What is the effect of democracy on economic growth?

Responsible researcher: Adriano Valladão Pires Ribeiro

Article title: DEMOCRACY DOES CAUSE GROWTH

Article authors: Daron Acemoglu, Suresh Naidu, Pascual Restrepo and James A. Robinson

Location of intervention: Country panel

Sample size: 175 countries

Major theme: Economic Policy and Governance

Type of Intervention: Adoption of a democratic regime

Variable of Main Interest: GDP Growth

Evaluation method: Dynamic linear model

Policy Problem

A question of general interest is the relationship between the political system and economic growth. In other words, which regime, between democracy and non-democracy, generates greater growth? The topic gains even more relevance given the recent performance of the non-democratic Chinese regime, leading to simplistic conclusions that more political rights have no effect or even hinder economic growth.

Assessment Context

Despite the relevance of the subject, obtaining the causal effects of democracy on economic growth and answering the question above is not a trivial task. First, it is difficult to construct error-free democratic indices that correspond to and capture changes in countries' institutions, so erroneous variations in the indices can lead to wrong conclusions about the effect of the political regime on growth. Second, democracies and non-democracies also differ in unobservable factors that affect growth, such as institutions, history and cultural aspects. Not accounting for these elements affects the measurement of the impact on growth. Third, the data reveal that, on average, GDP has a rapid and temporary drop in the years prior to democratization, so its dynamics must be properly considered so that the effects of transitioning to a democratic regime are correctly measured. Finally, changes in the political regime can be affected by factors that vary over the years that are not observable, that is, not accounting for them would lead to a distorted measure of the effect of democratization on growth. In short, the data must be correctly constructed, the particularities of the countries must be considered, the GDP dynamics must be correctly analyzed and the factors that change over time must be considered. Only when all these points can be overcome without errors will the impact causality of the political regime on economic growth can be measured.

Intervention Details

Based on the discussion above, the choices of periods and variables gain importance, which is why annual data from 175 countries between 1960 and 2010 is considered. The index that measures democracy combines information from several other indices, such as those from Freedom House and Polity IV, and classifies a country in a given year as democratic only if it is classified as such in several of the indices considered. Economic growth is measured through GDP per capita made available by the World Bank, other variables accessible by the World Bank are investment, trade (sum of exports and imports), enrollment in primary and secondary education, and the mortality rate childish. In addition, information is collected regarding financial flows, productivity, taxes, economic reforms and a measure of social insurgencies (indicates disturbances and revolts).

Methodology Details

With the data above, it is possible to alleviate all the problems discussed previously, as the information is used to model the dynamics of GDP growth and mitigate the effects of individual country characteristics and temporal variations. The necessary hypothesis to measure the effect of democracy on economic growth is that countries transitioning to or from a democratic regime and with similar levels of GDP, at a given moment, would have both the same growth trend and similar levels of development in the future. long term. Thus, changes in policies and institutions, such as taxes and economic reforms, arising from the transformation of the political system would form the channels of subsequent impact on GDP.

A second exercise would be to use the waves of democratization in certain regions, such as the Arab Spring, the implementation of non-democratic regimes in Latin America in the 1960s and 1970s and the return to democracy in the 1980s, the democratization of Eastern Europe after the fall of the Soviet Union, among others. After a first country becomes democratic in a region, a number of nearby countries usually follow the same movement. The waves of democratization are not associated with economic factors, therefore, the relationship between the waves and the democracy index can be used to obtain more precisely the impact of democratization on economic growth.

Finally, the last exercise seeks to explore the mechanisms that explain the impact of the political regime on economic growth. The mechanisms investigated are the share of investment in GDP, the productivity of the economy, the economic reforms adopted with the change of regime, the share of trade in GDP, the tax burden, the number of enrollments in primary and secondary education, the rate of infant mortality and the rate of social insurgency.

Results

The dynamics of GDP evolution plays an important role in computing the results, as a change in political regime impacts economic growth for several years. Therefore, the total effect of democratization on GDP, also called the long-term effect, is determined by the accumulation of variations over the years, that is, the dynamics considers the impact in the first year, then in the second year and so on until the entire effect will be accounted for. That said, the impact of a permanent change to a democratic regime implies a total increase of 21.24% in GDP per capita. It is also noted that most of the gains are almost entirely obtained between 25 and 30 years after the transition.

The result of the second method, using regional democratization waves, also captures, as in the first exercise, the dynamics of GDP. The long-term effect of definitively implementing a democracy is an increase in GDP per capita of 26.32%. It is observed that the correction generated by using the waves of democratization only accentuates the total effect of democracy on GDP per capita.

Given the positive effect of democratization, it remains to be explored which mechanisms are responsible for this growth. It is found that, in a democracy, there are more chances of carrying out economic reforms, increasing taxes, a greater number of enrollments in primary and secondary education, and reduction of infant mortality. Furthermore, the effect of democracy is positive on investments and openness to foreign trade and negative on social insurgencies. Therefore, democratic regimes appear to conduct economic reforms, control social uprisings, and spend money from increased taxes on the social areas of health and education, all of which would contribute to more economic growth.

Public Policy Lessons

The main lesson of the study is that democracies in fact generate greater economic growth than non-democracies, despite the existing view influenced by China's booming growth. This result was obtained, firstly, after controlling GDP dynamics and, subsequently, by exploring regional waves of democratization. Finally, greater growth in a democracy is related to the promotion of economic reforms, social stability and the provision of schooling and medical care for the population.

Reference

Acemoglu, Daron; Naidu, Suresh; Restrepo, Pascual; Robinson, James A.. “Democracy causes growth.” Journal of Political Economy, vol. 127, no. 1, p. 47-100, 2019.