2015-07-02 07:45:06
Democracy, it turns out, is good for growth after all
Jun 27th 2015
CHINA S blistering economic performance in recent years has brought advocates of democracy out in hives. GDP growth in the one-party state, at an average of 10% over the past decade, has easily outpaced that of its democratic emerging-market rivals. India saw annual growth of 6% over the same period; Brazil, just 2%. Some say that democracy is to blame for India s and Brazil s slower progress. Politicians in such places cannot lay the foundations for long-term growth, the argument goes, since voters want instant gratification. Are freedom and prosperity really at odds?
The idea is not new. In 1994 Torsten Persson of Stockholm University and Guido Tabellini, then of the University of Brescia, published a paper that argued that in democracies, vote-hungry politicians divert resources away from people who could use them more efficiently by lavishing spending on their constituents in the form of unemployment benefits and pensions. This and political gridlock, another unfortunate aspect of democracy, both tend to slow growth. Another paper published in 1994, by Robert Barro of Harvard University, analysed data from some 100 countries before concluding that the effect of democracy on growth is weakly negative .
Democracy s economic denigrators have not had it all their own way, however. In a paper published in 2008 Daron Acemoglu of the Massachusetts Institute of Technology argued that in non-democracies, well-connected firms use political power to shut out competition. Ukraine, an oligarchy, has a backward economy partly because investors have typically been barred from large parts of the economy, such as the gas sector. That is not the only problem with repressive regimes. When people have no political power, the risk of conflict rises: think, for example, of the protests in Hong Kong last year. That may scare away investors. Autocracies also tend to skimp on schools and health care, which pushes down on the productive potential of the economy.
Mr Acemoglu, along with three colleagues, has now come back to the question in a new paper. It notes that comparing the economic impact of different political systems is tricky. The average free country, according to a classification by Freedom House, an advocacy group, has a GDP per person of $17,000, four times that of the average unfree or partly free country. That could be seen as an indicator in itself, but it also presents a problem. Economists have long reasoned that poor countries should grow faster than rich ones, since they can boost growth dramatically with simple investments in schools and roads, whereas rich nations have exhausted such easy gains. Given that authoritarian countries are poorer than democracies, they should also grow faster. Add in all manner of economic and cultural differences, and disentangling the effect of democracy itself is tough.
The paper also identifies another methodological problem. In the years leading up to a change in the political regime ie, when a country goes from being an autocracy to a democracy (or vice versa) GDP growth stumbles. Small wonder: such transitions often involve mass protests or violent coups. Alternatively, a flailing economy may itself make a change of regime more likely. Researchers, though, have typically failed to account for the volatile behaviour of GDP in response to such events.
Autocracies 1, democracies 1.2
The authors look at data for 175 countries from 1960 to 2010 and assess their degree of democracy based on an index that measures things like free elections and checks on executive power. They then compare growth rates and political freedom, having made adjustments for the odd behaviour of GDP during transitions and for the relative poverty of unfree countries, among other distortions. They find that a permanent democratisation where there is no slide back into autocracy leads to an increase in GDP per person of about 20% in the subsequent 25 years. When a given country is in such a democratic state, it grows faster than when it is not (see chart). The authors reckon that higher investment in schooling and health care and lower social unrest are the reason. There is also no clear evidence to suggest that poor countries benefit less from democratisation, as many had assumed.
By now, sceptics will have spotted a problem. Some factors may help a country both to become more democratic and to grow faster. Take South Korea s transition to democracy in 1988. In the subsequent five years its income per person grew at an average annual rate of 6%. That makes political freedom look like an economic boon, but it is not so simple. In the years leading up to the transition, university attendance grew rapidly. As the number of educated Koreans rose, calls for democracy got louder. Yet better education may also have led to stronger economic growth in itself. That makes it hard to tell whether democratisation causes growth, or growth causes democratisation.
To help solve this problem, the authors need a clean variable, one that runs from political system to economic outcome, not the other way round. Their answer lies in the fact that democratisation in one country tends to make it likelier in a nearby country, too. Tunisia s revolution in 2010 was partly responsible for Egypt s, for example, which soon followed. Crucially, however, Tunisian politics had little effect on Egypt s growth rate. That, the authors say, means the democratisation of nearby countries can be used as a proxy for the democratisation of the country itself. This approach yields similar results: democracies fuel growth.
Not everyone will be convinced. Historians will protest that trying to compress the infinite variety of global politics into a few variables is a hopeless task. Each democracy and autocracy operates in a different way, after all. Democracy advocates may not even get that excited: few fling themselves into the cause of self-determination in order to boost GDP. But freedom and growth make for a pretty unbeatable combination.