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Democracy creates economic growth

by CIFAR May 29 / 14

The researchers found that switching to democracy has economic benefits. 
Photo: Shutterstock

Countries that switch to democracy experience 20 per cent more economic growth than if they don’t switch.

The research contradicts a common belief that democracy is somehow bad for growth, especially for poor or poorly educated countries, according to the authors of a new working paper. In fact, democracy is good economically for all countries that switch to it.

“The effect is somewhat greater for better educated countries. But even for poor countries there’s not a different effect. Democracy is good for really poor countries as well,” says Suresh Naidu (Columbia University), a co-author on the paper and a former CIFAR Global Scholar.

He co-authored the paper with Daron Acemoglu (Massachusetts Institute of Technology), a senior fellow in the program in Institutions, Organizations & Growth, and Pascual Restropo (MIT) and James A. Robinson (Harvard).

The research looked at 164 countries from 1960 to 2010, a time when democratic governments increased 30 percent globally. The researchers were interested in the question because many academics and political columnists have concluded that non-democracies have an advantage. Their idea is that non-democratic governments can enact policies that are necessary but politically unpopular, Naidu says.

But that turns out not to be true. In fact, because of the extra growth from the wave of democratization, the global economy is 6 percent larger than it would be otherwise.

To rate a country as a democracy, the researchers combined the scores of two independent organizations, Freedom House and Polity IV.

To determine economic growth, they had to take into account the fact that GDP actually tends to go down in countries shortly before they become democratic, probably because of political and economic unrest either caused by or leading to the shift. To adjust for this, the researchers compared the democracies to countries that experienced similar falls in GDP but did not switch to democracy.

And although it’s hard to tell why democracy is good for the economy, the authors think the cause is probably increased civil liberties.

“To the extent we can tell, it does look like it’s civil liberties. In democracies countries have to respect people’s civil rights. People can use those civil rights to push for other changes,” Naidu says. This helps prevent economically destructive practices such as government corruption or favouritism for cronies, for instance.