Democracy is slowly spreading around the world. From the Middle East to Latin America and Asia, many autocracies are taking gradual steps towards more democratic and accountable forms of government, or have become fully-fledged and well functioning democracies. The US administration is determined to consolidate political freedoms in many developing countries under its sphere of influence; indeed, expansion of democracy has become a cornerstone of US foreign policy.
There are many reasons to celebrate the current democratic wave. Democracy is associated with less injustice and abuse, with basic civic and political freedoms, and with greater sensitivity by governments for the true priorities of its citizens. But how important is democracy for economic success?
Not much, the empirical evidence suggests. This might appear surprising. After all, is it not true that virtually all rich countries have democratic forms of government, while the poorest countries -- mainly in Africa -- are non-democracies? Indeed, throughout the world, democracy is strongly correlated with higher per capita income.
But this correlation goes missing when one looks at the dimension of time rather than space. Countries that become democracies do not, on average, achieve faster economic growth after their political transition; and, vice versa, democracies that fail and relapse into autocracy do not, on average, do worse than before.
The positive correlation between income and democracy that one sees across countries could be due to reverse causation: democracy is more likely to persist as a country grows richer. It could also be due to special historical or cultural circumstances: some societies are just more successful than others, both in terms of economic development and with regard to their ability to develop and maintain democratic political institutions.
Whatever the reason for the observed positive cross-country correlation between income and democracy, it should not be confused with causality. Being democratic does not seem important in securing economic success.
Of course, there are many different kinds of democratic transition, and lumping them all together might be misleading.
An important distinction in practice concerns the interaction between the economic and the political system. A democracy born in an open economic environment, with a well functioning market system, widespread foreign direct investment and sizeable international trade, is likely to consolidate economic liberalism, stabilize expectations and hence lead to more investment and faster growth. Conversely, if an economy is tightly controlled by the state, has protectionist barriers against foreign imports and capital movements, or relies on rents from exhaustible resources to obtain foreign currency, transition to democracy can be plagued by populism and struggles for redistribution, hurting economic growth.
Empirical evidence supports the idea that the success of a democracy depends on the openness of the underlying economic system at the time of political transition. In the post-World War II period, the more successful episodes of democratic transitions have been preceded by widespread economic reforms that extended the scope of the market and facilitated international integration. Examples include Chile and South Korea in the late 1980s and Mexico in the mid-1990s.
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