Ideas Matter: Why does democracy matter for growth?
According to Freedom House, some African nations, such as Ethiopia and Angola, made important strides toward becoming democracies in 2019, but overall progress on the continent was offset by increasing restrictions elsewhere. Why does this matter for growth and development? The reasons are complicated and manifold, but evidence suggests that the increased accountability that comes with democracy plays an important role in development.
The relationship between democracy and development has long been debated. On one hand, where countries have transitioned towards democracy after long periods of autocracy in places such as South Africa, improved growth has generally followed. To be more empirical, evidence suggests increased democratisation in low-income countries can create conditions that later promote growth. For example, various studies have shown improved levels of educational spending and attainment as a consequence of increased electoral competition (Galego 2015, Stasvage 2005). Daron Acemoglu et al’s 2014 study also found a causal link whereby countries that transition toward democracy achieve around 20% higher GDP per capita in the long run, due to improved private investments and a reduction in social conflicts.
However, the democracy and development nexus is not as straightforward as it may appear. Consider the Seychelles, which enjoys relatively high standards of living and is the highest-ranked African nation in the Human Development Index (UNDP 2019). Yet, the East African nation has historically scored poorly on most democratic indicators and is still only considered ‘part free’ by Freedom House (2020).
The causal relationship between democracy and growth is often disputed. For example, Ruiz Pozuelo et al’s 2016 study challenges the idea that the levels of a country’s democracy can be quantified in a manner effective enough to make such assertions. They also raise concerns around endogeneity in studies on this subject and suggest many factors relating to growth in these contexts are exogenous.
Part of the IGC’s State Effectiveness Programme considers the ways that improved democracy and accountability can help build conditions that lead to growth. Here are just some of the things that we have learned.
Democracy can improve the fairness of resource allocation
Unlike autocratic regimes, democracies tend to have better means to scrutinise resource allocation and politicians may have an impetus to ensure they are distributed fairly across a country. For example, a president needs support from the wider electorate to be elected and parliamentarians will want to ensure their constituency sees investment opportunities to enhance their re-election efforts. Conversely, leaders in autocracies may only need to maintain the support of certain interest groups in society to stay in power and may therefore have fewer reasons to allocate resources fairly.
A 2015 IGC study in Kenya by Robin Burgess et al investigated how ethnic favouritism differed across autocratic and democratic regimes by analysing spending levels on road building. The researchers found that in times of democracy, favouritism is substantially lower and economic growth higher. Conversely, during periods of autocracy districts where residents predominantly shared the ethnicity of the president received twice as much expenditure on roads and saw five times the length of paved roads built.
More broadly, improved accountability can help reduce the corruption, clientelism and rent-seeking that are often endemic in non-democracies and a hindrance to growth. For example, Paul Lagunes’ 2017 experiment in Peru found that civil society’s monitoring of public service workers reduced both corruption levels and the costs of infrastructure to taxpayers due to reduced leakages.
Information can improve performance as well as accountability
For democracies to function effectively, voters must be able to hold the politicians that govern them to account. However, in younger democracies, voters may be less informed on the issues being discussed and the policies of candidates vying for their support.
The IGC has funded various studies on how information interventions can strengthen democracies and therefore improve accountability. For example, Banerjee et al (2011) studied the impact of distributing report cards on the performance of politicians in Indian slums ahead of an election. They found greater transparency resulted in gains for better performing and more qualified incumbent politicians.
In Sierra Leone, holding viewings of debates between candidates in the run-up to the 2012 general election was found to increase voters’ general political awareness and the qualifications and stances of candidates (Bidwell et al, 2019). Interestingly, this knowledge not only saw a 3.5 percentage point average increase in the vote shares for the candidates who performed best, but incumbent politicians who participated in the debates were found to host more meetings with their constituents and spend more public funds on development projects, suggesting they became more accountable.
However, information interventions also have limits. A study by Dunning et al (2019) found that providing information about politicians was not particularly effective and suggests the context in which information is distributed could be important (read more in this 2019 IGC Growth Brief).
Accountability and democracy are difficult to build but vital for growth
The saying goes that democracy is more of a process than an event and there are innumerable examples of democratic transitions making progress only to regress or backslide.
The LSE-Oxford Fragility Commission argued that ‘…building blocks of effective democracy – including checks and balances, rule of law, and protection of minorities – are more important than the actual event of holding a multiparty election’ (2017). Similarly, a 2012 IGC project by Robert Bates and Anke Hoeffler found that levels of income per capita in the newly founded African democracies of the 1990s adapted very slowly to democratisation and risked reversing on their progress. Overall, it would seem that building strong institutions are a key underpinning to creating functioning democracies.
Finally, fledgling democracies must build trust between citizens and government by creating national narratives that bind both in some sort of common mission. This is a pre-requisite that allows the state to begin the difficult work of delivering effective services to citizens and creating the conditions that lead to sustainable and inclusive growth.