Democracy and Economic Growth

Democracy and Economic Growth

Why is Democracy a central issue in discussion of economic development?

The Fundamental Dilemma: Government too Strong VS. too
Weak
Economic Consequences: Protect VS Jeopardize economic
freedoms
The Central Issue: What Political System?
Requirements: Strong yet carries self-enforcing limits
The Answer: Democracy
Questions:
Democracy
Democracy?

Economic Growth VS Economic Growth

Democracy and Economic Growth

Structure
1. Definitions
2. Democracy promotes economic growth
2.1 Direct relation
2.2 Indirect relation
2.3 No relation
3. Economic growth promotes democracy
4. Conclusions

Democracy and Economic Growth

1. Definition
Democracy
Huntington (1991) a one public virtue, not the only one, and the
relation of democracy to other public virtues and vices can only be
understood if democracy is clearly distinguished from other
characteristics of political system;
Polterovich and Popov (2007) Democracy generally includes the
rights to vote, to be elected, and to form political parties as well
as freedom of political competition.

Democracy and Economic Growth

1. Definition
Economic Growth
Fang (1997) The average growth rate of real Gross Domestic
Product (GDP) per capita and used a group of economic control
variables as significant stimulant to growth which includes GDP,
human capital accumulation, investment, inflation, and trade
expansion;
Baum and Lake (2003) Consisted of the level of household income
per capita, population growth, investment in physical capital and
investment in human capital.

Democracy and Economic Growth

2.1 Direct Relation between Democracy and Economic Growth
Positive effect - Compatibility perspective
Acemoglu and Robinson (2012) Political institutions determines
economic institutions
Sirowy and Inkeles (1990) Less developed countries (LDCs)
democratic regimes are appropriate to promote sustained and
equitable economic growth;
Heo and Tan (2001) Democracy tends to encourage and to prepare
economic actors such as entrepreneurs and businessman to exercise
economic freedom and thus, it could push the government to promote
economic freedom and, eventually, it will contribute to economic
growth;
Helliwell (1994) and Heo and Tan (2001) A high level of economic
growth has the capability to increase its level of education and also
the income of citizens. Thus, it will increase the demands for many
welfare enhancing policies including the range of political rights and
civil liberties so that eventually the country improves its level of

Democracy and Economic Growth

2.1 Direct Relation between Democracy and Economic Growth
Negative effect - Conflict perspective
Huntington (1968) A negative effect of democracy on economic
growth is a consequence of the reality that in democratic
developing countries, the peoples needs tend to increase and this
leads to high levels of government expenditure.
Krieckhaus (2006) Special-interest groups excessively affect the
government policy, and this could damage the overall economic
activities, such as Latin America and Asia.

Democracy and Economic Growth

2.1 Direct Relation between Democracy and Economic Growth
Positive and Negative effect Non-linear perspective
Barro (1996) At low levels of democracy, more political freedom
enhances growth. The growth rate reaches a peak at a middle
level of democracy, and then diminishes if democracy continues to
rise
Democracy Index

-0.074

0.053

Democracy Index Squared

-0.056

Democracy Index Dummy for (0. 0.33)

0.0046

Democracy Index Dummy for (0.33, 0.67)

0.0155

Democracy

Democracy and Economic Growth

2.2 Indirect Relation between Democracy and Economic Growth
Democracy and economic growth have a strong indirect
relationship through some channels
Human Capital: improving life expectancy in poor countries and
secondary school in rich countries;
Political Stability: the regular government change is likely to have
a positive effect on growth because it provides a stable political
environment for economic growth;
Quality of Governance: Strong law and order build a strong
institution which can stimulate economic growth;

Government size: Democracy activities tend to increase

government consumption which will reduce the economic growth.

Democracy and Economic Growth

2.2 Indirect Relation between Democracy and Economic Growth
Income Inequality : It encourages the government to adopt a high
rate of taxation. Hence, this condition lowers economic growth
Trade Openness : Applying trade openness will increase the
internal degree of product market competition and, thus, it will
utilize technological transmissions for accessing larger markets an
d may provide incentive s for greater policy discipline through
regional or global economic transmission;
Physical Capital Accumulation : Political process conducts a
distribution of national income between capital and labor,
resulting in higher wages which reduce the return to capital and
lower the incentive for private investment that slows down the
process of growth;
Investment: People in poor countries prefer consuming
immediately, democracy help them to drive wages up and reduce
company profit, which decrease the investment and slow down
economic growth.

Democracy and Economic Growth

2.3 No Systematic Relation between Democracy and Economic Growth
Feng (1997), a democratic system alone is not of a great
importance to give effect on economic growth, institutional
structure and government development strategies are more
important;
Helliwell (1994), Nelson and Singh (1998), with statistical
regressions democracy does not have any statistical impact on
economic growth in some countries, such as, Argentina, Brazil,
Pakistan, and some countries at Africa and so on.
AmartyaSen (1999), the precondition of this relationship needs the
rise people of entrepreneurs and corporate managers, otherwise
democracy would lack of ability to motivate economic growth.

Democracy and Economic Growth

3. Economic Growth

Democracy

Barro (1996) The Lipset Hypothesis: increases in various

measures of the standard of living tend to generate a gradual rise
in democracy. In contrast, democracies that arise without prior
economic development--sometimes because they are imposed
from outside--tend not to last.
A test of the Lipset hypothesis
Variable
Coefficient
Log(GDP)

0.051 (0.022)

Democracy and Economic Growth

Conclusions
Complexity of the issue: multiple forms of democracy;
difficulties in cross-national comparisons
Democracy is a luxury: rethinking aid policies
Better political institutions and growth are interrelated,
not isolated: democracy is not the ultimate solution to all
problems

Thank you for your attention!