Money Can’t Buy Democracy

Contrary to a long-held assumption, prosperity does not always lead nations down the path to democracy.
July 23, 2008
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The idea that economic prosperity engenders political freedom can be traced to Aristotle, who argued that only well-off citizens were afforded enough leisure time to adequately participate in political life. In the 1950s the political scientist Seymour Lipset was among the first to propose a novel take on Aristotle’s theory by promoting the idea that economic development is a prerequisite for the growth of democracy. Much of the work of such institutions as the World Bank and International Monetary Fund is informed by this premise, known as the modernization hypothesis.

At a first glance, the hypothesis appears to hold up. “Look around the world. Every rich country is also a democracy,” Professor Pierre Yared says. “So if we try to promote economic development, is that equivalent to trying to spread democracy?”

Yared worked with Daron Acemoglu and Simon Johnson of the Massachusetts Institute of Technology and James Robinson of Harvard University to answer this question. The researchers examined levels of democracy — measured by political freedom using the Freedom House Political Rights Index and the Polity Democracy Index — and prosperity — as defined by GDP per capita — from almost every country during the last 500 years. Their findings suggest that wealth does not promote democracy and that factors other than wealth — such as key, often accidental events in history — are more likely to be direct causal factors behind the differential trends toward democratization.

To identify or rule out a causal relationship between income and democracy, the researchers controlled for country fixed effects, a method that required looking at the individual experience of countries rather than comparing levels of income and democracy at a single point in time (an approach that shows a positive correlation but cannot eliminate other possible factors that may simultaneously affect levels of income and democracy). The researchers looked at changes in countries at intervals of 25, 50, 100 and 500 years.

“It seems that countries today are potentially different as a consequence of historical accidents,” Yared says. “An event long ago could have pushed a country on a path of high economic growth and democratization without the economic growth itself causing democratization.

“If the modernization hypothesis holds you would expect to see that in the short term — over the last 25 years — the countries whose economies grew the fastest also improved the most in political rights or, inversely, did not experience the deterioration of political rights,” Yared explains. “We don’t observe this, and in fact, it’s all over the board.” For instance, in Malaysia the economy boomed between 1970 and 1995, but political freedom there deteriorated relative to the rest of the world. During the same period, Niger experienced little economic growth but saw big improvements in political freedom.

The findings also suggest that any efforts to kindle democracy using only economic stimuli would at best require an extremely long wait on any return. “You might expect to see a positive causal relationship between a rise in income and democracy over the course of one hundred years, during the time period spanning the Industrial Revolution, for instance,” Yared says. “Surprisingly, you don’t see that. A hundred years of sustained economic growth is not associated with real improvements in political freedom. If you believe economic growth fosters democracy, a country would need to sustain high levels of growth for 500 years in order to see any effect on its political institutions, which is very long!”

Why then has there been a noticeable worldwide increase in democracy and income in some countries in the last 500 years? “We suggest that certain historical events have pushed some countries onto a virtuous path of growing faster economically and becoming democratic, whereas other countries have stagnated politically and economically,” Yared explains. Consider the role of repressive colonization in causing economic and political stagnation in much of sub-Saharan Africa, or the role of the Enlightenment and Protestant Reformation in promoting Europe’s development.

Economic development is desirable for its own sake because it often raises the standards of living for a broad group of people; political freedom can raise the overall quality of life for citizens. But policymakers may want to revisit the modernization hypothesis, focusing efforts less on economic development and more on building the kinds of institutions that foster political freedom. “You cannot expect democracy to happen as a benefit of economic growth,” Yared says. “It has to be more direct.”


Pierre Yared is assistant professor of finance and economics at Columbia Business School.

Pierre Yared

Pierre Yared is an Associate Professor of Business at Columbia Business School and Co-Director of the Richard Paul Richman Center for Business, Law, and Public Policy at Columbia University. He is a macroeconomist whose research focus is macroeconomic policy, growth, and political economy. His theoretical and empirical research has made a number of major practical contributions. For example, Yared’s work shows that...

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