A Barro Classic

Robert Barro's 1997 classic Determinants of Economic Growth has a number of interesting analyses on what drives prosperity. Most pertinent for my current research (see an earlier blog) are his findings on growth and democracy. These are mixed.

On the one hand, democracies may retard growth as they institute rich-to-poor redistributions of income (think Ecuador under Correa and Venezuela under Chavez). A number of authoritarian regimes have expanded economic freedoms: Chile under Pinochet, Peru under Fujimori, the Shah's regime in Iran, China under Mao. On the other hand, dictators can use their power to steal the nation's wealth. Think Marcos in the Philippines, and Mobutu Sese Seko in Zaire (now the Democratic Republic of Congo). Democracies can provide a check on such powers. Also, some growth-enhancing policies - for example making it easier for new businesses to start operations - are also politically popular and embraced by the electorate.

In sum, the link between growth and democracy is ambiguous. Enter Barro analyses on cross-country data from 1960 to 1990. The main finding is that increasing democracy from a low level to moderate levels increases growth (the upper limit in Barro's analysis is Mexico and Malaysia), beyond that democracy has a slight negative effect on growth. The interpretation is that after a given level of democracy, redistribution policies kick in too strongly. Also, pressure groups become more active in lobbying for specific interests, at the expense of growth policies.

Subsequent research has complained that cross-country analysis on macro data may raise too many endogeneity issues. The Doing Business data help in this respect, as they avoid these issues simply because the reforms captured in Doing Business are too small (individually) to affect the country's political environment (bend towards democracy). If one finds that in poorer countries democracy helps reforms, then Barro's findings are corroborated.

Whether a non-linearity exists is more difficult to test; there are few non-democracies among rich countries (and falling oil prices are reducing this number further).