Democracy pays off in the long run...

At a time when several countries apear to be heading down the democratisation path, it is timely to review what the recent literature tells us. As Macroblog has noted, there was an interesting recent post on the Becker-Posner blog about  Economic and Political Freedom: Does One Lead to the Other? Becker argued that:

The history of different countries during the past century strongly indicates that economic freedoms over time typically push societies toward political freedoms.

But, citing the cases of India, Mexico and Israel, he contends:

The path from political to economic freedom, by contrast, is slower and more uncertain.

Development economists have long debated these issues. The literature is full of papers on the link between growth and democracy or 'freedom' (however measured). What has been less studied, at least until the 1990s, are the economic outcomes of countries making the often difficult transition to democracy. This issue is likely to be the most pertinent to countries like the Ukraine and Lebanon.

Following the empirical growth framework by Barro and Sala-i-Martin, many authors augmented a classical growth regression with various subjective measures of political freedom. This literature suggests democracy has a statistically insignificant effect on economic growth.

Some commentators have also argued that wealth leads to democracy, rather than the other way around. They suggest this justifies a 'realpolitik' tolerance for autocratic regimes on the grounds that they are best able to grow the economy to the point where it is “ready” for democracy.

This patronising view is particularly popular in Asia, where presumably the population are not yet "ready" for genuine parliamentary democracy or freedom of speech (on which, see the remarkable Singabloodypore blog).

New research challenges those arguments. A paper by Dani Rodrik and Romain Wacziarg to the 2005 American Economic Association annual meeting looked at this question using an analysis of within-country variation in growth. The paper, Do Democratic Transitions Produce Bad Economic Outcomes? (PDF), concluded that:

The hypothesis that democratization is followed by bad economic performance, particularly inpoor, fractionalized countries, is not supported by our analysis of the within-country variation.

Claims that democratization leads to disappointing economic results are often used to justify calls to delay political reforms in poor, ethnically divided countries until they become “mature enough” for democracy.

...The problem with this view is that it presupposes that autocracies deliver better performance than democracies. We have shown this hypothesis to be false.

Rodrik and Wacziarg make an important point that economists often seem to forget - namely, that freedom and democracy have value in their own right, irrespective of whether they boost economic output or not:

Democratization surely yields benefits - in terms of individual freedom and empowerment - that are valued independently of their consequences for material wealth.

But there are economic benefits too:

In the average country in our sample, democratization comes at no discernible cost in terms of growth, and with likely benefits in the form of a short-run boost in growth and reduction in economic volatility.

Thus, a priori arguments or casual empiricism cannot be used to justify the postponement of political reform in developing countries on economic grounds. On the other hand, the heterogeneity in countries’ growth experiences following democratization suggests that further analysis of the factors conducive to successful political transitions would constitute a fruitful line of inquiry.

A new paper by economists Elias Papaioannou and Gregorios Siourounis, Democratization and Growth, also challenges those findings, again focussing on the the within-country effect. The authors:

...delve into numerous historical sources and democracy indicators to identify the countries and timing of recent democratization episodes. We then employ a before-after event study approach and analyze the impact of democratization on growth in countries that managed to abandon autocratic rule and consolidate democratic institutions. In contrast to previous studies, we primarily explore the within country effect of a permanent democratization, controlling for time-invariant country-specific effects.

The dynamic panel estimates imply that democratizations, on average, are associated with an almost one percent increase in real per capita growth. The analysis also reveals a noteworthy J-shaped growth pattern: during the transition growth is slow and even negative; after, however, the third post-democratization year growth peaks and stabilizes at higher steady state level. The effect is robust to various model specifications, panel methodologies, alternative democratization dates, and to the potential endogeneity of democratization.

From a theoretical standpoint the evidence offer direct support to "development" theories of democracy and growth that highlight the positive impact of representative institutions on economic activity. They also favour the old Aristotelean notion, recently rephrased and updated by Friedrich Hayek (1960) that the merits of democracy will come in the long run.

UPDATE: I've come across a recent book on this topic which may be of interest: The Democracy Advantage: How Democracies Promote Prosperity and Peace (a Council on Foreign Relations book, published by Routledge), by Morton Halperin,  Joseph T. Siegle and Michael M. Weinstein. It makes the case for the superiority of democratic development:

For decades, policies pursued by the United States and other industrialized nations toward the developing world have been based on a dirty little secret among policy experts: democracy and development don’t mix. The Democracy Advantage makes a compelling case that they do.

Using 40 years of empirical data from countries as diverse as China, India, Iraq, and Chile, The Democracy Advantage shows that poor democracies surpass poor autocracies on nearly every economic measure of consequence. The book offers evidence that democracies are more stable: they are less likely to fall into armed civil conflict, experience humanitarian catastrophes, or breed international terrorists than are authoritarian countries such as Egypt, Saudi Arabia, and Pakistan.

The Democracy Advantage incorporates into its analysis social welfare dimensions of development—indicators such as life expectancy, infant mortality, and girls’ education—on which democracies dramatically excel.

Chapter 1 can be downloaded for free. Hat tip to the newish blog Democracy Arsenal for the citation.

Comments

[Mark]

Also as Amartya Sen noted in Development as Freedom, no democratic country with a functioning free press has ever had a famine. Famines are very preventable and don't happen when brought to the attention of the populace. In contrast, think of the Mao's Great Leap Forward which killed an estimated 30 million.

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