Notes- The economic effects of democracy

From Knutsen's lecture.

Question: Is a democratic regime compatible with desired social and economic outcomes- high economic growth, low inequality, high wages, better education, etc?
=> CGG (Clark, Golder, Golder- Principles of Comparative Politics): sceptical.
=> may be too quick and simplistic.
=> Many studies, especially recent studies: positive effect of democracy on growth, property rights protection, health, education, etc.
Democracy: minimum level of growth.
Dictatorship: large variation=> different kinds of dictatorships?

- Przeworski and Limongi: 4 arguments on regime and growth: 
+ Democracy=> property rights protection=> growth.
=> P&L: indeterminate.
=> CGG: similar (not a strong link between democracy and property rights protection).
+ Dictatorship=> reduce consumption=> increase saving=> increase investment=> growth.
=> P&L: score for dictatorship.
=> CGG: question the validity of the argument- huge differences between dictatorships.
+ Dictatorship: leaders autonomous from general public and special interest groups=> pursue unpopular, growth-enhancing policies=> growth.
=> P&L: score for dictatorship.
=> CGG: question the validity of the argument- what if the leaders don't care about growth?
+ Autonomous dictators may be predatory.
=> P&L: score for democracy.

- Democracy and property rights protection:
+ Property rights protection=> economic certainty => incentive to work hard and invest=> growth.
+ CGG are sceptical but their counterexamples are only exceptions: Lee Kuan Yew's Singapore, Pinochet's Chile, etc.
Most empirical studies find that democracies protect property better.
- Why democracy might harm proper rights:
The Meltzer-Richards model: the median voter in democracies is relatively poor (poorer than the average) whereas the median member of winning coalition in dictatorships is relatively rich=> more taxation and redistribution in democracies=> disincentive for investment=> reduced growth.
But:

• In democracies the rich are more likely to vote+ to influence policies (credible exit threat).
• Rulers in democracies have to think of elections=> can't tax too high.
• Not proved empirically.

- Why democracy might strengthen property rights:

• Autocratic rulers may expropriate property and redistribute to themselves or close allies (economic. political motivations).
• Weaker checks on autocratic rulers=> easier for expropriation.
• Elections, role of free media in monitoring the actions of leaders in democracies.
• Democracy: large winning coalition=> provide public goods rather than selectively allocate private goods (e.g expropriated property) to political backers.

- Democracy and consumption vs saving/ investment: 1 of the classic arguments on why democracy may be bad for growth.
+ Physical capital investment as an immediate determinant of growth.
+ Income may be consumed or saved: saved=> invested=> increasing productive capacity in the future.

• Dictatorial regimes are better at constraining consumption (public and/or private)=> increase saving.
• Can resist demands of large population segments for public spending.
• Can push through unpopular policies that reduce private consumption (e.g ban on tourism).
• No provision of public security, education, etc=> induce people to save privately.
• Democracy: redistribution of wealth to the relatively poor=> these groups save a smaller fraction of their incomes than the relatively rich.

- Democracy and human capital:
+ Democracy=> human capital=> growth.
(indirect effects).
+ Baum and Lake: democracy enhances growth through:

• increasing life expectancy in poor countries.
• increasing secondary school enrolment ratios in rich countries.

+ Knutsen: expanding data material back to 1820=> fairly robust positive effect of democracy on growth.
=> the main channel through which democracy enhances growth is not human capital but technological change.

- Variation within groups of regimes:
+ Variation between different democratic and dictatorial regimes.
=> more specific institutional set-up?
+ Significantly larger variation among dictatorships.

• Particular leader matters more for growth in dictatorships (not much in democracies).
• 1-party regimes+ dictatorships with legislatures+ dictatorships with autonomous winning coalition (not at mercy of particular leader) grow faster.

- Evans and Rauch:
+ Growth depends on governance.
+ State bureaucracies with Weberian characteristics (meritocratic recruitment, predictable long-term career rewards)

• => competence.
• share similar abilities=> internalise shared norms and goals (more than those who know they owe their office to the favour of a kinsman/ patron).
• reduce the attractiveness of the quick returns available from corrupt practices.
• increase propensity to advocate public-sector infrastructure in investment rather than consumptive expenditures.

=> growth.