Stable democracies better at fostering economic growth

Ashish Nanda | Updated on May 27, 2020

Research findings clearly show that compared to autocracies, democracies experience better economic development and are more responsive to the concerns of marginalised sections of society

Differences across countries in how the current pandemic has been managed have led some to raise the broader question of whether democracies are necessarily a good way to organise a society. Comparing China’s ability to contain infections to Wuhan with the unmitigated spread in Northern Italy, observers wondered if an authoritarian regime might be better at addressing such crises.

This sentiment has morphed into a generalised approbation of autocracy in some quarters and an argument that in the post-pandemic world, strong centralised power would lead to better societal results, specifically faster economic progress. I have been surprised to hear recently some experienced and pragmatic professionals extolling the potential of dictatorship to help a country like India progress economically.

A similar kerfuffle arose about three decades back, when Robert Wade, in his study of the economic progress of South Korea and Taiwan (1990), argued that, to make the leap to sustained growth, a developing country’s government must be able to resist the pressures of special-interest groups. He suggested that an authoritarian government is better placed to do this than a democratic one. And in 1992, Singapore’s Lee Kuan Yew famously told an audience in the Philippines: “I believe that what a country needs to develop is discipline more than democracy. The exuberance of democracy leads to indiscipline and disorderly conduct, which are inimical to development.”

This argument had particular currency during the early and mid-1990s, when observers pointed to the “Asian miracle” of China and several East Asian countries achieving rapid economic progress, not despite, but because of, having authoritarian governments. It was also a time of ambiguity in academe. In a 1993 article that reported the findings of 18 studies, Przeworski and Limongi concluded that there was no definitive answer to the question whether a democratic or an authoritarian political system was better at fostering economic growth.

Political systems and progress

However, the claim that authoritarian government works best for development drew on evidence from one region, East Asia, over a comparatively short period. Subsequent studies in development economics suggested that East Asia may well be special, but not because it has had authoritarian rulers. Broaden the evidence, chronologically and geographically, and the claim that authoritarianism leads to economic progress looks weaker still.

In recent years, research has shed new light on the relationship between political systems and economic progress. By now, researchers generally agree that there is an unequivocal positive correlation across countries between democracy and per capita income (see Przeworski and Limongi, 1997, for example).

But then, correlation is not causation. The positive correlation between democracy and economic growth exists because (a) democracy promotes economic growth, or (b) economic growth promotes democracy, or (c) an underlying cause promotes both.

The argument that economic growth leads to democracy, and thus democracy is a “luxury good” that only rich economies can afford, has established roots. Lipsett (1959) argued in his “modernisation theory” that economic well-being leads nations to democracy. Barro (1999) provided cross-sectional evidence in support of this hypothesis.

This causality was negated by Acemoglu, Johnson, Robinson, and Yared (2008), whose study of 150 countries over 40 years (as well as a smaller sample of 37 countries over 100 years) showed that there is no effect of income on democracy. They did show that, over a 500 year period (1500-2000), democracy and economic growth had proceeded together, and reasoned that this was because political and economic development paths are often interwoven.

Positive effect on growth

What about the other possible causality: does democracy lead to economic growth? In a study of 180 countries over 50 years, Gerring et al. (2005) found that number of years of democratic experience has a positive effect on a nation’s economic growth. In a study of 155 countries over 180 years, Persson and Tabellini (2009) also found that stable democratic polity leads to economic growth.

These findings suggest that democratic experience has a cumulative effect on a nation’s economic growth, which leads to a virtuous cycle. If a country stays on a democratic path over an extended period of time, it develops economically, which helps further consolidate democracy, leading in turn to additional economic growth.

Acemoglu and Robinson recently published another paper in collaboration with Naidu and Restrepo (2019) that buttresses this reasoning. In a study of 175 countries over 40 years, the authors found that when a given country is in a democratic state, it grows faster than when it is not. “Permanent” democratisation — where there is no slide back into autocracy — of a non-democratic state leads to an additional increase in GDP per person of about 20 per cent over the subsequent 25 years. The authors also found no evidence that poor countries benefit less from democratisation.

Social, economic capabilities

Democracy leads to economic growth through cumulation of social and economic capabilities. Acemoglu et al. (2019) argued that democracy leads to economic reforms, higher investment, improved provision of schooling and healthcare, and lower social unrest, all of which support economic growth. Through meta-analysis of 84 studies on democracy and growth, Doucouliagos and Ulubaşoğlu’s (2008) also concluded that although democracy does not have a direct impact on economic growth, it has robust, significant, and positive indirect effects through higher human capital, lower inflation, lower political instability, and higher levels of economic freedom.

Not only do democracies do better than authoritarian regimes, but their growth is also less volatile, as observed by Sah (1993). In a study of 140 countries over 32 years, Mathonat and Minea (2019) found that volatility in economic growth was lower for democratic countries than for authoritarian countries.

On undertaking reforms

How about the argument that authoritarian regimes do better in circumstances when bold reform is called for? Here I would point to a set of 13 case studies (ed. Williamson, 1994) of bold reform that included rich and poor countries and democratic and non-democratic regimes (specifically, four authoritarian, six democratic, and three mixed regimes).

Williamson did not find support for the claim that democratic governments are worse than non-democratic ones at carrying out reform. However, he did report that in all cases bar one, successful authoritarian reformers were dealing with problems that they or their authoritarian predecessors had helped to create, and at the same time, the most radical of the successful democratic reformers were coping with problems inherited from non-democratic days.

Caring for weaker section

And what is the relationship of democracy to caring for the weaker sections of society? Here, I refer to Sen’s Development as Freedom (1999), in which he points out that “famine has never taken place in the history of the world in a functioning democracy,” because democratic governments “have to win elections and face public criticism, and have strong incentive to undertake measures to avert famines and other catastrophes.” China can quarantine tens of millions of citizens in Wuhan and cause untold misery with nary a whimper in public; the Indian government’s initial inattentiveness to migrant labourers’ plight draws a strong public reaction, forcing the government to take mitigating actions in response.

Thus, stable democracies experience better economic development and less volatility, and are more responsive to the concerns of marginalised sections of society, compared to autocracies. These benefits are independent of, and complementary to, the value that individuals attach to the political freedom and civil rights that democracy bestows. That people value freedom intrinsically was demonstrated powerfully in the Indian elections following the Emergency of 1975-1977, when India’s electorate — one of the world’s poorest — rejected the suppression of democratic rights and civil liberties even when promised economic growth (Sen, 1999).

Every few years, and particularly during challenging times, someone points to an authoritarian regime, with its appeal to quick action by benevolent leadership independent of interest groups, as a beguiling alternative to the hurly-burly of a functioning democracy. Yet, what Jagdish Bhagwati said in 1995 remains true today: there is no “cruel dilemma” of nations being forced to choose between democracy and economic progress.

This is not to suggest that democracy is infallible and that it cannot be improved and made more effective. Ensuring that political democracy is practised robustly and contributes to capacity building and economic freedom is a continuous and ongoing national endeavour. But democratic polity does offer a better framework, compared to autocracy, for economic progress.

The writer is Former IIMA Director and current Harvard Business School faculty


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Published on May 27, 2020

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