THE IMPACT OF DEMOCRACY ON ECONOMIC GROWTHINTRODUCTIONDoes democracy lead to economic growth?From the past fifty years, the relationship between political democracy and economic growth has been the significant argue.
A section of nationwide research has displayed that a theoretical division of the effects of democratic regimes against authoritarian regimes on growth is accompanied by ambiguous empirical results that lead to an unresolved resolution of an agreement.Democracy supporters debate that citizens motivation for work and investment, the effective allocation of resources on the market, and the boosting of private profit can be within the scope of freedom, free information and property control (North 1990). Democrats can bound state intervenes in the economy they respond to common demands in areas such as, justice and health, encourage sustainable and long-term growth and education (Roderick 1999, Lake and Baum 2001, Baum and Lake 2003). Opponents of democracy, on the other hand, debate that democracy can help people to take immediate care at the expense of profitable investments, cannot be insulated from the interests of rented persons and cannot quickly mobilize resources. Democrats are believed to be at odds with social, ethnic, and class struggles. While some writers respect authoritarian regimes to suppress conflicts, classify resistance and compulsory measures for rapid growth, others still hesitate in general whether regimes, quite than markets and institutions, for growth (Bhagwati 1995). The obtainability of data and econometric techniques permit researchers to examine the experiences of these issues.
Empirical findings, nevertheless, include a range of negative, negligible, and positive estimates, which make this possible.Democracy is defined in different methods, and from here, argued thought. While all the differences in its definition are democracy is nominated as the political regime in which those who are elected through competitive elections are consistent.Democratization of any country from an undemocratic regime can be preceded by a decrease in per capita GDP and unstable but estimated growth in long-term; on the other hand, authoritarian regimes have substantially improved their growth at the creation and failure in the long run (Ulubasoglu, 2006). The purpose for this is that non-democratic regimes are more effective when it come for implementing decisive policies, as well as ethnic resolution and conflict but in the long run are unstable, because they are more encouraged to extract money from the community, which in turn leads to be less prosperous (World Economic Forum, 2006).
Democratic regimes around the institutions and policies that method the basis and through which the principles of freedom and equality are deliberate and effected directly or indirectly on firms or individuals who advantage from the strategies and they upsurge their growth, focusing on them, which in turn has a positive impact on the economy. There are two arguments:1. Traditional Perspectives Does political democracy cause economic growth? Hobbes (1651), who for the first time has supported the view of conflict, according to Hobbes, absolute regimes gain more general improvement in public welfare because they cannot promote their own interests in other cases. Huntington (1968) also agrees with this view.
Huntington argues that democracy has weak and delicate political institutions, and they demand popular spending on profitable investment. Democratic governments are vulnerable to recourse to low-income groups and directly impossible by leaseholders for beneficial activities (Krueger 1974, Bhagwati 1982). Non-democratic regimes can implement the tough economic policies that are essential for growth, and stop the growing demands on the growth of income for low-income and working people in general, as well as the lack of social employment due to, ethnic, class struggles and religious. Democrats can not suppress such conflicts. Markets must be the first to promote economic growth, and authoritarian regimes can easily facilitate such policies. Moreover, some level of progress is needed to advance democracy (Lipset’s hypothesis, 1959). In sum, this view means that political democracy is a luxury advantage that is not possible by developing countries. Other advocates of the conflict view and authoritarian state knowledge in the economy are Galenson (1959), Andreski (1968), Huntington and Dominguez (1975), Rao (1984-5) and Haggard (1990).
After the success stories in Taiwan, South Korea, Singapore and Hong Kong in the 1950s and 1960s, the views of the conflict were amazing. 2 .Today’s question of democracy and growth Nowadays the question of political democracy is more intensive, with the accumulation of research and a growing list of country experiences (such as Latin America, China, Russia and the Asian financial crisis).
The theory has prevented traditional barriers to adaptive argument since various aspects of the growth issues of the broader institutions have been recognized. For example, scholars have divided political democracy from political democracy. Aspects such as the protection of property rights, credit, labor market and commercial laws, which have previously been devoted to political democracy, are now regarded as part of economic democracy. The examination of economic freedom displays from the Fraser Institute (by Gwartney and Lawson, 1996, 2000, 2003) and the Heritage Foundation (by O’Driscoll et al. 2003) has presented that economic freedom as well as other features is likewise related to grow (see Doucouliagos and Ulubasoglu 2006).
Heretofore, the features of political democracy, such as political instability, regulatory quality,corruption, government efficiency and rule of law, were partially or completely connected to political democracy. It is also accompanying with further growth. Newly, the World Bank announced the “Doing Business” aspect of corporate issues. Specifically Djankoy et al. (2002a, 2002b, 2005), Djankoy, McLiesh and Shleifer (2005) and Botero et al. (2004) has assessed business rules and set the degree of comfort of the private sector in employment-based economies; ease of start-up, registration and closure of businesses; protecting investors and enforcing contracts; and dealing with licensing and paying taxes.This study explores mainly the empirical relationship between democracy and economic growth and my hypothesis is Democracy leads to economic growth.THEORETICAL LOGICDemocracy leads to economic growth because, through our democracy, we have stable and foreseeable institutions that are willing to instrument policies that are directed at private companies and hence democracy invests in public goods, investing in human capital, maintaining the rule of law, and protective human property rights.
On the other hand, democracy is a required part of people’s ability to live freely and independently. It is an institutional guarantee that policies and laws produced by a state are in route with the simple interests of the people. As a result, democracy is dominant to the quality of life and is a fundamental element in the ability of men and women to live freely and independently as human beings (Boris Begovic, 2012).Over conceptualisation, economic presentation is determined by on many features of state policy, but the most essential part is still democratic institutions.
Empirically, modifications in institutions are recognised to be one of the most important elements of economic growth. This view, which is a good basis for recent empirical research on economic growth, is a key issue of the economic freedom index.How Democracy Effects On Growth? Democracy will in the long term lead to rise in economic growth, for the reason that democracies have permanent and expectable institutions and tend to provide policies for private firms. Although democracies are more likely to participate in large-scale distribution on a larger scale than governments, the effect is the sustainability of the redistribution of the fact that democracies impede entry, promote competition and innovation.The relationship between democracy and economic growth has led to many deliberations, research, and even astounding. The welfares of democracy are ability to recover the reliability and predictability of institutions that produces a structure for the business environment. There are two mechanics of economic growth: 1.
Reserve of features of production (capital and labour, including human capital) 2. Rises in entire element productivity through technological development and progresses in efficiency The economic growth is established on the massive numeral of mutually independent results prepared by a huge number of capitalists on how to invest their investment and workforce in different commercial accomplishments. The incentives that affect investment resolutions are very significant to describe the growth method. These reasons are shaped by economic institutions, particularly those that are connected to the total and effective security of private property rights and unlimited economic freedom. The improved the protection of private property rights, the upper the predictable returns on investment, so economic negotiators invest more seriously in the aspects of production, thus growth go faster. Also, the bigger the investment in research and development, the bigger protection of intellectual property rights, resulting to technological progress, total factor productivity rise and enhanced economic growth.
More economic freedom creates more prospects for discussion and more rivalry. Freer competition makes competitive force, which is an operative motivation for economic productivity (both allocative and productive), which donates to enhanced growth. Private property rights can be disrupted by private marauders or marauders in the government sector. Moreover, Public sector damages of private property rights can be illegal, such as legitimate and corruption.
Destruction of property rights by the public sector can be more disturbing to growth than private predation. Therefore, the government’s priority should be to defend private property rights from any breach. Features of democracy Democracy can be characterised by reference to its various elements:• Defence of minorities (including political minorities).
• Civil liberties: freedom of communication of all requirements and political and economic interests. • Peaceful transition of power, based on election outcomes and legitimate law. • Government responsibility to people with a public dynamic role.• Free elections founded on the rule of “one person, one vote”. Government response to people with a role Citizens’ active contribution in civil liberties is potential in politics, enchanting into account all partialities and interests, political or economic. Now, we can discover that a democratic organisation will have emotional impact on economic growth. Though the focus of this paper will be on how democracy affects growth, the reverse will also be the foundation of growth from democracy.
Political stability and predictability Political instability – demarcated as the trend to modification in the legislative or executive government – can be erratic expectation in public policy and economic economics. Under circumstances of political instability, entrepreneurs stop investing because revenues are vulnerable by possible policy modifications, such as poor protection of private property rights. Democracy prepares political stability and enhancement predictable. Though constitutional and executive circumstances are restricted by general elections, the timing of the political process is quite different, unlike the self-employed. The democracy of the polar societies is lower for the reason that, among other things everybody can without restrictions express his own political interest. Free expression of political preferences in the long run, democracies tend to produce a defensible environment and positive incentives for investment, innovation and growth. Investing in human capital Investing in human capital is significant for growth, because there is an accumulation of more elements of invention and more labour productivity. These investments have two parts.
One is the investment of individuals from time and strength to develop their human capital (for example, to learn) and the other is to participate in additional capitals required for the progression. Public spending on education and healthcare solves these kinds of liquidness restrictions. Then democracies from the entire population, not just elites are expected to make public investment in human capital in democracies more attractive than autocratic governments.However, traditionally, some authoritarian systems, such as totalitarian communist systems, providing negative investment in human capital as an unintentional result of indoctrination, which was the main motivation for education. Rule of law Protection of private property rights for growth is valuable.
Also, investments individual take place if private property rights are secure, as investors are ready for avoiding their return on investment, and intellectual property protection for investment in research and development is a major foundation of technological progress. As a final point, global protection of contractual rights strengthens and inspires the interchange of markets, and this intensive exchange, solider competitive pressure, and motivation for economic efficiency. Hence, rule of law makes both economic growths through mechanisms: the increase of aspects of production concluded investment and the increase of TFP. Making and keeping the rule of law is perhaps the principal improvement of democracy in relationships of economic growth. Democratic governments are responsible to the people and they prepare universal protection of private poverty rights.
Investing in physical capital Investing in physical capital is a crucial way to gather production aspects. These investments are supported by savings. Therefore, the question is how democracy affects the amount of savings, the share of income that is saved on investment to be consumed. Causality level of developmentAccording to causality, there are two significant definite mechanisms that have been recognized. The first important topic is created on the beginning of the middle class and the founding of civil society networks that are independent of the state public life that the government cannot control.
The second is proliferation in human capital; however, education, people who are educated are less likely to accomplish authoritarian rule. Moreover, autocracies countries are not fast growing in the long run; economic growth imposes seeds of death on autocratic regimes. Also, it is important to reminder that democracy at a higher level can be more imperative for economic growth. This outline is clarified by the discoveries that the foundations of economic growth are moving with the amount of economic development. Reserve of production aspects at a lower level is very essential; on the other hand the total factor productivity at a higher level is decisive, mainly outstanding to technological progress. Technological and innovation are dynamic in new entrances, and democracies are enhanced falling barriers to access to contrast autocracy states.
METHODOLOGYMeasurementThis paper provides analysis of the relationship between democracy and economic growth %. The analysis takes 147 countries as sample, with data from Quality of Government Standard dataset codebook. We also analyze data from economic institutions for the measure of growth %. According to the literature, there is evidence for the relationship between democracy and economic growth. The estimation of this relationship indicates that the level of democracy can move from lower to higher level of democracy.
Using democracy measure, it indicates that democracy increases the probability of growth %. The results in multiple regressions will include other controlling variables as well. As mentioned before, our sample in which data can be available to find information consists of 147 countries; and we use the time period covered 2003 to 2008.
In the analysis we use sources of data from Freedom House and polity (Djankov et al., 2007). These data provide the score between 0-10 scale. Zero represents lower level of democracy and 10 represent higher level of democracy. According to the research we conducted, the score of democracy from Polity are found on annual basis; but over sample period there is little time variation. Thus, we use scores that we found for the year 2003 for constructing democracy measure. This is coded as 1 for a country with high level of democracy, and 0 for countries with low level of democracy.For dependent variable we use growth % for its measurement.
Economic growth, however, refers to the positive change in the production of goods and services in an economy over a given period, usually a long period. In practice, the most used indicator to measure it is gross domestic product (GDP). GDP is the value of all goods and services produced in the country during a year, including by foreign companies (Robert Solow, 1924).Control VariablesI take care of control variables to avoid their theoretical effect on dependent variable.Firstly, we control Human Development Indicator (HDI), which seeks to account for human development.
It combines three criteria: the longevity of the population, the level of education and the level of wealth. The HDI shows very large differences between countries, like the ranking of countries according to their GNP per capita. However, there is no systematic link between income level and human development.
The standard of living measured by GNI per capita is an average income and it therefore makes it possible to measure what an average person can consume to satisfy his material needs (to feed himself, to clothe himself, etc.). A high average income can hide high inequalities and therefore, not accurately reflect the standard of living of the population: a small part of the population can very much receive a large portion of income. Second, how this increase in GDP per capita may also have had adverse effects on the population or at least some of them. Producing more can be done by using more than reasonably energy and raw materials. The purpose of the HDI is to measure the level of human development in a country, in a sense the level of well-being of the population. If it does not take into account the problems of inequality and environment, it is more qualitative than the simple GDP/capita. Therefore, the quality of democracy is better in countries where income is higher, because these countries may have better capacity for reform to check and balance on the government that prevent the use of policies.
Secondly, the literature indicates that human capital and economic growth have a strong relationship. Human capital affects economic growth and it refers to the knowledge, skill sets and motivation that people have, which provide economic value. This can be measured by Human Capital Index/Investment (output-cost-income-based/school enrollment rates). Data from Human Capital Index are measured using different scales. But the most standardized data are coded from 0-1; in which 1 is standard capital and zero otherwise.
Third, it has been demonstrated that political instability has an impact on economic growth. This effect remains great when we narrow regime type or regime change. Unstable political regime, however, can diminish the speed of economic growth and investment (Palau-Country Review, 2017). This is measured using political Risk Index that captures the level of risk posed by government and investors based on economic factors; and its scale varies from 0-10. Zero indicates high political risk and 10 indicates lower political risk.
The literature shows that the effects of regime type on economic growth have not established differences in average growth rates between autocracy and democracies. There could still be a difference in the variances. Democracy implies similar constraints on leaders and could lead to similar economic performance. Among autocracies, constitutional and institutional constraints are likely to be variable and weak. Moreover, the personal inclinations of autocrats may be more important than the personality differences between democratic leaders.
Data from the 1960-1987 (Erich Weede, 1996) period and scored from 0-10, provide evidence that there is greater variation in growth rates between autocracies than among democracies. RESULTSThe table 1 shows the correlation -0,389, and the p-value 0,000 (99%). This means that there is significant relationship between democracy and growth.Table1 : Correlation between Index of Democracy and GDP Growth Index of Democracy GDP Growth (%)Index of Democracy Pearson Correlation 1 -,389** Sig. (2-tailed) ,000 N 165 141GDP Growth (%) Pearson Correlation -,389** 1 Sig. (2-tailed) ,000 N 141 162**. Correlation is significant at the 0.
01 level (2-tailed).The graph 1 indicates to what extend is the relationship between independent and dependent variables. The empirical analysis shows that when democracy increases, GDP growth increases as well.
Graph 1: Scatterplot Democracy to Growth REGRESSIONVariables Entered/RemovedModel Variables Entered Variables Removed Method1 Regime Type, Human Capital Index, Political Stability, Level of Democracy (Freedom House/Imputed Polity)a . Entera. All requested variables entered. In the regression model (table 2), the result shows meaningful relationship between democracy and growth with 99% level of confidence.
Table 2: Regression between control and dependent variablesModel Unstandardised Coefficients Standardised Coefficients t Sig. B Std. Error Beta 1 (Constant) 7,349 1,602 4,587 ,000 Level of Democracy (Freedom House/Imputed Polity) -,405 ,175 -,329 -2,323 ,022 Political Stability -,594 ,462 -,151 -1,284 ,202 Human Capital Index -,784 ,579 -,148 -1,355 ,178 Regime Type ,438 ,381 ,168 1,149 ,253a. Dependent Variable: GDP Growth (%)After control variables’ analysis, the result shows the estimated coefficient of -0,329 for level of democracy variable that is statistically significant.
By using 0-10 democracy scale, the relationship between democracy and growth % is still significant (-0,329). This mean that from the lower level to the higher level of democracy increases the probability of growth as well.CONCLUSIONThe interaction between democracy and economic growth embraces the impact of political freedom on the growth and impact of living standards at the level of democracy. With esteem to the definition of growth, analysis between countries increases the anticipated effect from sustaining the free market, rule of law, human capital and low consumption of government.
While these variables and the primary level of GDP remain constant, the overall effect of democracy is on negative growth. There are some indications of a non-linear relationship in which democracy more likely to raise growth at a low level of political freedom, but it reduces economic growth when it reaches an average level of political freedom. With regard to the impact of economic development on democracy, examination illustrations that the progress of living – measured by a country’s real GDP , significantly increasing the likelihood that political institutions will become more democratic over time. Hence, political freedom seems to be a luxury, they will enjoy more democratic places, because this is in the best interest, and even if increased political freedom may have a negative impact on growth. In fact, rich countries can be responsible for a cutback in economic progress.There are strong rules in the relationship between democracy and economic growth. However, the causal mechanisms are complex, overlapping, and sometimes with balanced effects. There is no simple rule and no direct conclusion.
In some cases, democracy has been shown to even be detrimental to economic growth, specifically as esteems the restructuring of compulsory income, and independent states can efficiently reject this political pressure. This theory is established by swift growth periods in independent countries. Though democracy in universal is valuable for economic growth, it is a solution that treats miraculously poverty and creates societies flourishing. These are long-term results.
More democracy motivations on the provision of the rule of law and effectively allocates political pressure for restructuring, and the consequences of economic growth will be better.