Democracy, Dictators, and Growth

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The economic success of postwar East Asia has been a consequence of good-for-growth dictators, not of institutions constraining them.

The notion that democratic political institutions help foster economic growth has gained much attention in recent years. Indeed, the relationship seems intuitive: democracy, checks on government, and strong individual property rights should create a hospitable environment for investments in human and physical capital, and growth should follow naturally. However, in Do Institutions Cause Growth? (NBER Working Paper No. 10568), authors Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer turn this notion on its head, arguing that "economic growth and human capital accumulation cause institutional improvement, rather than the other way around."

The authors first illustrate their point with the example of North and South Korea. Both nations were exceptionally poor in 1950, and between the end of the Korean War and 1980, both countries were governed by dictatorial regimes. Yet, by 1980, South Korea's per capita income had reached $1589, while North Korea's only reached $768. In 1980, South Korea began democratizing, while North Korea remains a dictatorship to this day. "While on average, looking over the half century between 1950 and 2000, South Korea obviously had better institutions as measured by constraints on the executive" explain the authors, "these institutions are the outcome of economic growth after 1950 rather than its cause." In other words, they say, South Korea's economic progress can be linked to the choices made by its dictators, not to the emergence of democratic institutions, which only happened subsequently.

Glaeser and his coauthors then examine the evidence supporting the notion that good institutions produce growth, focusing on three indicators commonly used to measure institutional strength: 1) risk of property expropriation by the government; 2) government effectiveness; and 3) constraints on the executive. The authors contend that these measures are inappropriate for several reasons. The first two indicators measure outcomes rather than enduring institutional characteristics; indeed, they do not distinguish between dictatorial regimes that freely choose those good policies and democratic governments that are obliged to follow such policies. (For example, in 1984, Singapore and the Soviet Union ranked among the top ten countries with the lowest expropriation risk.) The commonly used institutional data from the International Country Risk Guide include "subjective elements" of investor risk, such as law and order, bureaucratic quality, and corruption. "These are clear ex post outcomes, highly correlated with levels of economic development," note the authors, "rather than political constraints per se." Meanwhile, the typical measures of executive constraints are highly volatile and seem to reflect electoral results rather than enduring institutional constraints.

The authors also find that more objective measures of institutions -- including those that describe the actual constitutional rules limiting sovereign power, such as judicial independence and proportional representation -- have no predictive power for the growth of per capita income. "The bottom line," the authors contend, "is that the commonly used measures of institutions cannot be used to establish causality" between institutions and economic growth.

While the authors find no evidence that institutional factors predict growth, they find some evidence that initial human capital (such as primary school enrollments) can predict growth. Countries with high human capital as of 1960 grew two times faster on average than countries with low human capital. Stable democracies have grown slightly faster than imperfect democracies, but the authors are quick to note that this may simply reflect the human capital effect. The authors also find that initial levels of schooling are a "strong predictor" of improving institutional outcomes over the following five years. And, while nearly every poor nation in 1960 was governed by a dictatorship, some have remained in poverty while others have managed to grow. This evidence implies "that it is the choices made by the dictators, rather than the constraints on them, that have allowed some poor countries to emerge from poverty."

"[I]nstitutions have only a second order effect on economic performance," conclude the authors. "The first order effect comes from human and social capital, which shape both institutional and productive capacities of a society." They argue that this conclusion has important implications for economic thinking and policy. First, research on institutional economics should focus on actual rules rather than fuzzy assessments of institutional outcomes. Second, the results offer no support to the view that democracy and constraints on government are preconditions for economic development. Indeed, the authors point out that the economic success of postwar East Asia "has been a consequence of good-for-growth dictators, not of institutions constraining them." Finally, while the authors embrace the notion that democracy and constraints on government are certainly essential human values, they are skeptical of the viability of democracy in nations with low levels of human capital. To the contrary, "countries that emerge from poverty accumulate human and physical capital under dictatorships, and then, once they become richer, are increasingly likely to improve their institutions."

-- Carlos Lozada