Democracy and GDP

11th July 2019 Off By binary
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We’ve long known that democratic countries tend to be richer than dictatorships. There’s also evidence that this understates the advantages of democracies. For instance, democracies are also less prone to experiencing famines, even compared to equally poor dictatorships. But is there a causal link? Here’s Alex Tabarrok:

In their sample of 175 countries from 1960 to 2010, Acemoglu et al. find that democracies have a GDP per-capita about four times higher than nondemocracies ($2074 v. $8149). (This is uncorrected for time or other factors.) But how much of this difference is explained by democracy? Hardly any. Acemoglu et al. write:

Our estimates imply that a country that transitions from nondemocracy to democracy achieves about 20 percent higher GDP per capita in the next 25 years than a country that remains a nondemocracy.

In other words, if the average nondemocracy in their sample had transitioned to a democracy its GDP per capita would have increased from $2074 to $2489 in 25 years (i.e. this is the causal effect of democracy, ignoring other factors changing over time). Twenty percent is better than nothing and better than dictatorship but it’s weak tea. GDP per capita in the United States is about 20% higher than in Sweden, Denmark or Germany and 40% higher than in France but I don’t see a big demand in those countries to adopt US practices. Indeed, quite the opposite! If we want countries to adopt democracy, twenty percent higher GDP in 25 years is not a big carrot.

There are many economic reforms that countries can do.  Thus the US could do tax reform, zoning reform, occupational licensing reform, reduce subsidies to health care and education, remove rent controls, remove tariffs and quotas, and many other types of reforms.  Considered individually, each reform would only have a very small impact on GDP. 

Democracy is different. I can’t think of any potential policy reform that even comes close to boosting GDP by 20%, other than democracy.  It seems to me that it is by far the most powerful growth enhancing reform available to countries. In that sense I disagree with Alex; I view this study as incredibly good news for democracy.  It is the ultimate low hanging fruit.

So if 20% is so big, then why don’t European countries emulate the US economic model?  Suppose they did adopt our relatively low tax regime, and suppose this boosted hours worked up to US levels.  In that case, they might also be able to boost GDP per capita close to US levels.  After all, the main difference between the US and northwestern Europe is hours worked, not labor productivity.  So why don’t they adopt the US model?

Perhaps the Europeans see two downsides to the American model.  First, they’d lose a lot of leisure time.  Second, they’d lose the revenue to support their huge welfare states, and that might increase inequality.  I still believe that they should switch to a lower tax model—Switzerland has done very well with this approach—but I can also see what holds them back.

In contrast, it’s hard to see any downsides from moving toward democracy.  Consider the things that don’t show up in GDP, such as leisure, a clean environment, human rights, avoidance of regional famine.  In all cases, it hard to see how democracy would make those conditions worse, and indeed in most cases it seems like the exact opposite is true—democracies also do better in terms of “intangibles” that don’t show up in GDP data.  Dictators don’t care as much about the public having human rights, clean air, leisure time, and a stable food supply.  They want power.

In the article discussed by Alex, the authors note the following:

With the spectacular economic growth under nondemocracy in China, the eclipse of the Arab Spring, and the recent rise of populist politics in Europe and the United States, the view that democratic institutions are at best irrelevant and at worst a hindrance for economic growth has become increasingly popular in both academia and policy discourse. For example, the prominent New York Times columnist Tom Friedman (2009) argues that “one-party non democracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. ”

This is a very weak argument. The world is full of horrible dictators in places like Turkmenistan, Cuba, North Korea, Central African Republic, Venezuela, Equatorial Guinea, and dozens of other places. And because the democracy skeptics are able to find one allegedly well functioning dictatorship, this is supposed to be a powerful argument for autocracy? (And don’t forget the human rights disaster in Xinjiang.) What are the odds that you end up with an “enlightened” dictator?

But it’s even worse. Mainland China clearly lags far behind democratic Taiwan. Even worse, the Chinese Communist Party caused the worst disaster in human history in 1959-61. All they have done recently is move from disastrous Maoism to a much less bad mixed economy, which has pushed Chinese GDP/person from extreme poverty up to the level of a middle-income country like Mexico. If someone has their foot on my throat, and then eases up a bit so I can breath better, am I supposed to praise them for making me feel good? That’s the successful “model” for rejecting democracy?

I’m actually open to the argument that dictatorships might be better, but pointing to anecdotal examples such as China is not going to convince me. You’d need to provide systematic evidence. If the evidence from 175 countries suggests that democracy boosts GDP by a huge 20%, and if democracy also leads to gains in all sorts of intangibles, then why wouldn’t all countries wish to go that direction?

Fukuyama was right; the world will become democratic.

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