Why Certain Countries Cannot Grow Faster in Democracy

With the rise of the Chinese economy and the eclipse of the Arab Spring, the effect of democracy on economic growth has gained a lot of attention recently. Even though there does not seem to be a clear consensus on the nature of the relationship, more recent evidence as put forward by the influential paper of Acemoglu et al. (2019) (Hereafter ANRR) points towards a positive long-run link. The figure below shows GDP per capita dynamics in countries that democratized at year zero relative to other countries that remained nondemocratic. By using a worldwide large unbalanced panel and employing a linear dynamic panel model with various estimation strategies, ANRR demonstrates a sizable 20% long-run effect of democratization on economic growth (captured by GDP per capita).

GDP per capita before and after a democratization

Source: Acemoglu et al. (2020)

Chen and Stengos (2021) (Hereafter CS) revisits the same estimation approach taken by ANRR with an essential methodological twist as they allow for the presence of nonlinear effects in how democracy affects economic development through different regimes. Whereas CS confirms a uniformly positive effect, they also find strong evidence for nonlinearity in the way a country with a higher institutional quality level attains a larger positive return of democratization on economic growth. Thus, CS suggests the democratization requires a certain level of institutional quality to be a more effective driving engine for economic growth.

Although the globally averaged effect seems optimistic, the regionally averaged result gives an entirely different picture. For example, Khodaverdian (2021) examines the impact of democracy on growth for countries in the Sub-Saharan Africa area (SSA) and finds democracy cannot benefit GDP per capita in SSA. The next figure compares the percentage changes of GDP per capita dynamics after democratization for SSA (solid line) with non-SSA (dashed line). While the non-SSA shows a quite sharp V-shape change over time, surprisingly, the SSA suffers a prolonged stagnation after the transition. Besides, the conventional mechanisms that sort out why democracy affects growth, such as investment, education, and trade, cannot convincingly address this regional heterogeneity. We need a new channel to explain the SSA puzzle.

Average %-change in GDP per capita before and after a democratization for SSA countries and non-SSA countries

Source: Khodaverdian (2021)

To provide insight, Khodaverdian (2021) further investigates the effect of democracy on total GDP instead of the GDP per capita and realizes a shocking fact – neither SSA nor non-SSA countries’ total GDP benefits from democracy. In other words, democracy only increases GDP per capita in non-SSA countries but not total GDP. The result refers to a critical role of the denominator of GDP per capita – the democratization enforces some countries to slow down population growth and thus inflates the GDP per capita. Khodaverdian (2021) subsequently proposes a new mechanism of democracy affecting growth based on this conjecture – the demographic structure. He then examines the channel and finds that democracy has a heterogeneous effect on demographic structure. Indeed, democracy decreases the population size and accelerates the ageing process in non-SSA countries. In contrast, the opposite moves are observed for the SSA countries. Consequently, the author attributes the presence of the SSA puzzle to the heterogeneous effect of democracy on the demographic structure. 

Tragically, democracy seems to drag SSA countries toward a Malthusian trap. Perhaps, as the author highlights in the paper, the heterogeneous effect of democracy on the demographic structure may strongly relate to the fact that the democracy fails to reduce the child mortality rate in the SSA countries but dramatically improves it in non-SSA countries. At first glance, it seems to be quite odd to see countries with higher child mortality rates turn out to gain higher population growth. In fact, we can use “rebalancing birth incentives” to explain this counter-intuitive argument. To be more specific, with a higher mortality rate, parents tend to have more babies to hedge the risk of child mortality. In contrast, a lower mortality rate eases birth anxiety and motivates parents to optimize their birth plan. Hence, two types of birthing attitudes aggregately set a different path to population growth. As a result, democracy promotes a demographic transition towards a healthier structure in non-SSA but fails to promote the same transition in SSA.  Suppose the above argument is valid. In that scenario, an improvement of the pro-health environment for children is the only way to bypass the Malthusian trap. It may not be too late for SSA countries to avoid the tragedy. But they must act from now.

Democracy is an intrinsically invaluable asset. However, if we wish to count it as the locomotive of economic development, it is better to think about it once again. Without enough progress in both society and human consciousness, just old wine in a new bottle.

Chaoyi Chen

Chaoyi CHEN joined the MNB and the MNB Institute in 2020. He received a PhD in Economics from University of Guelph in 2019. His research interests are econometrics and applied econometrics. His research topics have included the threshold regressions,  long-horizon regressions, nonstationary time series regressions, and applications on macroeconomics.


References:

Acemoglu, D., Naidu, S., Restrepo, P., & Robinson, J. A. (2019). Democracy does cause growth. Journal of Political Economy, 127(1), 47-100.

Chen, C., & Stengos, T. (2021). The democracy-growth nexus: a GMM linear threshold model approach. mimeo.

Khodaverdian, S. (2021). The African tragedy: the effect of democracy on economic growth. Empirical Economics, forthcoming.


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