We revisit one of the central empirical findings of the political economy literature that higher income per capita causes democracy. Existing studies establish a strong cross-country correlation between income and democracy but do not typically control for factors that simultaneously affect both variables. In the post-war sample, we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We present instrumental-variables estimates using two different strategies that also show no causal effect of income on democracy. Moreover, in a sample spanning the entire 20th century, the inclusion of country fixed effects again removes the statistical association between income and democracy. The cross-country correlation between income and democracy instead reflects longer-run changes, in particular, a positive correlation between changes in income and democracy over the past 500 years. We suggest a possible explanation for this pattern based on the idea that societies may have embarked on divergent political-economic development paths at certain critical junctures over the past 500 years. Consistent with this, the 500-year correlation between changes in income and democracy is significantly weakened or disappears when we control for potential determinants of these divergent development paths.
Acemoglu, Daron, Simon Johnson, James Robinson, and Pierre Yared. "Income and Democracy." American Economic Review 98, no. 3 (June 2008): 808-42.
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