Principal investigator: Eduarda Miller de Figueiredo
Authors: Daron Acemoglu, Simon Johnson, James A. Robinson and Pierre Yared
Location of the Intervention: All countries
Sample Size:
Sector: Political Economy
Primary Variable of Interest: Lagged value of the log of per capita income
Type of Intervention: Democracia
Methodology: Instrumental Variables
Summary
Previous literature had demonstrated a positive relationship between income and democracy, but without considering the issue of causality. Therefore, the authors revisited this relationship, analyzing the question of causality. To do this, the authors used data on measures of democracy and autocracy, assembling a panel of annual data and data from five, ten, and twenty years. OLS estimates, difference-in-differences estimates, and estimates for instrumental variables were performed. The results showed that there is no evidence of a causal effect of income on democracy.
- Policy Problem
Studies had been demonstrating a positive relationship between income and democracy in the 1990s. Most countries were not democratic before the modern growth process; thus, the democratization process occurred alongside growth. As Barro (1999) states: “increases in various measures of living standards predict a gradual increase in democracy. In contrast, democracies that emerge without prior economic development… tend not to last.”[1].
The authors state that previous studies did not establish causality. Therefore, when revisiting the relationship between per capita income and democracy, they analyze the issue of reverse causality and the potential for omitted variable bias, given that some other factor may determine both the nature of the political regime and the potential for economic growth. In this context, reverse causality would be caused by the fact that democracy generates income, and not the other way around.
- Implementation and Evaluation Context
The literature argues that differences in European colonization strategies were a major determinant of the divergent developmental paths of colonial societies (Acemoglu, Johnson, and Robinson, 2001, 2002; Engerman and Sokoloff, 1997). This suggests that, in the sample studied, the critical moment for most societies corresponds to their experience under European colonization.
The main measure of democracy used by the authors is... Freedom House Political Rights IndexIn this index, a country receives a higher score as its political rights approach the ideals suggested by a checklist of questions, which include the existence of free and fair elections, whether elected officials govern, whether other political groups exist, whether the opposition plays an important role and has real power, and whether minority groups participate in government.
Data from all countries independent since 1800 were also used. Polity IV and the composition Polity Index, which is the difference between the indices of democracy and autocracy (Marshall and Jaggers, 2004). Thus, a panel of five, ten, and twenty years was assembled, in addition to an annual data panel.
- Policy/Program Details
The authors used two strategies to investigate the causal effect of income on democracy.
The first era involved controlling for country-specific factors affecting both income and democracy, including fixed country effects. The primary source of potential bias in a regression of democracy on per capita income is country-specific historical factors influencing political and economic development. If these omitted characteristics are time-invariant, the inclusion of fixed effects will remove this source of bias.
A second strategy employed by the authors was to use the instrumental variables method to estimate the impact of income on democracy. To do this, the authors used two instruments: (i) previous savings rates; and (ii) changes in the incomes of trading partners.
- Assessment Method
The econometric model developed by the authors for this study has as its dependent variable the democracy score of country i in period t. In addition, lagged variables were added to capture the persistence of democracy, and the main variable of interest was the lagged value of the log of per capita income. Thus, a parameter was also added to measure the causal effect of per capita income on democracy, a set of binary variables for the countries, and a set of time effects to capture common shocks for democracies.
Based on this model, the authors ran regressions for OLS, the Difference-in-Differences Method, and the Instrumental Variables Method.
The first instrument is the savings rate. According to the authors, it is natural for the savings rate to influence future income, and it is plausible to expect that changes in the savings rate over periods of 5 to 10 years will not have a direct effect on the culture of democracy, the structure of political institutions, or the nature of political conflict within society. However, there are several channels through which the savings rate can be correlated with the error term of the econometric model, such as the fact that it can be influenced by the current political regime or also be correlated with changes in income distribution or asset composition – which could have a direct effect on political equilibria.
The second instrument explores trade links between countries. The transmission of economic cycles from one country to another through trade implies that one can consider a statistical model for a country's income that includes a parameter z measuring the effect of trade-weighted world income on each country's income. To this end, the authors use a weighted sum of world income for each country as an instrument.
- Main results
The results for OLS regressions using the five-year sample suggest that the democracy lag is highly significant and indicates a considerable degree of persistence in democracy. The log of per capita income also proved significant and, according to the authors, this illustrates the positive relationship between income and democracy. And, although statistically significant, the income effect is quantitatively small. However, the positive relationship between per capita income and various measures of democracy disappeared when fixed effects were introduced. Therefore, there is no relationship between changes in per capita income and changes in democracy. In other words, per capita income is not an important determinant of democracy.
Using the instrumental variables method, the results showed a strong relationship between income and the savings rate in the first stage. The authors found that a global democracy index, constructed by them through commercial actions, has no effect. Therefore, the two IV strategies presented by the authors showed consistent results indicating that there is no evidence for a strong causal effect of income on democracy.
The authors conclude, after presenting results that corroborate the findings, that although the results did not provide evidence of a causal effect of income on democracy, such an effect may be present, but acting at much lower frequencies, or this causal effect may be conditioned by some other characteristics. It is also emphasized that the results found do not imply that democracy has no effect on economic growth, since the fixed effects in the regressions and the presence of divergent development trajectories create a trend, but there are other factors influencing the path of democracy in countries.
- Lessons in Public Policy
In response to the question of “Why are rich countries democratic today?The authors state that, while there is no correlation between changes in income and democracy over the last 100 years, there is a positive association over the last 500 years. Most societies were not democratic 500 years ago and had similar income levels, where the positive cross-reference relationship reflects the fact that those who became more democratic over that period are also those who grew faster. The authors hypothesize that the positive cross-reference relationship, over the 500-year period, between changes in income and democracy is caused by the fact that countries embarked on divergent development paths.
References
Barro, RJ1999. “Determinants of Democracy”. Journal of Political Economy, 107(6): S158-83.
Marshall, MG; Jaggers, K. “Political Regime Characteristics and Transitions, 1800-2002.” College Park, MD: Polity IV Project, University of Maryland
[1] My own translation. Original quote: “Increases in various measures of the standard of living forecast a gradual rise in democracy. In contrast, democracies that arise without prior economic development… tend not to last” (Barro, 1999).
