Principal investigator: Adriano Valladão Pires Ribeiro
Article title: Democracy does cause growth.
Article authors: Daron Acemoglu, Suresh Naidu, Pascual Restrepo and James A. Robinson
Location of the intervention: Country panel
Sample size: 175 countries
Main theme: Economic Policy and Governance
Type of Intervention: Adoption of a democratic regime
Main Variable of 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 in view of 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.
Evaluation Context
Despite the relevance of the subject, determining 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 incorrect 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 experiences a rapid and temporary decline 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 variable factors 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, data must be constructed correctly, the particularities of each country must be considered, GDP dynamics must be analyzed correctly, and factors that change over time must be weighed. Only when all these points can be addressed without error can the causal impact of the political regime on economic growth be measured.
Intervention Details
Based on the discussion above, the choice of periods and variables becomes important; therefore, annual data from 175 countries between 1960 and 2010 are 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 using GDP per capita provided by the World Bank; other variables accessible from the World Bank include investment, trade (sum of exports and imports), primary and secondary school enrollment, and infant mortality rate. In addition, information is gathered regarding financial flows, productivity, taxes, economic reforms, and a measure of social insurgencies (indicating disturbances and revolts).
Methodology Details
With the above data, it is possible to mitigate all the problems discussed previously, since the information is used to model the dynamics of GDP growth and attenuate the effects of individual country characteristics and temporal variations. The necessary hypothesis for measuring the effect of democracy on economic growth is that countries transitioning to or from a democratic regime and with similar GDP levels at a given moment would have both the same growth trend and similar levels of development in the long term. Thus, changes in policies and institutions, such as taxes and economic reforms, resulting from the transformation of the political system would form the channels of subsequent impact on GDP.
A second exercise would be to use waves of democratization in specific regions, such as the Arab Spring, the establishment 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 tend to follow suit. Waves of democratization are not associated with economic factors; therefore, the relationship between these waves and the democracy index can be used to more precisely determine 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 regime change, the share of trade in GDP, the tax burden, the number of enrollments in primary and secondary education, the infant mortality rate, and the social insurgency index.
Results
The dynamics of GDP evolution play an important role in calculating the results, since 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 consider the impact in the first year, then in the second year, and so on until the entire effect is 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 waves of democratization, 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 waves of democratization only accentuates the total effect of democracy on GDP per capita.
Given the positive effect of democratization, it remains to explore the mechanisms responsible for this growth. It is found that, in a democracy, there are greater chances of implementing economic reforms, increasing taxes, a higher number of enrollments in primary and secondary education, and a reduction in infant mortality. Furthermore, the effect of democracy is positive for investments and openness to foreign trade, and negative for social uprisings. Therefore, democratic regimes seem to conduct economic reforms, control social revolts, and spend the money from increased taxes on social areas such as health and education, all of which would contribute to greater economic growth.
Lessons in Public Policy
The main lesson of the study is that democracies do in fact generate greater economic growth than non-democracies, despite the existing view influenced by China's explosive growth. This result was obtained, firstly, after controlling for GDP dynamics and, subsequently, by exploring regional waves of democratization. Finally, the study links greater growth in a democracy to the promotion of economic reforms, social stability, and the provision of education and healthcare for the population.
Reference
Acemoglu, Daron; Naidu, Suresh; Restrepo, Pascual; Robinson, James A.. “Democracy causes growth.” Journal of Political Economy, vol. 127, n. 1, p. 47-100, 2019.
