FOUR

Democracy and Development

INTRODUCTION
The effect of democracy on economic development has captivated many
thinkers. De Tocqueville (1835) and Schumpeter (1942), for example, be-
lieve democracy provides the social securities required for development.
Hayek (1944) argues that democracies exhibit relatively less unrest and
political instability, promoting development. Friedman (1962) asserts that
democracy promotes development by keeping state power in check. North
(1990) expects autocrats to prey on their subjects, and Olson (1993) argues
that autocrats are corrupt and promote their cronies, which are bad for
development. Going a step further, Fukuyama (1992) argues that capitalism
and democracy work in unison to promote welfare, a view many observers
share (e.g., The Economist, 1994; Cohen, 2007).
In contrast, Marx (1867, 1871) and Lenin (1911) argued that democ-
racy came out of capitalist development as a tool for the elite to deprive
and appease the masses. John S. Mill (1860), a supporter of democracy,
is skeptical about its ability to promote development. Huntington (1968)
argues that democracies exhibit high state expenditures in response to their
citizens’ demands, reducing the excess that is expendable for development.
Olson (1982) argues that special interests in democracy shape public policy
to promote their own interests, undermining the economy. Wade (1996)
argues that strong autocrats can resist popular pressure for policies to save
doomed industries, which is good for development. Barro (2000) and Bueno
de Mesquita and Downs (2005) argue that autocrats can effectively pursue
prodevelopment policies.
Despite the controversy, the view that democracy promotes development
has recently become prevalent in the policy circles of the developed world.
For example, a number of senior practitioners recently argued that poor

89
90 Democracy and Economic Openness in an Interconnected System

countries undertaking democratic reforms outperform poor autocracies in

development. The United States should, therefore, target its aid to help coun-
tries that attempt democratic reforms. President Bush, the authors note,
supports having democratic governance “as qualifying criteria for countries
to receive assistance” (Siegle et al., 2004). Similarly, Bush’s Under Secretary
of State Dobriansky argues that solid democratic institutions are the basis for
economic development (U.S. Department of State, 2007), and Bush himself
apparently believes that political and economic liberties, both of which pro-
mote social welfare, are the natural by-products of each other (Cohen, 2007).
Democracy, as a regime favoring equal political rights and civil liberties,
is definitely worthy of promotion. We have seen that many writers and
policymakers justify the promotion of democracy as a means to encourage
economic development, but does a rise in democracy really lead to a higher
level of development? The argument that democracy promotes develop-
ment considers neither the possibility that democracy could undermine
development nor the possibility that the causality may flow from develop-
ment to democracy. In fact, as we show in the next section, the effect of
development on democracy has received ample scholarly attention.
The issue of causation stands at the center of this chapter. We argue
that sorting out the causal direction between democracy and economic
development is important. For example, if the goal is to promote democracy
but the causation goes from development to democracy, we should not
condition the distribution of aid to poor countries on instituting democratic
reforms; rather, we should condition aid on forces such as economic reforms
that encourage development or on the quality of the projects themselves.
The relationship between democracy and development raises two salient
questions. Does development lead to democracy? Does democracy encour-
age or undermine development? Together, these questions imply that the
two forces may affect each other in a reciprocal manner. But statistical studies
typically employ single-equation models, which specify either democracy as
the dependent variable and development as the key independent variable,
or development as the dependent variable and democracy as the key inde-
pendent variable. As several scholars noted recently, these single-equation
models cannot address the possible reciprocal relationship between democ-
racy and development, and their inferences may be misleading (Chan, 2002;
Midlarsky, 2002; Przeworski and Limongi, 2003).1

1 Chan (2002: 118) warns that even if some results indicate that democracy boosts develop-
ment, “the relationship may well be the other way around [development boosts democracy].”
Midlarsky (2002: 672) calls “for the greater use of structural equations modeling” in the
 Democracy and Development 91

The development–democracy reciprocity issue has so far received very

limited attention. Burkhart and Lewis-Beck (1994) tested the causal-
ity between democracy and energy consumption per capita by using
Granger’s method, but they did not specify a simultaneous equations
model (SEM). Przeworski et al. (2000) used dynamic probit to study the
effect of development on regime transition and a selection-corrected esti-
mator to assess the effect of regime type on economic growth, but they
did not specify a full SEM. Helliwell (1994) and Feng (2003) employed
SEMs, but their analyses raise a number of concerns, to which we will
return.
Given the significance of and the inadequate attention to the issue, fur-
ther analysis of the simultaneity between democracy and development is
warranted. Some readers may view this issue as a methodological nuisance,
not a theoretical problem. We consider it to have both theoretical and
methodological implications. If democracy and development affect each
other, unidirectional models are theoretically incomplete and, as Alvarez
and Glasgow (2000) noted, will produce biased estimates.
We construct a SEM of the levels of development and democracy. By
employing this approach, we are able to decide which of the following
four theoretically distinct possibilities holds: (1) development affects demo-
cracy, but not the other way around; (2) democracy affects development,
but not the other way around; (3) the two forces affect each other; and
(4) the two forces are unrelated. We also identify the signs and sizes of the
statistically significant effects. We estimate this model using a large-N sample
of countries across nearly four decades. The empirical results suggest that
a rise in development in a country increases its democracy, whereas a rise
in democracy reduces development. These findings have important policy
implications.
The rest of this chapter is organized as follows. The next section discusses
the theoretical arguments concerning the relationship between democracy
and development, and the following section provides an overview of pre-
vious empirical efforts and raises several important but overlooked design
issues. The fourth section discusses our statistical model and presents the
main empirical findings. The last section summarizes the findings and
explores their implications. As in previous chapters, technical details and
additional results are delegated to the chapter appendix.

development–democracy literature. Przeworski and Limongi (2003: 348) argue that “infer-
ences based on standard [single-equation] regression models [of democracy and development]
are invalid.”
92 Democracy and Economic Openness in an Interconnected System

THEORETICAL ARGUMENTS
This section provides the theoretical context for our analysis rather than an
exhaustive review of two very large bodies of literature. We demonstrate that
a large number of arguments exist for both claims: economic development
influences democracy, and democracy affects development. Acknowledging
these plausible arguments, one should entertain the theoretical possibility
that development and democracy affect each other simultaneously.

Causality from Development to Democracy

The hypothesis that economic development promotes democracy has
received wide attention in the literature. Lipset traces this so-called mod-
ernization thesis back to the Greek philosopher Aristotle. “From Aristotle
down to the present,” he writes, “men have argued that only in a wealthy
society in which relatively few citizens lived in real poverty could a situation
exist in which the mass of the population could intelligently participate in
politics and could develop the self-restraint necessary to avoid succumbing
to the appeals of irresponsible demagogues” (1959: 75).
Development arguably promotes democracy through several channels.
First, as economy develops, the need for an educated labor force rises
and people can afford to spend more on education. Educated people, in
turn, often demand greater government transparency, political freedom,
and participation in policymaking (Diamond et al., 1987; Lipset et al.,
1993), which are all elements of democracy. Educated people also tend to
be more receptive to the idea of resolving political disagreement through
nonviolent, majority-based decision making. They also demand freer flows
of information, more mass media, and communication outlets, which assist
the diffusion of democratic ideas (Lipset, 1959; Dahl, 1989; Diamond and
Plattner, 1994).
In a second channel, economic development promotes civic society and
socioeconomic progress, which increase the power of the middle class at the
expense of the ruling elite and constrain authoritarianism (de Tocqueville,
1835; Lipset, 1959; Huber et al., 1993; Putnam et al., 1993). Also, as the
number of urban dwellers rises, the masses can more easily get organized to
demand political rights (Lipset, 1959; Lipset et al., 1993).
Third, underdevelopment and poverty cause discontent, accentuate
grievances, and polarize societies. These tensions increase the attractive-
ness of violence as a means to secure survival and acquire social mobil-
ity, which can increase political instability and even lead to civil war. In
 Democracy and Development 93

trying to assert power, the state may become oppressive, reducing democ-
racy. Economic development promotes democracy by alleviating these ten-
sions (Im, 1987; Huntington, 1991; Haggard and Kaufman, 1995).
A fourth channel considers the appeal of autocracy to the elite. Political
leaders constantly contemplate whether to accept the outcome of a demo-
cratic competition that mandates the distribution of the national pie or to
fight to establish autocratic control so as to acquire a larger share of the pie.
Assuming the marginal utility of consumption and the marginal return of
capital decrease with affluence, the attractiveness of dictatorship is expected
to wane when affluence rises. Also, as the economy and civil society develop,
defeated politicians have more opportunities for respectable employment,
enabling their acceptance of electoral defeats. Because economic develop-
ment increases affluence and supplies more acceptable alternatives, dictator-
ship becomes less attractive as a political solution to distributional conflicts
(Lipset, 1959, 1981; Przeworski et al., 2000).
Finally, poverty and underdevelopment erode public confidence in the
ability of nascent democracies to resolve problems, reducing the legitimacy
of the regime and increasing the appeal of authoritarianism to the public.
When developmental problems become salient and pressing, the democratic
government may lose public support altogether, raising the likelihood of a
forceful transition to autocracy. Development, in contrast, alleviates these
pressures and enables democracy to take hold and consolidate (Linz, 1978;
Seligson and Muller, 1987; Huntington, 1991; Haggard and Kaufman, 1995).
The positive effect of development on democracy, however, is not the only
possible outcome. Development may delay democratization in two ways.
First, economic development may strengthen an authoritarian government
(Bueno de Mesquita and Downs, 2005); development provides more finan-
cial resources for the autocrat, not only the middle class, particularly when
the government owns some means of production. Because a financially
stronger government can sustain a larger security force and develop better
monitoring and surveillance methods, it becomes more capable of sup-
pressing the grassroots efforts toward democracy.
Second, as long as the economy develops strongly, the public in an autoc-
racy may not always be interested in changing the status quo. If the public
values robust economic development more than democratic norms such
as freedom of speech, freedom of association, or freedom of political par-
ticipation, economic development may serve to maintain the autocratic
regime.
Some stylized observations support the argument that development may
not bring about democratization. China, for example, has been vigorously
94 Democracy and Economic Openness in an Interconnected System

developing its economy since the late 1970s, but it remains a one-party state.
Since the late 1990s, Russia has achieved considerable economic develop-
ment, but various reports suggest its level of democracy is on the decline.
Strong developments in Japan from the late nineteenth century to 1945 and
in Germany from 1933 to 1945 coincided with highly undemocratic yet
popular regimes. Finally, despite Singapore’s stellar economic development
record, the country is still autocratic.

Causality from Democracy to Development

Theoretical considerations suggest the effect of democracy on development
can be negative or positive. Starting with the negative impact, one chan-
nel argues democracies are bogged down by special interests and rent-
seeking, which hinders development. Special interests use the democratic
political process to redistribute wealth from the public to themselves, and
rent-seeking allocates resources to unproductive activities. A development-
oriented autocrat may restrain the overbearing rent-seeking interests
(Olson, 1982; Lal, 1983; Jackman, 1993). In this vein, regimes based on
alliances between the military and technocrats may be efficient in promoting
development, because the technocrats devise required policies and the deter-
mined military regime implements them (O’Donnell, 1979; Cohen, 1985).
In a second channel, free people may be reluctant to curtail their con-
sumption in order to save. Low savings, in turn, leads to low investments,
which slows down development. Democratic governments, depending on
the electoral support to stay in office, are often afraid to impose unpopu-
lar measures to increase savings and investments. Depending relatively less
on public support, autocrats can implement unpopular policies to boost
savings and investments (Hewlett, 1979; Rao, 1985).
Third, democratic governments tend to spend much on social welfare
programs because the public values them. Massive government expendi-
tures, in turn, crowd out resources for development projects. Democracies
may also have to confront strong populist pressures to redistribute wealth
from the rich to the poor in various ways, reducing the willingness of the
wealthy to save and invest. Authoritarian leaders may be better able to ward
off these pressures, encouraging economic development (Haggard, 1990;
Barro, 2000).
In a fourth channel, democracies are less able to suppress social unrest
than autocracies because they have to protect civil liberties. Social unrest, in
turn, slows down production, undermines effective business planning, and
 Democracy and Development 95

scares away investors. Because it is more capable of enforcing social order,

an autocratic regime can promote economic development better than a
democratic government (Pye, 1966; Hewlett, 1980).
Finally, less developed countries (LDCs) feature agrarian societies, high
income inequality, youth-oriented demographics, low levels of technology,
underdeveloped financial markets, and dependence on international capital
and technology. In such situations, the state necessarily must play an active
and interventionist role in promoting development, suggesting that author-
itarian decision making may outperform the diffused democratic process
(Chirot, 1977; Cohen, 1985).
In contrast, several arguments indicate that democracy can facilitate
development. First, political freedom leads to economic freedom. Free mar-
kets, in turn, allocate financial resources and factors of production to their
most efficient use, bringing about development (Goodin, 1979; Goodell
and Powelson, 1982).
Second, democracy respects individual rights, including private property
rights. Secure property rights, in turn, are critical for trade, savings, and
investments, which promote development (Goodell and Powelson, 1982;
North, 1990; Olson, 1993; Clauge et al., 1996; Li and Resnick, 2003). Auto-
crats may also secure property rights, but democratic leaders are more likely
to do so since they are subject to checks and balances (North and Weingast,
1989). Autocrats may abruptly change the rules of the game, increasing
uncertainty and, therefore, the willingness to invest. Autocrats may also be
more predatory than democratic leaders, because they have fewer incentives
to consider public welfare, as opposed to their own interests and those of
their cronies (Goodell, 1985; Findlay, 1990; Olson, 1991).
Third, because democratic regimes are more responsive to public con-
cerns and more likely to solve problems through political compromise, they
may experience less domestic unrest than autocracies. Because democratic
governments represent the public, they may seek to achieve relatively more
equitable income distributions than autocracies. All these forces work to
defuse public grievances and reduce the likelihood of social strife and revo-
lution. Political stability, in turn, leads to a longer time horizon for economic
activities, increasing the allocation efficiency and investments required for
development (Przeworski, 1985; Barro, 2000; Feng, 2003).
Fourth, autocrats’ military spending needs to be relatively more excessive
to sustain control over their population. Consequently, they need to extract
more resources from society through tax or pillage, which hinders economic
development. In addition, as autocrats allocate most of their energy to
96 Democracy and Economic Openness in an Interconnected System

maintaining social order and guarding against possible coups that might be
staged by their opponents or the public, they are less likely to be effective at
modernizing their economies (Nordlinger, 1970; Bienen, 1971).
Finally, the autocrat, who requires the support of the ruling elite, may
be subject to rent seeking, corruption, and patron–client relationships, all
of which undermine development. Whereas autocrats have more decision-
making power, they still make bad decisions. For example, capital-intensive
development strategies, which autocrats have often chosen, may produce
dual economies in LDCs, which is detrimental for development. In contrast,
rent-seeking in democracy need not be as severe as in autocracy, and demo-
cratic deliberation does not necessarily lead to bad public policy (Goodin,
1979; King, 1981; Nafziger, 2006).

THE EMPIRICAL LITERATURE

The previous section discussed various theoretical conjectures on the effects
of democracy and development on each other. Taken together, these argu-
ments suggest that democracy and development affect each other simul-
taneously. Moreover, because all the preceding arguments are theoretically
plausible, the net effects of development and democracy on each other
could be positive, negative, or insignificant. To the extent that theory can-
not definitively calibrate the strengths of the causal forces, the exact nature
and strength of the reciprocal relationship between democracy and devel-
opment is an empirical issue.
This section overviews empirical findings in the literature and discusses
a number of critical design issues. In general, some stylized facts support
Lipset’s (1959) modernization thesis. For example, today the developed
countries (DCs) are all democratic, and those DCs with the most recent
history of autocratic rule – Greece, Portugal, Spain, and Turkey – are also the
least developed among the DCs. In Taiwan, South Korea, and several other
newly industrialized countries, a move toward greater democracy followed
economic development, whereas some of the worst democratic records are
found in LDCs. That said, stylized facts rejecting the modernization thesis
also exist (e.g., China and Russia) and, more generally, stylized facts may
not generalize across many countries.
Statistical studies of democracy typically employ single-equation models.
Development is typically measured by real gross domestic product (GDP)
per capita (RGDPPC) and democracy is typically measured as a continu-
ous variable. Most of these studies find that a rise in RGDPPC increases