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Monday, March 12, 2007

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...

    Posted by on Monday, March 12, 2007 at 04:17 PM in Economics | Permalink  TrackBack (1)  Comments (21)

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    » China's Economic Growth: What's Political System Got To Do With It from China Law Blog

    Very interesting (and long) back and forth discussion in today's Wall Street Journal on the linkage between democracy and growth. Now I know this issue has been dealt with plenty of times before, but this article, entitled, Is Democracy the Best Settin... [Read More]

    Tracked on Tuesday, March 13, 2007 at 04:48 AM


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