Democracy Does Not Cause Growth

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Does democracy cause more economic prosperity and growth? This question dates back to Plato and Aristotle’s debate regarding which form of government brings more political and economic gain to society. However, after more than two millennia, there seems to be no clear consensus about whether democracy (in and of itself) delivers more economic growth than autocratic forms of government.

To answer this important question, we must turn to the data. On the one hand, research that relies on cross-country comparisons has questioned the relationship between democracy and economic growth (Sirowy and Inkeles, 1990; Przeworski and Limongi, 1993; Helliwell, 1994; Barro, 1996; Tavares and Wacziarg, 2001). On the other hand, more recent economic studies that exploit both time series and cross-country variability (i.e. panel data) actually tend to support the theory that democracy has a sizable effect on prosperity. (Rodrik and Wacziarg, 2005; Papaioannuo and Siourounis, 2008; Persson and Tabellini, 2009; Acemoglu, Naidu, Restrepo, and Robinson, 2014).

Indeed, Figure 1 depicts this fact for 38 democratic transitions during the so-called “Third Wave of Democratization,” including the fall of communism in the early 1990s.[1] The average annual per capita growth rate increases about half a percentage point following a democratic transition. Depicted by red lines, growth after the democratization is statistically larger than before the transition (-0.01 percent versus -0.44 percent, respectively). While small at first glance, the cumulative effect of this difference would reduce the time needed for this group of countries to converge towards OECD income levels by one third. The evidence portrayed in Figure 1 seems to show that, taken at face value, democracy has a sizable impact on economic growth.

Figure 1. Real GDP per capita growth around democratic transitions

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Despite this evidence, however, extensive political science research indicates that it is in fact economic turmoil that is responsible for causing or facilitating many democratic transitions (O’Donnell, 1973; Linz, 1978; Cavarozzi, 1992; Remmer, 1993; Gasiorowski, 1995; Haggard and Kaufmann, 1995). In this view, the lower (and negative!) growth rate depicted in Figure 1 before the democratic transition may indicate that poor economic performance pushed or catalyzed the end of autocratic regimes. For example, many scholars point to the oil shocks of the 1970s, the related expansion of international lending, and the subsequent debt crises as the origins of the 1980s wave of democratization in Latin America.

In other words, the positive association between democracy and economic growth portrayed by Figure 1 could reflect that either democracy causes more economic growth (the argument pushed by recent economic studies), that economic turmoil causes the emergence of democratic rule (the argument espoused by extensive political science research) or, to some extent, both. Although disentangling this causality is not an easy task, understanding the true impact of democracy on economic growth remains crucial.

We take on the challenge in our recent study “Democracy Does Not Cause Growth: The Importance of Endogeneity Arguments.” To solve this puzzle, we propose a novel strategy based on a new worldwide survey of 165 democracy experts. In a snapshot, the study uses these experts’ answers to a series of questions regarding the underlying forces that gave rise to democracy in each country. Based on this approach, democratic transitions were classified into those occurring for reasons related to economic turmoil—which we call endogenous—and those grounded in factors unrelated to economic growth — which we call exogenous — including, among others, the death of the autocratic leader and political/institutional developments. [1]

Figure 2 recreates Figure 1 by dividing countries into exogenous (Panel A) and endogenous democratizations (Panel B).

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The evidence from Figure 2 shows that democracy does not cause growth. Panel A shows that democratizations triggered by factors unrelated to economic growth (not related to economic turmoil) have no effect on prosperity. Depicted by red lines, growth rates before and after democracy are statistically the same.

As a corollary, Panel B shows that the effects of democracy on economic performance are driven by “endogenous democratizations.” In other words, the typical positive effect of democracy on economic well-being is driven by the wrongful inclusion of endogenous democratic transitions to estimate the impact of the political system on economic performance (which, in turn, gives the false impression that democracy causes more growth).

In summary, we show that a further examination into considerations of causality indicates that, contrary to recent findings, unfortunately democracy does not seem to be the key to unlocking economic growth.

Of course, this truth applies in reverse, too.  While democracy does not seem to be the key to spurring economic well-being, it would be a mistake to conclude that an autocratic or dictatorial regime would fare any better. In other words, the form of government has little bearing on prosperity.

[1]For more on the methodology, see the paper at www.guillermovuletin.com

[1] The list of 38 democratizations include Argentina, Benin, Bolivia, Brazil, Bulgaria, Cape Verde, Chile, Croatia, Czech Republic, Dominican Republic, Ecuador, El Salvador, Estonia, Ghana, Greece, Grenada, Guyana, Honduras, Hungary, Republic of Korea, Latvia, Lithuania, Mali, Mexico, Mongolia, Panama, Peru, Philippines, Poland, Portugal, Romania, Sao Tome and Principe, Senegal, Slovak Republic, Slovenia, South Africa, Spain, and Uruguay.

 

Guest Authors: Julia Ruiz Pozuelo (The Brookings Institution) and Amy Slipowitz (Columbia University)

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Posts written by guest authors. This section is open to experts from the public and private sector, academia, and multilateral organizations who want to contribute to the debate.

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Guillermo Vuletin

Guillermo Vuletin

Guillermo Vuletin is a Visiting Economist in the Research Department at the Inter-American Development Bank. He is also a Non-resident Fellow in the Global Economy and Development Program at the Brookings Institution (Click here to visit my Brookings web page) and Visiting Professor at the Johns Hopkins School of Advanced International Studies (SAIS). He is also an Associate Editor of Economia, Journal of the Latin American and Caribbean Economic Association (LACEA). He received a PhD in Economics from the University of Maryland in 2007 and an undergraduate degree and a MA in Economics from the Universidad Nacional de La Plata, Argentina. Prior to joining the IDB, he was a Resident Fellow at the Brookings Institution. His research focuses on fiscal and monetary policies with a particular interest in macroeconomic policy in emerging and developing countries. His work has been published in Journal of Monetary Economics, American Economic Journal: Economic Policy, and Journal of Development Economics, as well as in other journals. His research has been featured in the financial press, including The Economist, The Wall Street Journal, The Financial Times, and The Washington Post.

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