While there is a lot to be said for democracy, generally the consensus is that there has, to date, been little robust evidence to prove it generates – on average – higher levels of economic development. Given the names attached to this new NBER working paper this situation may be about to change…
Democracy Does Cause Growth
Daron Acemoglu, Suresh Naidu, Pascual Restrepo, James A. Robinson
NBER Working Paper No. 20004
Issued in March 2014
NBER Program(s): DEV EFG POL
We provide evidence that democracy has a significant and robust positive effect on GDP. Our empirical strategy relies on a dichotomous measure of democracy coded from several sources to reduce measurement error and controls for country fixed effects and the rich dynamics of GDP, which otherwise confound the effect of democracy on economic growth. Our baseline results use a linear model for GDP dynamics estimated using either a standard within estimator or various different Generalized Method of Moments estimators, and show that democratizations increase GDP per capita by about 20% in the long run. These results are confirmed when we use a semiparametric propensity score matching estimator to control for GDP dynamics. We also obtain similar results using regional waves of democratizations and reversals to instrument for country democracy. Our results suggest that democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest. We find little support for the view that democracy is a constraint on economic growth for less developed economies.