Is Democracy Good for Economic Growth?

This article is a sidebar to the Lands of Liberty 2000 report.

This year's 2000 Index of Economic Freedom, contains a fascinating essay by Robert Barro, entitled "Rule of Law, Democracy, and Economic Performance." Barro is a professor of economics at Harvard University, and the author of Determinants of Economic Growth: A Cross-Country Empirical Study.

The essay begins by asking what effects on economic growth one might anticipate from increases and decreases in democratic rights. In each case, Barro foresees a negative effect but with the possibility of offsetting factors. For example, he notes that highly democratic societies typically experience "the pressure to enact redistribution of income from the rich to the poor." That, in turn, encourages recipients to stay on the poor end (the receiving end) of redistribution and discourages earners from striving to stay on the rich end (the plundered end) of the program. Nevertheless, a possible offsetting effect can be imagined: a reduction in social unrest, such as riots and revolution. "Since social unrest reduces everyone's incentives to work and invest, some amount of publicly organized income redistribution would contribute to overall economic activity."

But if democracy can be dangerous to a country's economic health, Barrow reasons, so can autocracy. "One problem with dictators is that they have the power-and hence the inclination-to steal the nation's wealth. More specifically, an autocrat may find it difficult to convince people that their property will not be confiscated once investments have been made." Again, however, compensating factors may exist to lessen this effect of autocracy. For example, the dictator may, over time, acquire a personal reputation for not intervening in the economy. Or, he may constrain his own powers by establishing a constitution, a bill of rights, a legislature, and so forth-in short by increasing the prevalence of democracy and civil liberties in the state. To the extent that democracy is involved as an element in such constraints, one would anticipate that its effect would be to encourage economic growth.

So much for theoretical considerations. What does empirical investigation show? Barro begins by relying on the Freedom House survey of political rights, but converting it in a 0-to-1.0 measure of democracy, where 0.0 represents Freedom House's least-free 7 and 1.0 represents Freedom House's most-free 1. Barro then calculates that "the overall relation between economic growth and the democracy is statistically weak. In particular, there are example of dictatorships (values of electoral rights near 0.0) with high and low rates of growth, and similar examples of democracies (values of democracy near 1.0)."

But the relationship does have one marginally significant feature worth noting:

There is some suggestion of a nonlinear relation-an inverted U-shape-in which growth rises initially with democracy, reaches a peak at a value for the electoral rights index of around 0.5, and then declines subsequently with further rises in democracy. . . . One way to interpret [this result] is that, in the worst dictatorships, an increase in electoral rights tends to increase growth and investment because the benefit from the limitation on governmental power is the key matter. In places that already have attained a moderate amount of democracy, however, a further increase in electoral rights tends to impair growth and investment. As electoral rights are increased, the dominant effect becomes an intensified concern with social programs and income redistribution.

In sum, however, the conclusion must be that to the extent any relationships exist between democracy and economic growth they are weak ones. "These findings ," Barro notes, "support neither the popular notion that democracy is necessary for growth nor the idea that dictatorship is the route to prosperity." And he concludes:

The current U.S. Secretary of State, Madeleine Albright, once was asked whether it was sometimes necessary to sacrifice democracy in the short run to promote economic growth. She replied to the effect that there was no such trade-off because democracy was a prerequisite for economic growth. This response sounds pleasant but it is simply false.