Natural resources, democracy and corruption

We study how natural resources can feed corruption and how this effect depends on the quality of the democratic institutions. Our game-theoretic model predicts that resource rents lead to an increase in corruption if the quality of the democratic institutions is relatively poor, but not otherwise. We use panel data covering the period 1980-2004 and 124 countries to test this theoretical prediction. Our estimates confirm that the relationship between resource rents and corruption depends on the quality of the democratic institutions. Our main results hold when we control for the effects of income, time varying common shocks, regional fixed effects and various additional covariates. They are also robust across different samples, and to the use of various alternative measures of natural resources, democracy and corruption.     

Is democracy good for growth? — Development at political transition time matters

Is democracy a better political regime for economic prosperity than autocracy? This paper shows that the answer depends on the initial economic development level during the democratic transition when the foundation of institutions was laid. Democracy facilitates growth only in countries that already have adequate development at transition time. These countries are more likely to create and sustain growth-enhancing institutions than others. Without appropriate development, democracy does not improve growth; this applies to about 40% of the third-wave democratized countries. These results are based on a sample of 153 countries in 1960–2010 and robust to various specifications and endogeneity issues.     

Income inequality, democracy and growth reconsidered

Persson and Tabellini (Persson, T., Tabellini, G., 1992a. Growth, distribution and politics. Eur. Econ. Rev. 36, 593–602; Persson, T., Tabellini, G., 1992b. Growth, distribution and politics. In: Cukierman, A., Hercowitz, Z., Leiderman, L. (Eds.), Political Economy, Growth, and Business Cycles. MIT Press, Cambridge, MA, pp. 3–22; Persson, T., Tabellini, G., 1994. Is inequality harmful for growth? Am. Econ. Rev. 84, 600–621) as well as Alesina and Rodrik (Alesina, A., Rodrik, D., 1992. Distribution, political conflict, and economic growth. In: Cukierman, A., Hercowitz, Z., Leiderman, L. (Eds.), Political Economy, Growth, and Business Cycles. MIT Press, Cambridge, MA, pp. 23–50; Alesina, A., Rodrik, D., 1994. Distributive politics and economic growth, Q. J. Econ. 109, 465–490) have argued that income inequality reduces economic growth rates among democracies because it promotes distributional struggles. In this paper I question the supportive evidence for a number of reasons. Measures of income distribution and democracy are unreliable and permit only very tentative conclusions. Changes in data sources or recoding of some influential cases affect results. It is questionable whether equality effects on growth apply only within democracies, as a median voter interpretation of this relationship should make one expect. The general idea that distributional struggle hurts the growth prospects of nations, however, receives some empirical support.     

The political economy of redistribution under democracy

We ask what redistributions of income and assets are feasible in a democracy, given the initial assets and their distribution. The question is motivated by the possibility that if redistribution is insufficient for the poor or excessive for the rich, they may turn against democracy. In turn, if no redistribution simultaneously satisfies the poor and the wealthy, democracy cannot be sustained. Hence, the corollary question concerns the conditions under which democracy is sustainable. We find that democracies survive in wealthy societies. Conditional on the initial income distribution and the capacity of the poor and the wealthy to overthrow democracy, each country has a threshold of capital stock above which democracy survives. This threshold is lower when the distribution of initial endowments is more equal and when the revolutionary prowess of these groups is lower. Yet in poor unequal countries there exist no redistribution scheme which would be accepted both by the poor and the wealthy. Hence, democracy cannot survive. As endowments increase, redistribution schemes that satisfy both the poor and the wealthy emerge. Moreover, as capital stock grows the wealthy tolerate more and the poor less redistribution, so that the set of feasible redistributions becomes larger. Since the median voter prefers one such scheme to the dictatorship of either group, democracy survives.We would like to thank, Daron Acemoglu, Marco Basetto, Alberto Bisin, V.V. Chari, Pat Kehoe, Onur Ozgur for very useful comments.     

Why does democracy need education?

Across countries, education and democracy are highly correlated. We motivate empirically and then model a causal mechanism explaining this correlation. In our model, schooling teaches people to interact with others and raises the benefits of civic participation, including voting and organizing. In the battle between democracy and dictatorship, democracy has a wide potential base of support but offers weak incentives to its defenders. Dictatorship provides stronger incentives to a narrower base. As education raises the benefits of civic engagement, it raises participation in support of a broad-based regime (democracy) relative to that in support of a narrow-based regime (dictatorship). This increases the likelihood of successful democratic revolutions against dictatorships, and reduces that of successful anti-democratic coups.     

Wealth inequality,democracy and economic freedom

Using a novel panel data set from the Credit Suisse on the top wealth shares for 46 sample countries spanning 2000–2014, this paper empirically investigates to what extent wealth inequality influences economic freedom and whether this relationship is affected by the level of democracy. Economic freedom is measured by the Fraser Institute's economic freedom summary index as well as its five major sub-indices, such as government size, property rights, access to sound money, freedom to trade, and regulations. Wealth inequality is measured by the top wealth shares. Trade union density is used as an instrument for wealth inequality. Empirical results suggest that the rising wealth inequality significantly hampers overall economic freedom, property rights protection, freedom to trade, soundness of money and regulatory environment. Furthermore, this negative effect of wealth inequality is reinforced at a lower level of democracy. These findings are robust to alternative measures of wealth inequality, economic freedom, treatment for endogeneity, and model specification.     

Populist policies in the transition to democracy

This paper develops a political economy model that provides an explanation as for why ruling elites in oligarchic societies may rely on income redistribution to the poor (the masses) in order to prevent them from attempting a revolution. We refer to this kind of redistribution as populist redistribution because, first it does not increase the poor's productive capacity (human capital), and second it seeks to “buy” political support (peace) to perpetuate the elite's control of political power. We examine the conditions under which ruling elites choose to deter the poor (by means of military repression and/or populist redistribution), to engage in a dispute with the poor for the control of political power, or, alternatively, to extend democracy. According to the results of the model populist redistribution (or military repression), if any, increases with initial wealth inequality and with the amount of redistribution that the poor can undertake under democracy, and decreases with the relative importance of a human capital externality in production. The model explains why in some cases the use of an apparently inefficient policy of populist redistribution turns out to be optimal for both groups (the ruling elite and the poor class) when the alternative is the use of military repression or default to conflict.     

Rule of law, democracy, openness, and income

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross‐national dataset into two sub‐samples: (i) colonies versus non‐colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub‐samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.     

The effect of democracy on different categories of economic freedom

Many empirical studies conclude that democracy increases economic freedom. However, these studies use highly aggregated indices of economic freedom, which eliminates interesting information. The purpose of this paper is to study empirically how in developing countries different categories of economic freedom are affected by democracy, measured either as political rights or civil liberties. Democracy appears to have a positive effect on the economic freedom categories Government Operations and Regulations and Restraints on International Exchange, but no effect on the categories Money and Inflation and Takings and Discriminatory Taxation. That a high level of democracy would have a negative effect on economic freedom reform receives no support in this study. The robustness of the results to the model specification and extreme points is tested.     

Do unfair perceived own pay and top managers’ pay erode satisfaction with democracy?

Many people are relatively unsatisfied with the democratic system as it currently exists. In this empirical research note, the authors present evidence that German workers, who perceive their own pay or top managers’ pay as unfair, are on average significantly less happy with the democracy in Germany. Thus, fairness perceptions in the labour market and of income inequality seem to have spillover effects on the overall satisfaction with the democratic system.     

The interaction effect of economic freedom and democracy on corruption: A panel cross-country analysis

This paper examines the effects of economic freedom, democracy and its interaction term on controlling corruption. Interactive results indicate that economic freedom and democracy significantly combat corruption. Economic freedom reduces corruption in any political environment. Democracy increases corruption when economic liberalization is low.     

Democratic revolutions as institutional innovation diffusion: Rapid adoption and survival of democracy

Recent ‘democratic revolutions’ in Islamic countries call for a re-consideration of transitions to and from democracy. Transitions to democracy have often been considered the outcome of socio-economic modernization and therefore slow and incremental processes. But as a recent study has made clear, in the last century, transitions to democracy have mainly occurred through rapid leaps rather than slow and incremental steps. Here, we therefore apply an innovation and systems perspective and consider transitions to democracy as processes of institutional, and therefore systemic, innovation adoption. We show that transitions to democracy starting before 1900 lasted for an average of 50 years and a median of 56 years, while transitions originating later took an average of 4.6 years and a median of 1.7 years. However, our results indicate that the survival time of democratic regimes is longer in cases where the transition periods have also been longer, suggesting that patience paid in previous democratizations. We identify a critical ‘consolidation-preparing’ transition period of 12 years. Our results also show that in cases where the transitions have not been made directly from autocracy to democracy, there are no main institutional paths towards democracy. Instead, democracy seems reachable from a variety of directions. This is in line with the analogy of diffusion of innovations at the nation systems level, for which assumptions are that potential adopter systems may vary in susceptibility over time. The adoption of the institutions of democracy therefore corresponds to the adoption of a new political communications standard for a nation, in this case the innovation of involving in principle all adult citizens on an equal basis.     

A farewell to critical junctures: Sorting out long-run causality of income and democracy

We consider the empirical relevance of two opposing hypotheses on the causality between income and democracy: The Democratic Transition hypothesis claims that rising incomes cause a transition to democracy, whereas the Critical Junctures hypothesis denies this causal relation. Our empirical strategy is motivated by Unified Growth Theory, which hypothesizes that the present international income differences have roots in the prehistoric past. Thus, we use prehistoric measures of biogeography as instruments for modern income levels, and find a large long-run causal effect of income on the degree of democracy. This result rejects the Critical Junctures hypothesis, which is an important part of the Primacy of Institutions view.     

Fiscal decentralization and government size: The role of democracy

This paper examines how the level of democracy in a country affects the relationship between fiscal decentralization and government size. We argue that political regimes, proxied by their democracy levels, are important for different decentralization theories to predict the impact of fiscal decentralization on government size. We test this argument using panel data from 76 developed and developing countries during 1972–2013. We find strong and robust evidence that fiscal decentralization is negatively associated with government size and that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. Therefore, our study contributes to the literature by offering a novel insight on mixed results regarding the relationship between fiscal decentralization and government size in the literature.     

Democracy and growth in Africa: Implications of increasing electoral competitiveness

Estimating a 1975–2004 decadal panel data in an augmented production-function framework, the paper finds that indexes of electoral competitiveness exhibit U-shape relationships with GDP growth, implying quite different “intermediate” and “advanced”-level effects of reforms in Africa.     

The political transfer problem: How cross-border financial windfalls affect democracy and civil war

Following a rise in the price of oil in the 1970s, a number of developing countries received a significant boost in foreign transfers as oil producers could not absorb all of their new rents domestically. When those transfers ended, some recipients of these transfers eventually democratized as part of the ”Third Wave” while others languished as violent autocracies. This raises a puzzle: how can declines in external transfers foster democratization in some cases, but heighten political violence in others? We develop a formal model to reconcile this tension and demonstrate that autocratic incumbents can become more repressive with higher levels of transfers and either experience civil conflict or democratize at lower levels of transfers. We characterize these dynamics as a ”political transfer problem” and then use case studies and econometric evidence to argue that the largest windfall of the 20th century, the period from 1973–85 during which oil prices were at all-time highs, and its aftermath, produced political dynamics consistent with our model.     

Capitalism and democracy at a crossroads: the civilizational dimension

This paper evaluates Schumpeter's grand vision as reflected in his Capitalism, Socialism and Democracy, and elaborates it in conjunction with the so-called “globalization” trends characteristic of the wake of the twenty-first century. In addition to the evolutionary nature of his methodology, the institutionalist dimension of Schumpeter's definitions are brought to light. A case is made for a fundamental process of “uncreative destruction” as far as the institutional setup of the economy is concerned. The contention of this paper is that there is ample support in Schumpeterian analysis for a counterpoint to the liberal thesis that envisages the worldwide spread of individualism, market economies, and democratic forms of government.     

The growth effect of democracy and technology: An industry disaggregated approach

The theoretical and empirical sides of democracy-growth literature fail to offer a consensus on the impact of democracy on growth. This paper provides a disaggregated manufacturing approach that reveals different effects of democracy across industries within countries. I surmise that the interplay between democracy and technological development is crucial to the economic performance of industries. A panel dataset of 61 manufacturing industries from 72 countries between 1990 and 2010 is employed, along with a wide variety of democracy measures. The results point to a technologically-conditioned effect of democracy. Political regime changes towards democracy are growth-enhancing for industries close to the World Technology Frontier but have a negative effect on backward industries. This evidence is robust to specification changes and alternative estimation techniques, and prevails once the possible dynamics of manufacturing growth are tackled.     

Does democracy cause growth? A meta-analysis (of 2000 regressions)

The relationship between democracy and economic growth has been widely debated in the social sciences with contrasting results. We apply a meta-analytical framework surveying 188 studies (2047 models) covering 36 years of research in the field. We also compare the effect of democracy on growth with the effect of human capital on growth in a sub-sample of 111 studies (875 models). Our findings suggest that democracy has a positive and direct effect on economic growth beyond the reach of publication bias, albeit weaker (about one third) of that of human capital. Further, the growth effect of democracy appears to be stronger in more recent papers not surveyed in Doucouliagos and Ulubaşoğlu (2008). Finally, we show that the heterogeneity in the reported results is mainly driven by spatial and temporal differences in the samples, indicating that the democracy and growth nexus is not homogeneous across world regions and decades.