Econoblog: Is Democracy the Best Setting For Strong Economic Growth?

This WSJ Econoblog features Ed Glaeser and Daron Acemoglu discussing the relationship between political freedom and economic growth. Here's the first of four rounds and an open link to the rest of the discussion:

Is Democracy the Best Setting For Strong Economic Growth?, WSJ Econoblog: Hoping to counterbalance the economic populism of Venezuela President Hugo Chavez, President Bush is on a weeklong tour of Latin America...

But what exactly do we know about the relationship between democracy and economic growth? Economies of less-than-democratic nations such as China have surged in recent years. Does a country's brightening economic picture boost the chance democracy may eventually blossom? Or is it the other way around? Are democratic institutions a key component of long-term economic growth? And what's the role of education?

WSJ.com asked economists Daron Acemoglu of the Massachusetts Institute of Technology and Ed Glaeser of Harvard University to discuss the delicate relationship between economic growth and broader political freedoms.

Ed Glaeser writes: Rich countries are stable democracies. Poor countries tend to be political basket cases, careening between brutal dictatorships and unstable semi-republics. The relationship between democracy and wealth might suggest democracy naturally leads to prosperity. This view is comforting and also gives us another reason to enthusiastically try to export democracy globally.

While I yield to no one in my passion for liberty, the view that democracy is a critical ingredient for economic growth is untenable. There is no robust statistical relationship to back it up, and Robert Barro actually found democracy reduces growth, once he statistically controls for the rule of law.

It is, however, true that growth rates vary much more under dictatorships than under democracies. Anti-development autocrats, such as Mobutu Sese Seko or Kim Jong Il, are about the worst thing for economic growth, other than civil war. But many of the best growth experiences have been in less-than-democratic regimes that invest in physical and human capital such as Lee Kwan Yew's Singapore or post-Mao China. Some dictators are even better than democrats at restraining the growth-killing practice of expropriating private wealth. I think the relationship between democracy and wealth reflects the power of human capital -- education -- to make countries both rich and democratic. If you put enough smart people together, they'll figure out how to govern themselves and gravitate towards democracy.

Daron Acemoglu writes: I agree with Ed on many points. In the postwar era, it's true that democracies haven't grown faster than autocratic regimes. Plus, there are clear examples of fast growth under dictatorships; see South Korea under Gen. Park Chung Hee. So, why haven't democracies been more successful? I believe the answer lies in recognizing two things. First, there are different kinds of democracies. And second, it's important to consider that economic growth and democracy have a very different relationship over the long term -- that is for periods as long as 100 years -- than over the short or medium term.

Many societies counted as "democratic" using standard measures are really "dysfunctional democracies" where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation and even assassination. Colombia, which has had regular democratic elections for the past 50 years, is a typical example. In others, democratic institutions survive, but there is significant in-fighting between ethnic groups, religious groups or social classes. The situation in Iraq would be the most extreme -- but not a unique -- example. Finally, many democracies suffer economically from populist and irresponsible macroeconomic policies, which are often adopted after transitions from repressive dictatorships and during periods when politics are turbulent and conflicts over wealth distribution are strong.

On the second point, it's true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing because they have more equal distributions of political power than autocracies or monarchies.

So, if we look beyond the past 60 years, we see that it was the U.S., with its democratic institutions, that created the environment for new businesses to enter, flourish and spur the industrial growth of the 19th century. There were many rich autocracies and repressive regimes in the 18th century, including places like Cuba, Haiti and Jamaica. But it was the U.S. that grew rapidly over the next two centuries while these autocratic regimes stagnated.The relationship between human capital and democracy that Ed raises is fascinating. But I will return to that in a little in the context of the causes of democracy.

[...continue reading...]

Ed Glaeser says in closing:

I have tried to articulate two views. First, democracy doesn't strongly predict economic growth. Second, education is an important factor that supports democracy.

Daron Acemoglu has the final word and sums up the discussion with:

There is a lot Ed and I agree on. Democracy doesn't strongly predict economic growth, at least not in the short run. Education is wonderful for many reasons. And democracy is not perfect as a political system, but it is the best we have. ... There are ... barriers to democracy's ability to flourish in many societies. And finally, exporting democracy is probably neither easy nor always feasible and we should be careful in such attempts. ...

However, there are still some areas where there is healthy disagreement between us. The main barrier to democracy is not low education but deep social and economic divides that create intense conflict. Democracy has failed in highly educated countries -- such as Germany before World War II or post-war Argentina. It has also been extremely successful in very low-education countries. Botswana provides a perfect example...

Comments

[Bruce Wilder]

"Some dictators are even better than democrats at restraining the growth-killing practice of expropriating private wealth."

Are some democrats even better at kleptocracy than the dictators?

[James Killus]

I'd feel better about the argument if I saw good definitions of "democracy" and "economic growth."

Is the former just votes in the ballot box and the latter just money in the bank? And are there more sophisticated measures that don't begin with the presumption that both are "whatever looks most like the U.S." or, worse, whatever U.S. business and political leaders are most comfortable with?

[Winslow R.]

My gut instinct says the strength of democracy is that it 'optimizes' growth and maximizes opportunity.

The idea that democracy maximizes GDP growth seems counter intuitive and not the purpose of government at all.

The purpose of government is to govern.

There seems to be a very good correlation between the ability to govern and democracy when compared to any other form of government.

The failure mode of democracy seems tied to either its inability to find a political solution between the various power factions (Iraq) or that one faction becomes so powerful that in no longer needs to negotiate (Germany).

[gordon]

The UN Human Development Report for 2000, subtitled "Human Rights and Human Development", indicates to me that democracy and rights should be considered together. The report shows how democracy, rights, poverty and growth are inseparable issues in human development. Taking "democracy" as an issue without considering what it means in different contexts is unlikely to achieve much.

[piglet]

JK as usual got it right. This is a useless debate, asking wrong senseless questions using poorly understood concepts.

Winslow, I am confused. Do you regard Iraq as a democracy, and what faction holds the power in Germany?

[anne]

James Killus:

"I'd feel better about the argument if I saw good definitions of 'democracy' and 'economic growth.'"

Agreed.

"Some dictators are even better than democrats at restraining the growth-killing practice of expropriating private wealth."

What the heck does this mean?

[Winslow R.]

Piglet wrote: "Do you regard Iraq as a democracy, and what faction holds the power in Germany?"

I do not regard Iraq as a functioning democracy as they so far have not shown an ability to resolve conflict through a democratic political process.

I was referring to the past transition of Germany from democracy to dictator.

[piglet]

"Some dictators are even better than democrats at restraining the growth-killing practice of expropriating private wealth."

What the heck does this mean?

It means that dictators are more reliable defenders of class privilege than democrats. In general, that is true, although in the US probably not. Since democracy in this country has been redefined to mean that the rich have the right to buy political candidates, the risk is very low that those elected will ever threaten to expropriate "private wealth".

[Lafayette]

"Ed Glaeser writes: Rich countries are stable democracies."

He's not been to Saudi Arabia lately. And, the whisperings coming out of Venezuela presently are very dark indeed.

Power corrupts and absolute power corrupts absolutely. Democracies are, rather, good examples of a system of values of which the first premise is that power must not only be shared by the various components of government (balance of power between the executive, legislative and judicial branches), but at the will of the people.

It is by no means clear that a democracy, wherein a vote is taken every two years, that the "will of the people" is expressed. What is expressed is a choice of representative. When that choice is based upon informed opinion, then it is a good one.

When it is based upon mindless media manipulation, sound-bite argumentation by talking heads and exaggerated exuberance on behalf of a political party, it can lead to disaster.

This plutocracy mismanaging America is just such a case in point. (Beware; the devil is in the details. Which is why the details are never divulged to an intelligent constituency before an election - but always have a curious way of appearing well afterwards.)

[Lafayette]

"Ed Glaeser says in closing: I have tried to articulate two views. First, democracy doesn't strongly predict economic growth. Second, education is an important factor that supports democracy."

Education is necessary, but never sufficient in a democracy. A democracy is based, for better or worse, upon the will of the people.

People MUST be informed and to be informed one must be relatively well educated to arrive at a reasoned opinion. But, that too is never sufficient.

The means by which one arrives at a reasoned opinion (regarding the complex number of issues that require policy decisions) is typically one of "objective debate" of the fundamentals. Is that the case in democracies today?

I don't think so, not in the US nor elsewhere. Because the political process tries (and succeeds) to manipulate public opinion employing the same techniques it uses to sell soap powder.

Public debate is the fundamental common prerogative of a functional democracy. Not the candidates winning smile. Nor the apparent wholesomeness of the candidate's family. Neither the muck candidates throw at one another in mindless character assassination.

Democracy is not a beauty contest. Or is it? Alas, in the balance, perhaps it is indeed the winning smile that most often carries the day. And, the vote.

[Lafayette]

piglet: "In general, that is true, although in the US probably not."

You're sense of irony is finely honed. Or, is it humour?

Go figure.

[piglet]

I'm sorry, what is ironic about that statement?

dictators are more reliable defenders of class privilege than democrats. In general, that is true, although in the US probably not. Since democracy in this country has been redefined to mean that the rich have the right to buy political candidates, the risk is very low that those elected will ever threaten to expropriate "private wealth".

[Robert D Feinman]

Growth rates are a poor measure of "success". When a place like Singapore does well one of the factors is that it started from a very low base. The same is true of China. The long-term democracies have much bigger economies so expecting them to keep up a high rate of growth is not realistic.

What democracies provide is the potential for unfettered entrepreneurship. Only when smart people can develop and commercialize their ideas without central planning do we see real innovation. Singapore and China have had good growth, but little innovation. Instead they have taken over existing functions as foreign firms move to their locations or as they copy existing business programs.

The other issue is why do advanced economies need to continue at a high rate of growth? Once a society has reached a reasonable standard of living what's wrong with a steady-state economy? Growth is used as a promise for a better tomorrow to the underclasses so that the wealthy can forestall real attempts at equality.

The US is rich enough so everyone could live a decent life. It's not growth that is need to improve things just a better allocation of existing resources. Promises of a better tomorrow are just so much cheaper. And that's why the intellectual whores called "economists" are so happy to create justifications for imbalance.

[Barry]

",...and Robert Barro actually found democracy reduces growth, once he statistically controls for the rule of law."

Many places are probably nice places to live in, once one 'controls for the rule of law'.

[fiskhus jim]

Not only is democracy NOT a proxy for economic growth (or even development) it seems clear that fascism IS such a proxy.

Certainly the Bush family (as attendents to the Harriman fortune) have made it a transgenerational goal to bring the benefits of fascism to the American corporatocracy.

It also seems clear that this pursuit of fascism has been a hidden plank in the GOP platform since the failure of their coup to militarily overthrow FDR.

[Lafayette]

RDF : "And that's why the intellectual whores called "economists" are so happy to create justifications for imbalance."

Easy to call the messengers whores when you don’t like the message.

What do you call them when you like the message? Business angels?

“The US is rich enough so everyone could live a decent life. »

Yeah, right. Which is why income inequality is entrenched. The US is rich enough for the rich. Most of the wealth in the hands of very few families. That’s your idea of fairness in America?

“What democracies provide is the potential for unfettered entrepreneurship.”

Democracies may indeed further entrepreneurship, but a tax system that favors capital accumulation for the rich keeps millions in poverty – whilst cronyism at the top rakes off money for a comparatively select few.

You've got blinders on.

[piglet]

"Most of the wealth in the hands of very few families. That’s your idea of fairness in America?"

Obviosuly that's not RDF's idea.
"The other issue is why do advanced economies need to continue at a high rate of growth? Once a society has reached a reasonable standard of living what's wrong with a steady-state economy? Growth is used as a promise for a better tomorrow to the underclasses so that the wealthy can forestall real attempts at equality.

The US is rich enough so everyone could live a decent life. It's not growth that is need to improve things just a better allocation of existing resources. Promises of a better tomorrow are just so much cheaper. And that's why the intellectual whores called "economists" are so happy to create justifications for imbalance."
Which seems quite to the point.

[reason]

I should be interested in this because I am quite passionate about the need for a vibrant democracy. But I'm not really, because maximising economic growth is not my reason for wanting democracy. I want democracy because reasoned debate is the best mechanism for a society to solve its problems as they arise. Some of those problems are reflected in GNP most aren't.

[Tom]

The Greater the Freedom and opportunity spread among the Majority of a population would usually produce very positive results both Economically and politically.
Giving people a right to form unions or a Right to Universal Health Coverage is a good starter.
Giving people the right to protest and the right to vote on things that matter are also a sign of a strong Society!War, Social issues,Energy Policy,etc.
Free or cheap College and Trade educations are very helpful.
The vast majority of the population should be educated and should possess the knowledge required for a strong economy and democracy!
A country should have a secure energy source for it's civiliztion. Oil is on the downslope so Renewables should be made a priority.
The military should only be used to protect a civilization, never offensively!
Thermodynamics is the foundation of any society, without energy sources everything fails!
The prison population and the judical system of a country also tells a story about Justice and Freedom.
The U.S. has over 8 million people in it's correctional institutions and increasing. In 1980 it was 1 million!
A country that is a debtor nation-Consumer,Trade,Governmental,State,Corporate,etc is not a strong or Free Society nor is it productive.
The U.S. has 50 Trillion dollars in debts thoughout the economy and it's rising 3 1/2 TRILLION ANNUALLY!!!
For every new dollar or GDP, the U.S. is adding 6 dollars in new debt!
A country that sells out to the highest bidder is not a Free or sovereign country!
A country that sends the poorest of it's population to fight and die in wars is not a Free or just society!
If a country does not prevent monopolization of it's resources,Companies,press,etc it is not a Free nor Democratic nation!
Support Research and Development without Corruption from Money sources is a good sign of Democracy!
Hiding facts or findings from the public because it does not help a certain Corporation or not allowing scientists to work on stem cell research is not a good sign of a strong scientific community. Using 60% of your R&D money on weapons research is not a good use of a countris resources!
Support Small businesses!
Support Medium Size businesses!
Social Justice!
If a country follows these rules then most likely that country will be strong and prosperous!
A country that uses the GPI( Genuine Progess Indicator) over GDP will have a much clearer picture of how they are doing! The U.S. peaked in the 1970's and has declined since!
These are some of the Keys!
Is the U.S. doing a good job?
Are they Democratic?
Socially Fair?
Pragmatic?
I won't answer that question but just using the above measurements you should be able to answer this for yourself.

[Lafayette]

Tom: "The Greater the Freedom and opportunity spread among the Majority of a population would usually produce very positive results both Economically and politically."

Well, I dunno.

I live in a country where "freedom" is conditional. That is, there is freedom, but not quite the American kind. People cannot do as easily what most Americans can do because it is a "collective society". This means that the priorities of the community (local, state, nation) are far more important than that of the individual.

What is worrisome is not that the people are not as free as the American variety, but that they willingly accept it. It is strange for an American to understand why people would WANT to be constrained. (Don't they want it all and want it now?)

Well, no, they don't. They are perfectly happy with mediocrity, if the distance between the average and the extremes is not too large. They are quite willing to work within oligopolies (limited market competition) because they do not go ballistic if prices are NOT the cheapest they can find. (Wal-Mart has just closed down operations in Germany because "THE ABSOLUTELY LOWEST PRICE" is simply not the maxim it is in America.)

They are also quite willing to pay huge taxes (45% of the French GDP versus 32% of the American GDP). Just as long as the state uses the money to provide services that the citizens wants. France has a first class medical system and a university education is tuition-free. Social services to the family and to the less fortunate exist in all communities, large and small. (And, no, it is not just "foreigners" who take advantage of them, but the community as a whole.)

So, the statement above perhaps requires some re-thinking. Is growth at any price really worth it? Particularly if it serves to increase the distance from the middle of both the upper and lower levels in terms of income and wealth.

Can America carry on forever in the belief that each individual must cope for him/herself? That in the rat-race to riches, broken families are an acceptable price to pay? That the poor are tolerable road-kill on the highway of life?

These are not only value judgments. They are, more importantly, moral judgments.

[piglet]

I am going to make a heretical statement here. It is commonplace to identify democracy, capitalism and economic success because in the last two centuries, democratic countries were indeed more dynamic, prosperous and successful than their nondemocratic counterparts. But this observation usually overlooks one major success factor of those countries, and it is not one most of us would be proud of today.

The major 19th century colonial powers were democracies - Britain, France, the Netherlands, and of course the USA (which was focused on continental expansion, stealing huge territories from the native Indians and Mexico, before becoming interested in overseas colonialism. Britain and the US, the most democratically advanced countries of the period, were also main actors in slave trade and exploitation, after monarchic Spain had introduced slavery in the Americas. These democratic countries derived much of their economic prosperitiy from the absolutely undemocratic exploitation of slaves and colonies, and later in the 20th century through other forms of imperialism (US interventions in Latin America etc.)