The Economics of Young Democracies: Policies and Performance

Kapstein, Ethan and Converse, Nathan (2006): The Economics of Young Democracies: Policies and Performance.

Abstract

Since the “third wave” of democratization began in 1974, nearly 100 states have adopted democratic forms of government, including, of course, most of the former Soviet bloc nations. Policy-makers in the west have expressed the hope that this democratic wave will extend even further, to the Middle East and onward to China. But the durability of this new democratic age remains an open question. By some accounts, at least half of the world’s young democracies—often referred to in the academic literature as being “unconsolidated” or “fragile”—are still struggling to develop their political institutions, and several have reverted back to authoritarian rule. Among the countries in the early stages of democratic institution building are states vital to U.S. national security interests, including Afghanistan and Iraq.

The ability of fledgling democracies to maintain popular support depends in part on the ability of their governments to deliver economic policies that meet with widespread approval. But what sorts of economic policies are these, and are they necessarily the same as the policies required for tackling difficult issues of economic stabilization and reform? Conversely, what sorts of economic policies are most likely to spark a backlash against young and fragile democratic regimes? Do the leaders of young democracies face trade-offs as they ponder their electoral and economic strategies?

These are among the questions we explore in this paper, which provides an overview of the monograph we are currently writing on the economics of young democracies. We do so first by exploring the hypothesized relationships between democratic politics and economic policy, as well as the findings of several important empirical studies with respect to the economic performance of young democracies around the world. We then provide some descriptive statistics on how the new democracies have fared in practice, making use of a new dataset that we have compiled (and which, among other things, is more up-to-date than most others cited herein). Do the data reveal any distinctive economic patterns with respect to democratic consolidation and reversal? We will show that they do. In particular, we find that deteriorating or stagnant economic performance constitutes a red flag or warning signal that the country is at risk of democratic reversal. Moreover, we find considerable variation in economic performance, suggesting that the design of political institutions in new democracies may have a significant influence on the probability of their survival.

• Item Type: MPRA Paper
• Language: English
• Keywords: democracy; economic growth; inflation; political development
• Subjects: P - Economic Systems > P1 - Capitalist Systems > P16 - Political Economy; P - Economic Systems > P1 - Capitalist Systems > P17 - Performance and Prospects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

References

Acemoglu, Daron and James Robinson. 2006. Economic Origins of Democracy and Dictatorship (New York: Cambridge University Press). Aizenman, Joshua and Marion, Nancy. 1999. Volatility and Investment: Interpreting Evidence from Developing Countries. Economica 66: 157-79. Alesina, Alberto., Devleeschauwer, Arnaud, Easterly, William, Kurlat, Sergio and Wacziarg, Romain. 2002. Journal of Economic Growth 8: 155-194. Alesina, Alberto and Rodrik, Dani. 1994. Distributive Politics and Economic Growth Quarterly Journal of Economics 109 (2):: 465-90. Alesina, Alberto, Roubini, Nouriel with Cohen, Gerald. 1997. Political Cycles and the Macroeconomy. Cambridge, MA: MIT Press. Bardhan, Pranab and Tsung-Tao Yang. 2004. Political Competition in Economic Perspective. BREAD Working Paper no. 78. Baum, Matthew. and Lake, David 2003. The Political Economy of Growth: Democracy and Human Capital. American Journal of Political Science 47(2): 333-347. Beck, Thorsten. and Laeven, Luc. 2005. Institution Building and Growth in Transition Economies. World Bank Policy Research Working Paper 3657. Biglaiser, Glenn and Danis, Michelle 2002. Privatization and Democracy: The Effects of Regime Type in the Developing World. Comparative Political Studies 35(1): 83-102. Block, Steven A. 2002. Elections, Electoral Competitiveness, and Political Budget Cycles in Developing Countries. Harvard University Center for International Development Working Paper No. 78. Block, Steven A., K. Ferree, and S. Singh. 2003. Multiparty Competition, Founding Elections, and Political Business Cycles in Africa. Journal of African Economies 12(3). Borner, Silvio, Aymo Brunetti, and Beatrice Weder. 1995. Political Credibility and Economic Development. London: Macmillan. Bourguignon, Francois. and Morrison, Christian. 1990. Income Distribution, Development and Foreign Trade. European Economic Review 34: 1113-1132. Bourguignon, Francois and Verdier, Thierry. 2000. Oligarchy, Democracy, Inequality and Growth. Journal of Development Economics 62: 285-313. Brender, Adi and Drazen, Allan. 2004. Political Budget Cycles in New Versus Established Economies. NBER Working Paper 10539. Bresser Pereira Luis Carlos, J.M. Maravall, and A. Przeworski, Eds. 1993. Economic Reforms in New Democracies: A Social Democratic Approach. Cambridge: Cambridge University Press. Buchanan, James and Richard Wagner. 1978. Democracy and Keynesian Constitutions: Political Biases and Economic Consequences. London: Institute for Economic Affairs. Dethier, Jean-Jacques. Ghanem, Hafez, and Zoli, Edda. 1999. Does Democracy Facilitate the Economic Transition? World Bank Policy Research Working Paper 2194. Diamond, Larry. 2005. Democracy, Development and Good Governance: The Inseparable Links. Annual Democracy and Governance Lecture, Center for Democratic Development, Accra, Ghana. Downs, Anthony. 1957. An Economic Theory of Democracy. New York: Harpers. Drazen, Allan. 2001. The Political Economy of Macroeconomics. Princeton: Princeton University Press. Easterly, William and Levine, Ross. 1997. “Africa's Growth Tragedy: Policies and Ethnic Divisions.” Quarterly Journal of Economics 111(4): 1203-1250. Easterly, William, Ritzen, Jozef and Woolcock, Michael. 2005 Social Cohesion, Institutions and Growth. New York University Development Research Institute working paper 17. Fernandez, Raquel and Rodrik, Dani. 1991. Resistance to Reform. American Economic Review 81: 1146-55. Fish, M. Steven. The Dynamics of Democratic Erosion. In Richard D. Anderson, Jr., et.al. Postcommunism and the Theory of Democracy. Princeton: Princeton University Press, 2001. Gasiorowski, Mark J. 2000. “Democracy and Macroeconomic Performance in Underdeveloped Countries: An Empirical Analysis.” Comparative Political Studies 33(3): 319-349. Giddens, Anthony. 1971. Capitalism and Modern Social Theory: An Analysis of the writings of Marx, Durkheim, and Max Weber. Cambridge: Cambridge University Press. Grossman, Gene and Elhanan Helpman. 2002. Interest Groups and Trade Policy. Princeton: Princeton University Press. Guillaume, Dominique and Stasavage, David. 1999. Making and Breaking Monetary Policy Rules: The Experience of African Countries. Centre for the Study of African Economies Working Paper 99-2 Oxford University. Haggard, Stephan and Robert R. Kaufman. 1992. Economic Adjustment and the Prospects for Democracy. The Politics of Economic Adjustment: International Constraints, Distrubutive Conflicts, and the State. Princeton: Princeton University Press. Haggard, Stephan and Robert Kaufman. 1995. The Political Economy of Democratic Transitions. Princeton: Princeton University Press. Halperin, Morton; Joseph Siegle, Michael Weinstein. 2005. The Democracy Advantage (New York: Routledge). Hellman, Joel. 1998. Winner Takes All: The Politics of Partial Reform in Postcommunist Transition. World Politics 50: 203-234. Huntington, Samuel P. 1968. Political Order in Changing Societies. New Haven: Yale University Press. Huntington, Samuel P. 1991. The Third Wave: Democratization in the Late Twentieth Century (Norman: University of Oklahoma Press). Kapstein, Ethan B. and Branko Milanovic. 2003. Income and Influence: Social Policy in Emerging Market Economies. Kalamazoo, Mi.: Upjohn Institute. Keefer, Philip. 2005. Democratization and clientelism: Why are Young Democracies Badly Governed? World Bank Policy Research Working Paper 3594. Keefer, Philip. 2005. Beyond Elections: Politics, Development, and the Poor Performance of Poor Democracies. Unpublished manuscript. Krieckhaus, Jonathan. 2005. Democracy and Growth: How Regional Context Influences Regime Effects. British Journal of Political Science 35. Lake, David and Baum, Matthew. 2001. The Invisible Hand of Democracy: Political Control and the Provision of Public Services. Comparative Political Studies 34(6): 587-621. Marshall, Monty G. and Jaggers, Keith. 2002. Polity IV Project: Political Regime Characteristics and Transactions, 1800-2002. University of Maryland. Mayer, Wolfgang. 1984. Endogenous Tariff Formation. American Economic Review 74: 970-985. Milanovic, Branco. Forthcoming. Relationship between Income and Democracy Re-examined, 1820-2000: A Non-Paramentric Approach. Milner, Helen. and Kubota, Keiko. 2005. Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries. International Organizations 59: 157-193. Minier, Jenny 1998. Democracy and Growth: Alternative Approachs. Journal of Economic Growth 3:241-66. Mulligan, Casey, Gil, R., and Sala-i-Martin, X. 2004. Do Democracies Have Different Public Policies than Non-democracies? Columbia University Department of Economics Discussion Paper No.: 0304-14. Munck, Geraldo L. and Verkuilen, Jay. 2002. Conceptualizing and Measuring Democracy: Evaluating Alternative Indices. Comparative Political Studies 35(1): 5-34. North, Douglas. 1990. Institutions, Institutional Change, and Economic Performance. New York: Cambridge University Press. Olson, Mancur. 1965. The Logic of Collective Action. Cambridge, Ma.: Harvard University Press. Olson, Mancur. 1982. The Rise and Decline of Nations. New Haven, Ct.: Yale University Press. Papaioannou, Elias and Gregorios Siourounis. 2004. Democratization and Growth. London Business School Working Paper Series. Persson, Torsten and Guido Tabellini. 2002. The Economic Effects of Constitutions. Unpublished manuscript. Przeworski, Adam, Michael E. Alvarez, Jose Antonio Cheibub and Fernando Limongi. 1996. What Makes Democracy Endure? Journal of Democracy 7(1): 39. Przeworski, Adam, Michael E. Alvarez, Jose Antonio Cheibub and Fernando Limongi.. 2000. Democracy and Development: Political Institutions and Well-being in the World, 1950– 1990. (New York: Cambridge University Press). Przeworski, Adam. and Limongi, Fernando. 1993. Political Regimes and Economic Growth. Journal of Economic Perspectives 7: 51-69. Ramey, G. and Ramey V.A. 1995. Cross-country Evidence on the Link Between Volatility and Growth. American Economic Review 85: 1138-51. Rao, Vaman. 1984. Democracy and Economic Development. Studies in Comparative International Development 19(4): 67-81. Rigobon, Roberto and Dani Rodrik. 2004 Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships. NBER Working Paper 10750. Rivera-Batiz, Francisco L. 2002. Democracy, Governance, and Economic Growth: Theory and Evidence. Review of Development Economics 6(2): 225-47. Rodrik, Dani. 1998. The Rush to Free Trade in the Developing World. In eds. Sturznegger, F. and Tommasi, M. The Political Economy of Economic Reform. Cambridge, Ma. MIT Press. Rodrik, Dani. 1999. Where did all the Growth Go? External Shocks, Social Conflict, and Growth Collapses. Journal of Economic Growth. Rodrik, Dani. 2000. Participatory Politics, Social Cooperation, and Economic Stability. American Economic Review 90(2): 140-144. Rodrik, Dani and Romain Wacziarg. 2004. Do Democratic Transitions Produce Bad Economic Outcomes? http://ksghome.harvard.edu/~drodrik/democracy.pdf. Rogoff, Kenneth., 1990. Equilibrium Political Budget Cycles. American Economic Review (1990) 80:21-36. Rudea, David. n.d. Political Parties and Economic Policy in Industrialized Democracies: An Insider-Outsider Partisanship Model. Unpublished Manuscript, Cornell University. Rueschemeyer, Dietrich. Stephens, Evelyne. and Stephens, John. 1992. Development and Democracy. Chicago: University of Chicago Press. Satyanath, Shanker. and Subramanian, Arvind. 2004. What Determines Long-Run Macroeconomic stability? Democratic Institutions. Unpublished manuscript. Schuknecht, Ludger, 1996. Political business cycles and fiscal policies in developing countries. Kyklos 49: 155-170. Sen, Amartya. 1994. Poverty and Famines. Oxford: Oxford University Press. Tavares, José and Romain Wacziarg. 2001. How Democracy Affects Growth. European Economic Review 45(8): 1341-1379. Treisman, Daniel (2000). “The Causes of Corruption: A Cross-National Study.” Journal of Public Economics 76(3): 225-56. Willett, Thomas D. 2004. The Political Economy of Exchange Rate Regimes and Currency Crises. Background Paper for the Claremon Conference on the Political Economy of Exchange Rates. Williamson, John. and Haggard, Stephan. 1994. The Political Condidtions of Economic Reform. The Political economy of policy reform. Ed. Williamson, J. Washington: Insititute for International Economics.