Does Democracy Cause Growth?
A month ago I met an alumnus in Shenzhen who told me that the problem with N. Ireland's economy was, and I quote, "too much democracy"! Is too much democracy bad for growth? A few years ago, Wenwen Zhan I published a paper (click here) which looked at the extension of the electoral franchise in the UK in 1867. We found that investors reacted negatively to the passage of this legislation because of fears about the protection of property rights. In other words, there might well be a non-linear relationship inverted U-shaped relationship between democracy and growth - there can be too much democracy!
However, Daron Acemoglu and co-authors have recently published a paper entitled Democracy Does Cause Growth. In this paper, they argue that democracy causes growth and it does so by encouraging investment, increasing schooling, inducing reforms, reducing social unrest, and improving the provision of public goods. Here is the paper's abstract:
We provide evidence that democracy has a significant and robust positive effect on GDP per capita. Our empirical strategy relies on a dichotomous measure of democracy coded from several sources to reduce measurement error and controls for country fixed effects and the rich dynamics of GDP, which otherwise confound the effect of democracy on economic growth. Our baseline results use a dynamic panel model for GDP, and show that democratizations increase GDP per capita by about 20% in the long run. We find similar results when we estimate the effect of democratizations on GDP year-by-year, controlling for the GDP dynamics linearly or using the estimated propensity to democratize based on past GDP dynamics. We obtain comparable estimates using regional waves of democratizations and reversals to instrument for democracy. Our results suggest that democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest. We find little support for the view that democracy is a constraint on economic growth for less developed economies.