Is Democracy the Best Setting
For Strong Economic Growth?

Found this WSJ Econoblog (via M. Khan's Environmental and Urban Economics)

It's a conversation with K. Daron Acemoglu and Ed Glaeser on the relationship between democracy and economic growth.

But what exactly do we know about the relationship between democracy and economic growth? Economies of less-than-democratic nations such as China have surged in recent years. Does a country's brightening economic picture boost the chance democracy may eventually blossom? Or is it the other way around? Are democratic institutions a key component of long-term economic growth? And what's the role of education?

I think it is a must read.

Some gems:
(warning, most links are to pdfs)

Glaeser: Rich countries are stable democracies. Poor countries tend to be political basket cases, careening between brutal dictatorships and unstable semi-republics. The relationship between democracy and wealth might suggest democracy naturally leads to prosperity. This view is comforting and also gives us another reason to enthusiastically try to export democracy globally.

While I yield to no one in my passion for liberty, the view that democracy is a critical ingredient for economic growth is untenable. There is no robust statistical relationship to back it up, and Robert Barro actually found democracy reduces growth, once he statistically controls for the rule of law.

Acemoglu: So, why haven't democracies been more successful? I believe the answer lies in recognizing two things. First, there are different kinds of democracies. And second, it's important to consider that economic growth and democracy have a very different relationship over the long term -- that is for periods as long as 100 years -- than over the short or medium term.

Many societies counted as "democratic" using standard measures are really "dysfunctional democracies" where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation and even assassination. Colombia, which has had regular democratic elections for the past 50 years, is a typical example. In others, democratic institutions survive, but there is significant in-fighting between ethnic groups, religious groups or social classes. The situation in Iraq would be the most extreme -- but not a unique -- example. Finally, many democracies suffer economically from populist and irresponsible macroeconomic policies, which are often adopted after transitions from repressive dictatorships and during periods when politics are turbulent and conflicts over wealth distribution are strong.

On the second point, it's true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing because they have more equal distributions of political power than autocracies or monarchies.

So, if we look beyond the past 60 years, we see that it was the U.S., with its democratic institutions, that created the environment for new businesses to enter, flourish and spur the industrial growth of the 19th century. There were many rich autocracies and repressive regimes in the 18th century, including places like Cuba, Haiti and Jamaica. But it was the U.S. that grew rapidly over the next two centuries while these autocratic regimes stagnated.The relationship between human capital and democracy that Ed raises is fascinating. But I will return to that in a little in the context of the causes of democracy.


Glaeser: Since democracy is always vulnerable, I think the key question is why it survived for centuries in some countries like the U.S., the United Kingdom and the Netherlands -- and died quickly in other places, such as post-colonial Africa. One answer is that human capital -- education -- is the bedrock for lasting democracy. Empirically, initial education strongly predicts the survival of democracy education and the survival of democracy in our research.

We found 95% of the democracies that ranked as "well-educated" in 1960 stayed democracies for the next 40 years. By contrast, 50% of 1960's "less well-educated" became dictatorships within a decade. The survival of democracy hinges upon capable people who have the incentives and ability to protect their rights against would-be dictators. Education produces social capital that makes it possible for people to organize and makes them think that democracy is worth fighting to protect.

Acemoglu: Looking at the data, there is no strong evidence that either education or economic growth is a major factors in creating or strengthening democracy. In fact, countries that have grown fast over the past 50 years -- or over the past 150 -- . Consider the recent experience of Russia and Saudi Arabia. If suddenly the price of oil increases and they become much richer, do we expect them to become more democratic? The same applies to education. Countries that have boosted education levels haven't been more likely to consolidate democracy or transition from autocracy to democracy. After all, former Socialist republics had very high levels of education during the Cold War, but did not show a strong tendency to become democratic.

So what does strengthen democracy? Recent research by Benjamin Jones and Benjamin Olken finds that enlightened leadership matters, but it only in autocracies. In societies with strong institutions and established democracies, leader quality seems to have little effect on economic performance. This again makes me think that established democracies, by introducing checks and balances, create a good environment for collective decisions and resolution of conflicts. This type of environment for collective decision-making is the best guarantor of long-run economic development.

Lot's of good food for thought, so dig in.

No comments:

Quick Links

Notable posts on the metro