Democracies Pay Higher Wages
Mohammad Amin and I are soon finishing a new research project, linking democracy to Doing Business reforms. Or, stated more pompously, investigating the link between political and economic governance. Results will be featured here in a week. A preview: democracies reform more.
The result may be counter-intuitive at first. A casual look at the top-10 reformers in Doing Business 2009 lists Belarus, Azerbaijan and Egypt. (However, it also features Botswana - the highest rated democracy in Africa.) There is a good rationale why less democratic countries may reform more: it is easier. The top decision-maker says reforms will happen, and they happen. And there is certainly evidence of this in Doing Business. But it is not the rule. On average, democracies yield more reforms.
Looking at the economics literature, I shouldn't be surprised. Several previous studies (by more eminent scholars) have found some parallel results. Dani Rodrik, for example, has a decade-old paper in the Quarterly Journal of Economics called Democracies Pay Higher Wages. The main result is that, after you control for labor productivity, income level and other possible determinants, the extent of democracy is associated with the level of manufacturing wages in his sample of 104 countries. Note that Rodrik uses the same two measures of democracy (from the Polity and Freedom House datasets) that the forthcoming Amin-Djankov paper uses.
The magnitude is large: a country can increase the level of wages by 30% if it jumps from a mid-range democracy to an advanced democracy. The reasons Rodrik gives are even more instructive. First, democracies obey the rule of law more consistently than do autocracies. Second, democracies are less prone to political instability and hence provide more economic growth opportunities, increasing the outside options for workers. Third, political competition ensures constituents are more often heard (also they are freer to associate).
The same reasons can apply to our project, as related to small businesses, who are the beneficiaries of Doing Business reforms. In sum, it is not too surprising that democracies do better in Doing Business....on average.
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Democracy is by far a more efficient decision-making mechanism than dictatorship. Basically, the core of democracy is political competition, which is almost non-existent in autocracies. This also helps explain why democracy is good for economic prosperity.
As for top reformers - autocracies are more able to make a showing of reforms (like military parades) than democracies. But these reforms may be very superficial.
When the authoritarian rulers' rents are declining, they are forced to reform. Because they simply cannot afford being so inefficient. But once the rents are back (let's say oil prices rise), all reforms will become a dead letter. Therefore the same non-democracies may re-appear on the top reformers list again and again.
Posted by: Yaraslau Kryvoi | Jan 9, 2009 3:50:36 PM