Democracy and GDP

We’ve long known that democratic countries tend to be richer than dictatorships. There’s also evidence that this understates the advantages of democracies. For instance, democracies are also less prone to experiencing famines, even compared to equally poor dictatorships. But is there a causal link? Here’s Alex Tabarrok:

In their sample of 175 countries from 1960 to 2010, Acemoglu et al. find that democracies have a GDP per-capita about four times higher than nondemocracies ($2074 v. $8149). (This is uncorrected for time or other factors.) But how much of this difference is explained by democracy? Hardly any. Acemoglu et al. write:

Our estimates imply that a country that transitions from nondemocracy to democracy achieves about 20 percent higher GDP per capita in the next 25 years than a country that remains a nondemocracy.

In other words, if the average nondemocracy in their sample had transitioned to a democracy its GDP per capita would have increased from $2074 to $2489 in 25 years (i.e. this is the causal effect of democracy, ignoring other factors changing over time). Twenty percent is better than nothing and better than dictatorship but it’s weak tea. GDP per capita in the United States is about 20% higher than in Sweden, Denmark or Germany and 40% higher than in France but I don’t see a big demand in those countries to adopt US practices. Indeed, quite the opposite! If we want countries to adopt democracy, twenty percent higher GDP in 25 years is not a big carrot.

There are many economic reforms that countries can do.  Thus the US could do tax reform, zoning reform, occupational licensing reform, reduce subsidies to health care and education, remove rent controls, remove tariffs and quotas, and many other types of reforms.  Considered individually, each reform would only have a very small impact on GDP. 

Democracy is different. I can’t think of any potential policy reform that even comes close to boosting GDP by 20%, other than democracy.  It seems to me that it is by far the most powerful growth enhancing reform available to countries. In that sense I disagree with Alex; I view this study as incredibly good news for democracy.  It is the ultimate low hanging fruit.

So if 20% is so big, then why don’t European countries emulate the US economic model?  Suppose they did adopt our relatively low tax regime, and suppose this boosted hours worked up to US levels.  In that case, they might also be able to boost GDP per capita close to US levels.  After all, the main difference between the US and northwestern Europe is hours worked, not labor productivity.  So why don’t they adopt the US model?

Perhaps the Europeans see two downsides to the American model.  First, they’d lose a lot of leisure time.  Second, they’d lose the revenue to support their huge welfare states, and that might increase inequality.  I still believe that they should switch to a lower tax model—Switzerland has done very well with this approach—but I can also see what holds them back.

In contrast, it’s hard to see any downsides from moving toward democracy.  Consider the things that don’t show up in GDP, such as leisure, a clean environment, human rights, avoidance of regional famine.  In all cases, it hard to see how democracy would make those conditions worse, and indeed in most cases it seems like the exact opposite is true—democracies also do better in terms of “intangibles” that don’t show up in GDP data.  Dictators don’t care as much about the public having human rights, clean air, leisure time, and a stable food supply.  They want power.

In the article discussed by Alex, the authors note the following:

With the spectacular economic growth under nondemocracy in China, the eclipse of the Arab Spring, and the recent rise of populist politics in Europe and the United States, the view that democratic institutions are at best irrelevant and at worst a hindrance for economic growth has become increasingly popular in both academia and policy discourse. For example, the prominent New York Times columnist Tom Friedman (2009) argues that “one-party non democracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. ”

This is a very weak argument. The world is full of horrible dictators in places like Turkmenistan, Cuba, North Korea, Central African Republic, Venezuela, Equatorial Guinea, and dozens of other places. And because the democracy skeptics are able to find one allegedly well functioning dictatorship, this is supposed to be a powerful argument for autocracy? (And don’t forget the human rights disaster in Xinjiang.) What are the odds that you end up with an “enlightened” dictator?

But it’s even worse. Mainland China clearly lags far behind democratic Taiwan. Even worse, the Chinese Communist Party caused the worst disaster in human history in 1959-61. All they have done recently is move from disastrous Maoism to a much less bad mixed economy, which has pushed Chinese GDP/person from extreme poverty up to the level of a middle-income country like Mexico. If someone has their foot on my throat, and then eases up a bit so I can breath better, am I supposed to praise them for making me feel good? That’s the successful “model” for rejecting democracy?

I’m actually open to the argument that dictatorships might be better, but pointing to anecdotal examples such as China is not going to convince me. You’d need to provide systematic evidence. If the evidence from 175 countries suggests that democracy boosts GDP by a huge 20%, and if democracy also leads to gains in all sorts of intangibles, then why wouldn’t all countries wish to go that direction?

Fukuyama was right; the world will become democratic.



31 Responses to “Democracy and GDP”

  1. Gravatar of John Hall John Hall
    10. July 2019 at 12:42

    I saw that post by Alex. And the whole time I was thinking, what about capitalism?

    You said, “I can’t think of any potential policy reform that even comes close to boosting GDP by 20%, other than democracy”. Again, I’m thinking what about capitalism?

    I think your point about China and dictatorship connects to this, but again China’s economic performance is due to becoming more capitalistic.

    I at least agree with your point about 20% actually being huge. Alex’s post is like, “meh 20% over 25 years, that’s not so much.” Here I am thinking that’s like an additional 0.7-0.8% growth per year for 25 years. That’s huge!

  2. Gravatar of stoneybatter stoneybatter
    10. July 2019 at 13:04

    I liked and agreed with the entire post, until the final line. Just because democracy might be beneficial for GDP and certain other intangibles, that doesn’t make it inevitable. It feels like that conclusion is beyond the scope of the rest of the post.

    As Orwell wrote almost 80 years ago:

    “Human beings don’t only want comfort, safety, short working-hours, hygiene, birth-control and, in general, common sense; they also, at least intermittently, want struggle and self-sacrifice, not to mention drums, flags and loyalty-parades.”

  3. Gravatar of ssumner ssumner
    10. July 2019 at 13:08

    John, Fair point. I was viewing “capitalism” as a large series of reforms, and democracy as a single reform. But of course that’s debatable.

    stoneybatter, In the last line I was transitioning from analysis to prediction. My claim is certainly debatable.

  4. Gravatar of E. Harding E. Harding
    10. July 2019 at 13:13

    20% difference sounds about right (though note there’s a lot of overlap and variation; it’s not one consistent effect).

  5. Gravatar of E. Harding E. Harding
    10. July 2019 at 13:15

    That is, the research might say democracies are better than dictatorships overall, but is much more mute about whether any specific democratic transition is advisable.

  6. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    10. July 2019 at 14:44

    Why the world don’t have strong mechanism to reform those failure nations?

  7. Gravatar of Benjamin Cole Benjamin Cole
    10. July 2019 at 15:37

    Minor point, but people misuse the word “capitalism” to mean a free-market system. See Scott and John above.

    There is plenty of capitalism in mainland China, but most of it is state capitalism.

    Then, you could also have a system of private capitalism, but no free markets. That is, markets are allocated to favored nongovernmental political actors, who are also capitalists.

    I think what people mean is they prefer democracy, and free markets, and a healthy dose of private capitalism. That is my point of view, anyway.

    It is a little unsettling to read in libertarian-oriented blogs that democracy is perhaps not the best way forward. Some libertarian bloggers are even suggesting that any state is a net bad, and that we should move to stateless non-societies. Others wax long on how democracies too often lead to majority repression of minorities (you know, taxing rich people).

    Well, like the old saw. Democracy is a lousy way to run things, until you try the second-best way.

  8. Gravatar of Benjamin Cole Benjamin Cole
    10. July 2019 at 16:09

    Add on: despite my affection for free markets and democracy, I still think mainland China, with a dirigiste economy, will easily eclipse the US in all economic categories within the next 30 years. I am not sure why this strikes me as obvious, but it does. It may have something to do with Han culture or with their financial system and their central bank. The People’s Bank of China appears to have broader goals in mind than the simple fight against inflation. The People’s Bank of China also can simply buy bad debts from the commercial banking system. This leaves the broader commercial banking and financial system solvent while deleveraging the economy. China is still below its inflation target of about 3%.

    Well, as I say, no one is ever wrong in macroeconomics.

  9. Gravatar of Michael Sandifer Michael Sandifer
    10. July 2019 at 18:59

    Very good comments.

  10. Gravatar of Doug M Doug M
    10. July 2019 at 21:53

    I have been thinking about this recently, and am wondering if perhaps the causality doesn’t run both ways. A country that does not have a diverse set of independent institutions lacks the stability required to maintain a democracy.

    he natural state of government is corruption. If a non-corrupt leader comes into power, those who could be grafting the system will ally together to depose the fair ruler, to install one who will be more generous with the payola. If there is money for the keptocrats to steal they will try to steal it.

    What keeps the keptocrats at bay, then are these collections of institutions that have some amount of power, and have an interest in operating in an environment of minimal theft.

    Dictatorships, and more generally concentrations of power, lead to corruption which depresses wealth and income. At the same time, countries that are poor have weak institutions and tend to prey to the dictators.

    It is a catch-22.

  11. Gravatar of LK Beland LK Beland
    11. July 2019 at 04:55

    I’m surprised that these types of discussion typically don’t mention India. It is, after all, the world’s largest democracy. It’s also been quite poor for most of its democratic existence, and has started growing rapidly relatively recently.

    To a large extent, India represents democracy’s best hope. If it succeeds in its development, India would be the main counterweight to the growing Chinese Communist influence worldwide.

  12. Gravatar of Michael Rulle Michael Rulle
    11. July 2019 at 05:15

    Good post. It was interesting Taborrak wrote that essay. I felt his heart was not really into it. He was just thinking out loud in my view, which is fine by me. His Friedman reference is old, as I believe he would not write that today.

    Another interesting country to observe is Vietnam. It comes to mind, as the “Untuckit” shirt I am wearing today was made in Vietnam—-they source shirts from everywhere. Very good shirt by the way. It seems to have adopted free market practices, growth is high and they hold regular elections, technically even permitting non CVP members to run. But it would be an exaggeration to claim it is a democracy—-as the Communist Party definitely maintains a strong hold on government. (fascinating they and China call themselves Communists_—must think it is good marketing).

    I do not know if the 20% concept is correct. But they are free market, if not Democratic.

    Europe as a whole does seem to value leisure more than Americans. Which, of course, is fine. But France, at least, virtually requires it. I know quite a few French people, and there are definitely complaints from those with “American style” work ethics who complain they are forced to not work longer hours—-and feel frustrated they are on a defined path. Not sure what that is about.

    When I look at how obsessed we have become about politics in America, it is strange to me. I am not about to go 2009 Friedman on this, but I never would have imagined we would have one of our major parties ready to go quasi-socialist—-or whatever we call their policies. Democracy can go in many directions.

  13. Gravatar of ssumner ssumner
    11. July 2019 at 07:07

    Doug, Yes, causation clearly runs both ways.

    LK, It’s worth noting that the more democratic part of former British India has done better than the less democratic part (i.e. Pakistan.)

    Michael, Vietnam is similar to China.

    I’m not sure if Europe values leisure more, or if the tax system causes people to consume more leisure. (Preferences vs. incentives.)

  14. Gravatar of LK Beland LK Beland
    11. July 2019 at 12:25

    “I’m not sure if Europe values leisure more, or if the tax system causes people to consume more leisure. (Preferences vs. incentives.)”

    Why did Europeans vote for a more “leisurely” tax system? I see at least two factors:

    – Soviet threat (i.e. proximity to Russia): pro-capitalism politicians implemented social-democratic policies in order to limit pro-Soviet sentiment on the Left

    -Historically homogeneous nations: during the 20th Century, European countries were more ethnically homogeneous than the United States. For this reason, Europeans taxpayers were probably less concerned about paying for the leisure of others than Americans. This may also explain why Switzerland, comprised of a mix of ethnic groups, opted for a smaller welfare state.

  15. Gravatar of Todd Kreider Todd Kreider
    11. July 2019 at 12:36

    “Even worse, the Chinese Communist Party caused the worst disaster in human history in 1959-61.”

    It may be the worst but the Taipei Rebellion resulted in 20 to 30 million deaths over a longer period, 1850 to 1865. That is roughly the mid-range estimate for the death toll of the Great Leap Forward.

  16. Gravatar of dtoh dtoh
    11. July 2019 at 16:49

    Some random comments.

    I think what you need is not democracy but liberty (specifically economic freedom, and even more specifically to have a government that doesn’t steal your money and property.)

    Liberty comes when there is diversification of power and everyone realizes that the only way to protect their power (rights) is to protect the rights of everyone. (Democracy is by-product of this process.)

    Democracy will fail. You need a Republic for long term success.

    In the 70’s everyone thought Japan was unstoppable. Moving workers from the farm to the factory (the Soviet, Japanese, Chinese model) only works for so long.

    The Chinese are entrepreneurial. The Japanese are ethical. The Vietnamese are both.

  17. Gravatar of Todd Kreider Todd Kreider
    11. July 2019 at 18:31

    “(the Soviet, Japanese, Chinese model)”

    Almost all of Japan’s fast growth was simply rebuilding after over 95% of its capital was destroyed and getting away from bad U.S. policies in the late 1940s.

  18. Gravatar of Dtoh Dtoh
    11. July 2019 at 21:47

    Postwar growth was a continuation of a trend started well before the war. The war and reconstruction was just and interruption of that trend. Read Rosovsky and Ohkawa.

  19. Gravatar of Todd Kreider Todd Kreider
    12. July 2019 at 03:49


    That was my point although interesting that Japan’s postwar growth was faster until the 1980s than 1890 to 1940 growth.

  20. Gravatar of dtoh dtoh
    12. July 2019 at 04:50

    Yes correct. I think the title of the Rosovsky Ohkawa book is “Trend Acceleration in the 20th century” or something like that.

  21. Gravatar of ssumner ssumner
    12. July 2019 at 08:30

    LK, You said:

    “Why did Europeans vote for a more “leisurely” tax system? I see at least two factors:”

    In only one European country were voters given the right to choose the level of taxes, and that was Switzerland. Guess which European country has low taxes?

  22. Gravatar of ssumner ssumner
    12. July 2019 at 08:44

    Todd, The estimates on the GLF death toll are 20 to 50 million. In addition, the GLF was a specific policy decision by one man, which could have been stopped at any time. Correct me if I’m wrong, but wasn’t the Taiping rebellion a messy, decentralized disastrous civil war? If so, I’d argue the GLF was the bigger crime, even if the two were equal disasters. I suppose the Black Death is also up there somewhere.

    Dtoh, You said:

    “Democracy will fail. You need a Republic for long term success.”

    Yes, that’s why Switzerland has done so poorly. Seriously, I was defining “democracy” in the broad sense, to include republics with elected governments. That’s now the more common definition, even if not historically accurate.

    You said:

    “The Chinese are entrepreneurial. The Japanese are ethical. The Vietnamese are both.”

    Ethical? Obviously that doesn’t include the Vietnamese people who happen to serve in the government, people who commit horrible human rights abuses. I presume you also favor a policy of the US refusing to trade with Vietnam, just as you’d have us refuse to trade with China?

    And how ethical was the Japanese treatment of the Chinese people in the 1930s? I’ll agree on one point; the Japanese public has a lot of civic virtue, more than virtually all other Asian nations. But “ethical” is a broad statement. There are many aspects to ethics, including the treatment of outsiders.

  23. Gravatar of Todd Kreider Todd Kreider
    12. July 2019 at 10:16

    “In addition, the GLF was a specific policy decision by one man, which could have been stopped at any time. Correct me if I’m wrong, but wasn’t the Taiping rebellion a messy, decentralized disastrous civil war?”

    Hong Xiuquan, who believed he was the half brother of Jesus Christ, anointed himself as the Heavenly King and led a rebellion against the Qing Dynasty. Just one man, whereas that may not be clear with Mao. I’m only saying that the 20 to 30 million dead with 15 years of extra suffering to the already dirt poor Chinese puts it up there in human led suffering, not that Mao wasn’t worse.

  24. Gravatar of cbu cbu
    12. July 2019 at 10:29

    On a per capita basis, the Great Famine in Ireland, which was mismanaged by the British government, was actually even worse, when more than 10% of the Irish population died. On the other hand, unchecked capitalism and “democratization” can also cause disaster, as the “shock therapy” in Russia demonstrated, where not only the economy was thrown into a depression that needed many years to recover, the mortality rate for working age male was also increased at least 13%.

    There seems quite a few “democracies” that are stuck in the middle-income trap (37 of them according to the World Bank). I think maybe we can hold our judgment a little longer to see If authoritarian China can pull it off,

  25. Gravatar of dtoh dtoh
    12. July 2019 at 13:07


    I don’t think ethics are immutable and I think most people will engage in unethical behavior depending on the circumstances.

    I think trustworthiness would have been a better description. Specifically the degree to which an average person in current society can be trusted in personal and business dealing

  26. Gravatar of dtoh dtoh
    12. July 2019 at 17:31

    Even though it’s ignored these days, the distinction between Democracy and Republicanism is extremely important.

    As for Switzerland….1) It’s a tiny country, 2) the amount of actual democracy is minimal (something like two actual referendums per year and one or two democratically enacted laws per decade), and 3) it does a poor job of protecting minority rights (women didn’t get full voting rights until 1991), and 4)most legislation is enacted through elected representatives.

  27. Gravatar of dtoh dtoh
    12. July 2019 at 17:32

    I would not favor a trade war with China because…

    1) It mostly follows the rules.
    2) It’s not a serious threat to humanity

  28. Gravatar of dtoh dtoh
    13. July 2019 at 06:32

    Meant Vietnam not China. I do favor a trade war with China.

  29. Gravatar of ssumner ssumner
    13. July 2019 at 16:39

    cbu, Wait, the Russian disaster was caused by “capitalism” and “democracy”? Seriously?

    You said:

    “I think maybe we can hold our judgment a little longer to see If authoritarian China can pull it off,”

    I never claimed that China would not continue to develop, my point is that China is hardly an argument against democracy.

    dtoh, The amount of democracy in Switzerland may be “tiny”, but they did have more national referenda during the 20th century than the rest of the world combined. And they also have a lot of decentralization, which makes Switzerland even more democratic. I’d say that Switzerland is by far the world’s most democratic country. In any case, my comment was about taxes, and in Switzerland tax increases must be approved by voters.

    And I don’t know of any “rules” that Vietnam follows that China does not. Studies show that China is an entirely average middle income country in terms of trade barriers, IP violations, and other points of contention. In any case, Trump has now trained his trade war sights on Vietnam, so it looks like they’ll be next. American nationalists don’t discriminate among the various Asian nations, they lump them all of them together. Once you start a trade war . . .

  30. Gravatar of dtoh dtoh
    13. July 2019 at 17:58

    IMHO, there should be five trade rules.

    1. You can import/export freely.
    2. You can invest freely.
    3. You don’t steal IP.
    4. You don’t spy on or censor anyone.
    5. You don’t use force or the threat of force against your neighbors.

    If you follow the rules, you can play. If you don’t follow the rules, you can’t play.

    Cut some slack for poor countries and cut some slack for middle income countries who follow rules 4) and 5).

  31. Gravatar of dtoh dtoh
    13. July 2019 at 18:09

    And BTW – the only reason VN is becoming an issue is because Chinese firms are cheating by trans-shipping to VN and putting a fake country of origin label on products.

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