Democracy is not a Luxury

by Heinrich Nax

"Does democracy cause growth, or is it a luxury enjoyed by wealthy countries that slows growth down?“ This is a question that one frequently hears these days.

The Austrian economist Joseph Schumpeter was first to address this question in his book "Capitalism, Socialism, and Democracy" in 1942, at a time when Austria had fallen into the hands of Nazi Germany, after having been one of the most important countries in the world before. This question continues to be of central concern, not only for political economists and development economists. Over the past decades, stirred by the disagreement of prominent scientists such as Milton Friedman (1962) and Seymour Martin Lipset (1959) over the corrent answer, this issue has been looked at time and again.

Famously, the American macroeconomist Robert Barro (1996) found that "the net effect of democracy on growth performance cross-nationally over the last five decades is negative or null" (Gerring, Bond, Barndt and Moreno 2005, p.323). Analyses of this kind have fueled arguments for the position that democracy is a luxury enjoyed by wealthy countries, which creates obstacles for economic development. Other scientists have disagreed with this finding (for example, Gerring et al. 2005). Their findings indicate that only sustained democracy has the virtue of facilitating the accumulation of physical, human, social and political capitals, which in turn leads to growth.

Again, one is left with two conflicting sets of evidence. However, there are two recent breakthroughs, which show that democracy is indeed no luxury. Acemoglu, Naidu, Restrepo and Robinson (2015) show that `regime transitions' and their precise timing are crucial. Democratization has a large positive effect on growth: "by estimating the effects on growth of the unprecedented spread of democracy around the world in the last 50 years [...] estimates imply that a country that transitions from non-democracy to democracy achieves about 20 percent higher GDP per capita in the next 25 years" (Acemoglu et al. 2015, p. 1).

However, the question whether established democracies have incentives to de-democratize remained unsolved. Precisely this question was now addressed by Nax and Schorr (2015). Their data-driven study using high-performance computers reveals "short-run economic incentives to de-democratization for the most economically and democratically developed nations. [However,] These short-run boosts come with intermediate-run reductions of political capitals and with long-run reductions in growth" (Nax and Schorr 2015). Therefore, democracy is more than a luxury. Giving up on it would be a terrible mistake.

Further information can be found in

H.H. Nax and A.B. Schorr, Democracy-Growth Dynamics for Richer and Poorer Countries,see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2698287

References:
- D. Acemoglu, S. Naidu, P. Restrepo, and J. A. Robinson. Democracy does cause growth. NBER Working Paper, pages 323-64, 2015.
- R.J. Barro. Democracy and growth. Journal of Economic Growth, 1(1):1-27, 1996.
 - M. Friedman. Capitalism and freedom. University of Chicago Press, 1962.
 - J. Gerring, P. Bond, W.T. Barndt, and C. Moreno. Democracy and economic growth: A historical perspective. World Politics, 57:323-64, 2005.
- S. M. Lipset. Some social requisites of democracy: Economic development and political legitimacy. The American Political Science Review, 53(1):pp. 69-105,
1959.

- H. H. Nax, A. B. Schorr. Democracy-growth dynamics for richer and poorer
Countries. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2698287 , 2015.
 
- J. Schumpeter. Capitalism, socialism and democracy. Harper, New
York/London, 1942.