that many of the countries considered follow social-democratic models and maintain strict limits on political donations (France, 2023), meaning that disproportionate elite influence can still be exerted without neoliberal administrations or blatant checkbook participation. Although numerous mechanisms behind this influence have been suggested (e.g., differential voter turnout, distorted information on public opinion, and a revolving door between public and private employment; Gilens & Page, 2014), few have been empirically tested. This article seeks to explain and provide preliminary empirical evidence for one such mechanism: capital mobility.

Background

Capital mobility (i.e., the ability to shift assets across borders) has been often suggested as a mechanism of elite power over public policy. (Swank, 2002). Essentially, when capital is highly mobile, firms, investors, and financial institutions can easily withdraw their investments from one jurisdiction and reinvest them in another. Given that these investments are integral for industry and employment prospects, governments are forced to appease capital owners through pro-business policies, lest they exit the local economy or refuse to invest in the first place (Swank, 2002). For example, this helps to explain why Alberta governments, across party lines, have refused to increase their notoriously low oil sands royalties (Bakx, 2016), or why Ontario has maintained similarly advantageous policies towards its automotive sector (Craggs, 2023). Unfortunately, this behaviour can lead to an intergovernmental race to the bottom, in which governments compete for investments by enacting policies that prioritize elite interests at the expense of typical voters and the democratic process. To illustrate, we can turn to one of the most shameless instances of intergovernmental competition in recent memory.

In 2017, Amazon declared that it would build a second headquarters in North America and extended a request for proposals from local governments (Rushe, 2018). Hoping to win $5 billion in investments and 50,000 additional jobs, 238 proposals were submitted, many of which promised huge tax breaks and employment subsidies (Rushe, 2018). However, this bidding process was largely concealed from the public, with proposals being chiefly drafted by business groups and real estate developers rather than elected bodies or community organizations (Jensen, 2019). In fact, less than half of all proposals were even publicly released (Jensen, 2019). Ultimately, Amazon decided to build two new headquarters, one in New York City and one in Arlington, Virginia, whose proposals offered a total of $1.5 billion in tax breaks and subsidies (Hansen, 2018, CBC). ¹ While this demonstrates how the attraction of new mobile capital can influence government policy, we can turn to another example to illustrate the influence of existing capital. 

The 2011 Peruvian general election saw the left-wing candidate Ollanta Humala sweep into power alongside his Peru Wins electoral alliance (Campello, 2015). His campaign had focused on ending the unfair exploitation of Peru’s natural resources by foreign investors, which would be achieved through regulations and constitutional reforms aimed at empowering workers, indigenous communities, and environmental groups (Avilés & Rosas, 2017). However, this platform proved too progressive for the owners of Peruvian capital, who immediately withdrew their investments en masse. Consequently, the day after Humala’s election, the country’s stock market contracted by a staggering 12.5 percent, the largest one-day fall in its history (Aviles & Rosas, 2017). In an effort to reverse this economic catastrophe, the new Peruvian administration quickly changed course, reneging on its campaign promises and replacing eleven of its left-wing cabinet members, including its first prime minister, with conservatives (Aviles & Rosas, 2017).  Only after sufficient concessions were made did Peru’s financial markets begin to recover (Campello, 2015). The lesson of this episode is clear: even if a policy platform receives a democratic mandate, as long as capital is highly mobile, the platform cannot be enacted without the implicit consent of capital-owning elites.

Empirical Analysis

In light of these historical examples, preliminary empirical evidence on the relationship between capital mobility and wealth-based differential representation will now be provided. To assess the former, the Chinn-Ito Index measures legal restrictions on the movement of capital across countries’ borders (Chinn & Ito, 2006). Alternatively, the European Social Survey, a biannual survey that covers most European countries plus Israel, will provide data on differential representation. Specifically, this analysis considers mean levels of democratic satisfaction (i.e., respondent satisfaction with how their country’s democracy is working) across different income deciles. The fifth decile of respondents is used to represent typical-income voters, while the tenth decile is used as a proxy for elites. ² Finally, given that European Union (EU) membership demands both democratic requirements and high capital mobility (Veebel, 2011), this membership may confound my results and is controlled for in the main analysis. The aggregated dataset reflects an unbalanced, biannual panel with 243 observations, covering 28 European countries plus Israel from 2000 to 2020.  

Consistent with previous findings, tenth-income-decile voters report significantly higher democratic satisfaction than fifth-income-decile voters (p < 0.01). This difference in democratic satisfaction is used as the primary measure of differential political representation. To check the robustness of the results, another measure of differential representation is also considered: the difference in democratic satisfaction between the tenth income decile and lower nine income deciles. Results are consistent regardless which of these measures is used.

In the main analysis, a fixed effects model is used to estimate the relationship between differential political representation and capital mobility, controlling for EU membership as well as country and year effects. As shown in Table 1, a significant, positive relationship is found between the two variables (i.e., as capital mobility increases, the difference in democratic satisfaction between typical and elite voters also increases). The estimated effect suggests that moving from the highest-possible level of capital mobility to the lowest would be associated with an 84 percent reduction in differential political representation. However, this estimate is ultimately correlational, so we cannot rule out reverse causation. It may be the case that, in countries where elites have relatively more power, they are more successful at pushing through policies that increase capital mobility. Yet, even if this is the case, it still suggests that elites desire greater capital mobility against the wishes of typical voters, meaning that differential representation and capital mobility go hand-in-hand.

Table 1 – Fixed effects estimates of the relationship between capital mobility and differential political representation, controlling for EU membership.

Conclusion

This analysis supports the notion that capital mobility is a mechanism behind differential political representation. Importantly, this evidence was found among a sample of European countries, where social-democratic traditions and democratic institutions are relatively strong. This suggests that, regardless of one’s governing model, control over interjurisdictional capital flows is a necessary condition for genuinely democratic policy-making. Unfortunately, turning to a policy of conventional capital controls could present its own pitfalls, including the encouragement of economic nationalism and limitations on the ability to realize gains from trade (Piketty, 2014). Further, even if a jurisdiction did wish to reduce capital mobility, these attempts would likely be punished by capital flight (Swank, 2002).

However, the situation is not hopeless, as interjurisdictional cooperation could overcome these obstacles. For instance, by modifying trade agreements to incorporate financial transparency requirements and capital mobility regulations, interjurisdictional trade can remain open while minimizing the influence of capital (Piketty, 2014). More broadly, if governments are able to coordinate policy reforms that might displease capital owners, they would make it harder for capital owners to find alternative destinations for their investments, reducing the feasibility of capital flight. While this coordination may seem like a difficult task, it will be necessary to remove political power from capital-owning elites, realize meaningful democracy, and halt our continued descent toward bald-faced oligarchy.

Notes

1. Thanks to opposition from grassroots organizers, unions, and a vocal group of local representatives (e.g., U.S. Rep. Alexandria Ocasio-Cortez), the New York headquarters was later cancelled (LeSeur, 2021). ↩︎
2. Using the tenth income decile as a proxy for elites follows the methodology of Gilens and Page (2014). However, given that this decile is quite broad and consists mainly of nonelites, the estimates are watered-down and should be treated as underestimates. ↩︎

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