Democracy Leads to Growth
A recent study published by the National Bureau of Economic Research found that countries that become more democratic achieve about 20 percent higher gross domestic product (GDP) per capita in the long run. Evidence showed that democracies were better at implementing economic reforms, investing more in public goods like education and reducing social unrest, all of which, to some degree, are tied to increasing GDP.
The researchers, Daron Acemoglu, Suresh Naidu, Pascual Restrepo and James A. Robinson, studied 175 countries between 1960 and 2010. Their study tackled the difficult task of comparing apples and oranges. There are countries that recently transitioned into a more democratic state, while others have had a long history of an established democracy. There are countries that hold elections, but practice only single party rule. There are countries that have been in and out of conflict. And there are countries with political institutions and economies that ebb and flow with a change in leadership. Nonetheless, Acemoglu, Naidu and Restrepo took on the challenge of creating a baseline for comparing different countries by developing an improved version of a democracy index.
Another challenge the researchers took on was to address the question, “does democracy need development first?” Some critics suggest that democracy would be economically costly when certain preconditions are not satisfied. For example, it is suggested that a benevolent dictatorship may be preferred when it comes to simple economies and poverty ridden-countries (or what some economist may label as those with “low human capital.”) Others argue that democracy promotes redistribution of resources that would discourage economic growth, or interest groups may end up dominating economic policies at the cost of the majority and hence increase inequality. The example of communist China and its economic powerhouse is often used to support the argument that political rights are not essential for economic growth.
However, Acemoglu, Naidu and Restrepo demonstrated that democracy does not have a negative effect for countries with low levels of economic development. Evidence showing increases in GDP were associated with democracy, no matter the stage of the country’s development. The researchers did note on the side that a population’s level of education did matter, but not in contradiction to their finding. Democracy had a stronger effect for economies with a greater fraction of the population with secondary schooling.
In sum, Acemoglu, Naidu and Restrepo found that there is a statistically significant positive correlation between democracy and future GDP per capita and this was especially so when examining countries that have switched from non-democracy to democracy into their next 30 years.
– Maria Caluag
Sources: NBER, The Regional Economist