Democracy and Income: A Time Series Analysis with Special Reference to Africa

In our paper we revisit Lipset’s Law. Writing in 1959, Seymour Martin Lipset reported a strong and positive correlation between income per capita and democracy in a global cross section of nations. He concluded that economic development is a causal mechanism for democratization. Doing so, he not only lay the foundations of modernization theory in comparative politics but also defined a major portion of the contemporary agenda in political economy, with its focus on the relationship between political institutions and economic development. In recent years Lipset’s findings have been challenged. While some researchers suggest that the causality runs from democracy to income, others find no significant relationship between democracy and income. In our paper we use recently developed time series panel data techniques to re-examine the relationship between income and democracy. Our estimations suggest three innovative findings. First, in a global sample of countries we cannot decide whether income causes democracy or whether the causality runs the other way round; income and democracy are endogenous. Second, allowing for this endogeneity we find a significant relationship between income and democracy – but one that is negative. This negative relationship is due to the composition of income. When we decompose overall per capita income we find that the source of income matters: the larger the portion originating from natural resource rents, the lower the level of democracy. Thus, countries dependent on natural resources find it more difficult to democratize. Our findings thus present further support for the political economy literature on ‘rentier states’ and the ‘resource curse’.Third, when we concentrate on Sub-Saharan African countries we find evidence that the relationship runs from political institutions – i.e. democracy – to economic performance – i.e. income. Sub-Saharan Africa experienced a wave of democratization since the early 1990s, however, our dynamic analysis suggests that income only slowly adjusts to these new levels of democracy. Sub-Saharan Africa countries may thus be “too democratic” for their current levels of income, with unfortunate implications for the future course of democracy in the continent and for the ability of democracy to generate future economic growth in this impoverished portion of the global economy. Indeed in line with these econometric results, we suggest that there is evidence of democratic ‘back-sliding’: several leaders have successfully challenged term limits, there have been a number of recent coups and although all Sub-Saharan countries hold elections many are not free and fair and have been accompanied by large scale violence.