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Democracy, Growth, and Inequality

Daron Acemoglu, Suresh Naidu, Pascual Restrepo, James Robinson.

July 2, 2015

Acemoglu et al. Democracy, Growth, and Inequality July 2, 2015 1 / 45

Democracy, Growth, Redistribution, and Inequality

New facts about democracy

In two papers, we estimate the effect of democracy on growth,redistribution, and inequality.

Application of the median voter theorem: the franchise extensionmakes the median voter poorer and hence more likely to favorredistribution.

Democratizations lead to higher taxes, more redistribution and a moreegalitarian post tax distribution of income.

If the taxes dampen incentives, can lead to lower growth.



But things may be more complicated.

But democracy may effect other policies (besides linear taxes andlump-sum transfers).

Democracy may increase investment on public education and statecapacity, specially targeted at new groups wielding political power(i.e, middle class).

Democracy may accelerate the “Structural Transformation” byremoving barriers that kept rural labor abundant and cheap. Thesebarriers benefited landed elites that lost some of their political power.

These could increase growth and either lower or increase inequality.



What We Find

In a panel of countries from 1950-2010, focusing on within-countryvariation and accounting for dynamics:

Democracy does cause growth.

Mechanisms include private and public investment, as well aseconomic reforms and lowered social conflict.

More nuanced results on inequality:

Democratizations lead to higher taxes and more public goods,

Effects on structural change.

But no robust effect on inequality.

Heterogeneous effects by land inequality, market opportunities, andtype of inequality (90-50 vs 50-10 ratios).



Motivation: context.

Widespread belief that democracy is a hindrance for growth or at bestirrelevant.

Resolution and growth of some non-democracies (like China), andthorny transitions (in Egypt for instance), used as examples to suggestdemocracy leads to gridlock and cannot be easily consolidated.

Far from a Straw man:

Barro (1997): “More political rights do not have an effect on growth...The first lesson is that democracy is not the key to economic growth.”Gerring et al. (2005) review of the academic literature: “The net effectof democracy on growth performance cross nationally over the last fivedecades is negative or null.”

Longstanding debate since ancient Greece, in popular media andcocktail parties.



Motivation: our paper.

We study the effect of the extensive and unprecedented increase indemocracy from 1960 to 2010.

In 1960, 30% of the countries were democratic. By 2000, 60%. More thana third of the world population lives in countries that democratized duringthis period.

Get the facts right: A democratization achieves about 20 percent higherGDP in 30 years.

Consistent with recent cross-country findings (see Persson andTabellini, 2008, Bates, Fayad and Hoeffler, 2012, and Pappaioannouand Siourounis, 2008).

Mostly independent of stage of development.



Democracy Around the World

.3.4

.5.6

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vera

ge d

emoc

racy

1960 1970 1980 1990 2000 2010Year

Figure: Global Average Democracy.


Estimating the effect of democracy

Estimating the effect of democracy: data.

−10

−5

05

10G

DP

per

cap

ita lo

g po

ints

−15 −10 −5 0 5 10 15 20 25 30Years around democratization

Figure: GDP per capita (in logs, from World Bank, in constant 2005 dollars) around ademocratic transition, relative to other nondemocracies.



Estimating the effect of democracy: challenges.

Estimating equation:

lnYct = βDct +p

∑j=1

γj lnYct−j + αc + δt + εct ,

Challenges and ingredients:

1 Dct : How do we measure democracy?

2 αc + δt : country and year fixed effects.

3 ∑pj=1 γj lnYct−j : Democratization preceded by crisis (Bruckner and

Ciccone, 2011).

4 E[Dcs εct ] = 0∀s ≤ t: Starting assumption. But unobservables orexpectations of future growth could make democracy endogenous.Reverse causality less worrying (see Acemoglu et al., 2008).



Estimating the effect of democracy: measuring democracy.

Dichotomous and consolidated measure for 175 countries based onPapaioannou and Siourounis (2008), but also capturing temporaltransitions.

Dct coded as 1 if enough evidence of democracy:

Freedom house codes it as “Free” or “Partially Free,” and Polity IVgives it a positive score (core variation).If any of these sources missing, we check the measures by Cheibub,Ghandi and Vreeland (2010), and Boix, Miller and Rosato (2012).Some dates of transitions verified using Papaioannou and Siourounis’archival work (2008).

122 democratizations and 71 reversals between 1960-2010.

Captures broad and significant changes in a bundle of components,including free elections, checks and balances, civil freedoms andpolitical rights.



Estimating the effect of democracy: results

Table: The dependent variable is the log of GDP per capita.

(1) (2) (3) (4) (5)

Democracy -10.112 0.973 0.651 0.787 0.887(4.316) (0.294) (0.248) (0.226) (0.245)

log GDP first lag 0.973 1.266 1.238 1.233(0.006) (0.038) (0.038) (0.039)

log GDP second lag -0.300 -0.207 -0.214(0.037) (0.046) (0.043)

log GDP third lag -0.026 -0.021(0.028) (0.028)

log GDP fourth lag -0.043 -0.039(0.017) (0.034)

p−value remaining lags [0.565]Long-run effect of democracy 35.59 19.60 21.24 22.01p− value long-run effect [0.011] [0.023] [0.003] [0.004]Persistence of GDP 0.973 0.967 0.963 0.960Observations 6,934 6,790 6,642 6,336 5,688Countries 175 175 175 175 175Acemoglu et al. Democracy, Growth, and Inequality July 2, 2015 11 / 45


Estimating the effect of democracy: Korea



Dealing with LDV/Nickel bias: results.

Table: The dependent variable is the log of GDP per capita.

Imposing persistence of GDP process

Base ABOND HHK At 0.96 At 0.97 At 0.98 At 0.99(1) (2) (3) (4) (5) (6) (7)

Democracy 0.787 0.875 1.181 0.752 0.867 0.982 1.097(0.226) (0.374) (0.355) (0.228) (0.218) (0.216) (0.223)

Long-run effect of democracy 21.24 16.45 24.51 13.28 17.32 22.32 28.56p− value long-run effect [0.003] [0.051] [0.005] [0.001] [0.000] [0.000] [0.000]Persistence of GDP 0.963 0.947 0.952 0.960 0.970 0.980 0.990Observations 6,636 6,161 6,161 6,636 6,636 6,636 6,636Countries 175 175 175 175 175 175 175



Allowing for general dynamics of GDP.

Problem: We assumed a linear model for the dynamics of GDP.

Adapt Angrist et al. (2014) semi-parametric estimates.

Essentially reweight by propensity to democratize as function of GDP(including lags).

Following Hirano, Imbens and Ryder (2003), we reweight data by aProbit estimate of the propensity to democratize based onDct−1 = 0, yct−1, yct−2, yct−3, yct−4, t.



Allowing for general dynamics of GDP: results.−

100

1020

30G

DP

per

cent

cha

nge

−15 −10 −5 0 5 10 15 20 25 30Years relative to event

GDP around a democratization


Instrumenting democracy

Instrumenting democracy: democratic waves.

The extensive increase in democratizations from 1960 to 2010 took placein regional waves (see Huntington, 1991, and Markoff, 1996).

No consensus on causes, but literature has emphasized the spread ofdissatisfaction (as in Aidt and Jensen, 2012) or cross-countrylearning. Not driven by regional economic shocks.

Let r be the (geographic) region containing c , and

Zct =1

Nrinit − 1 ∑c ′∈r ,Dc ′ init=Dcinit ,c ′ 6=c

Dc ′t .

The above discussion suggests that lags of Zct are plausibleinstruments for democracy. The first stage draws on the existence ofdemocratic waves.

Similar strategy used by Persson and Tabellini (2009)



Regional Democratization Waves: First Stage

0.2

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(mea

n) d

em

−.3

−.2

−.1

0.1

Like

lihoo

d of

dem

ocra

tizat

ion

−15 −10 −5 0 5 10 15 20 25 30Years around first democratization

Relative to all regions Relative to initial autocraciesRaw likelihood

Figure: Democratic waves using first democratization in region.



Instrumenting democracy: first stage.

Table: The dependent variable is our democracy index.

GDP in 1960quintiles× Soviet Regional Regional Regional Region

Covariates: year effects dummies GDP Unrest Trade Trends(1) (2) (3) (4) (5) (6) (7) (8)

Democracy wave t-1 0.800 0.547 0.448 0.480 0.537 0.351 0.558 0.498(0.073) (0.101) (0.106) (0.099) (0.100) (0.115) (0.106) (0.092)

Democracy wave t-2 0.133 0.139 0.133 0.133 0.076 0.079 0.129(0.081) (0.076) (0.080) (0.079) (0.092) (0.085) (0.081)

Democracy wave t-3 0.227 0.231 0.223 0.223 0.219 0.270 0.228(0.067) (0.065) (0.065) (0.069) (0.081) (0.068) (0.070)

Democracy wave t-4 -0.087 -0.079 -0.075 -0.091 -0.011 -0.071 -0.123(0.110) (0.101) (0.110) (0.110) (0.121) (0.116) (0.106)

F− statistic 119.1 33.2 16.8 26.7 29.6 33.1 33.2 23.7Observations 6,312 6,309 5,496 6,309 6,309 6,309 6,309 6,309Countries 174 174 174 174 174 174 174 174



Instrumenting democracy: exclusion restriction.

Leverage: Idiosyncratic sources of correlation betweendemocratization and unobserved variables do not violate exclusionrestriction (particular features of one regime, or growth expectationsfor a particular country).

Holds if demands for democracy spreads regionally and we control forother economic phenomena that also spread across borders and maycause democracy (i.e., trade, unrest, temporary common regionalshocks, crisis).

Plausible: conditional on these observables, democracy is only drivenby idiosyncratic country shocks and the spread of demands fordemocracy.

Unobserved factors related to regional development, which does nottrigger waves (no modernization).



Instrumenting democracy: results.

Table: 2SLS effects of democracy on GDP using regional democratization wavesas instrument.

Base Panel A: 2SLS estimates

GDP in 1960quintiles× Soviet Regional Regional Regional Region

Covariates: year effects dummies GDP Unrest Trade Trends(1) (2) (3) (4) (5) (6) (7) (8) (9)

Democracy 0.787 0.966 1.149 0.981 1.292 2.570 2.179 2.903 1.697(0.226) (0.558) (0.554) (0.694) (0.651) (0.762) (1.163) (0.655) (0.885)

GDP persistence 0.96 0.96 0.96 0.96 0.96 0.96 0.95 0.31 0.95p-value (test < 1) [ 0.000] [ 0.000] [ 0.000] [ 0.000] [ 0.000] [ 0.000] [ 0.000] [ 0.000] [ 0.000]Long-run effect 21.24 26.31 31.52 27.77 35.72 59.36 45.74 4.20 36.79p-value [ 0.003] [ 0.123] [ 0.070] [ 0.194] [ 0.074] [ 0.005] [ 0.069] [ 0.000] [ 0.075]Hansen p-value 0.21 0.44 0.32 0.19 0.36 0.36 0.28Observations 6336 6312 6309 6309 6309 6309 4931 6153 6309Countries in sample 175 174 174 174 174 174 170 174 174Exc. Instruments F-stat. 119.1 33.2 16.6 26.7 29.6 9.6 33.5 23.7Long-run effect 21.24 26.31 31.52 27.77 35.72 59.36 45.74 4.20 36.79p-value [ 0.003] [ 0.123] [ 0.070] [ 0.194] [ 0.074] [ 0.005] [ 0.069] [ 0.000] [ 0.075]GDP persistence 0.96 0.96 0.96 0.96 0.96 0.96 0.95 0.31 0.95


Mechanisms and requirements

Mechanisms: theory.

Growth is really caused by the right economic policies. Does democracydelivers such policies more consistently? and why?

Political process more responsive to demands of previouslydisenfranchised members of society and less influenced bymaintenance of power by elite.

Leads to provision of public goods (e.g, human capital as in Benabou,1996, and others), and removal of distortions favoring elites andredistributing away from citizens (as in Acemoglu, 2008).

Distributional conflict met through concessions, and not harmfulcycles of protest, repression, riots, and revolts.

Nondemocracies may also enact such policies, but only when not achallenge to their political power.

The potential downside is gridlock (Olsen, 1982) excessive taxation(Alesina and Rodrick, 1994, Persson and Tabellini, 1994) or harmfulredistribution (populism).



Mechanisms: results.

Table: Estimates on several potential channels.

Investment Economic Trade Tax revenue Primary Secondary Child Riots andOutcome: share in GDP TFP reforms share in GDP share in GDP enrollment enrollment mortality revolts

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Democracy 3.215 -0.205 0.687 1.042 1.345 3.774 -0.253 -7.832 -1.544(1.210) (0.276) (0.348) (0.338) (0.610) (1.459) (0.063) (2.185) (1.016)

Observations 5660 3879 4692 3714 2883 4511 6084 5646 5164Long run effect 12.39 -2.88 5.58 21.91 18.96 18.29 -34.26 -11.94 -6.54P-value 0.007 0.455 0.053 0.004 0.028 0.008 0.001 0.000 0.127Persistence 0.74 0.93 0.88 0.95 0.93 0.79 0.99 0.34 0.76



What components of democracy matter?

Table: Estimates on different dimensions of democracy

Polity components FH components

(1) (2) (3) (4) (5) (6) (7) (8)

Constraints on the executive -0.243 -0.542(0.261) (0.406)

Executive recruitment 0.132 0.424(0.214) (0.353)

Competitiveness of participation 0.361 0.379(0.318) (0.333)

Political rights 0.321 0.072(0.219) (0.264)

Civil Liberties 0.497∗∗ 0.453(0.245) (0.297)

Democratizations 0.803∗∗∗

(0.235)Reversals -0.705∗∗

(0.335)Observations 5487 5487 5487 5487 5585 5585 5585 6336



Does democracy need development?

Some argue that democracy requires preconditions, especially related todevelopment and education, to work:

Richard Posner: “Dictatorship will often be optimal for very poorcountries. Such countries tend not only to have simple economies butalso to lack the cultural and institutional preconditions to democracy.”

Glaeser et al. (2007): More educated people interact more andengage more in civic duties (such as voting).

Education may also soften distributional conflicts (Acemoglu andRobinson, 2006, and Galor and Moav, 2006).

We investigate this hypothesis by considering interactions betweendemocracy and initial level of development and human capital beforethe transition.



Does democracy need development? results.

Table: Heterogeneous effects of democracy.

Interaction with: log GDP per capita: Share with secondary:Measured at: 1960 1970 1980 Current 1960 1970 1980 Current

(1) (2) (3) (4) (5) (6) (7) (8)

Democracy 0.432 0.572 0.687 0.744 0.446 0.340 0.385 0.495(0.275) (0.248) (0.248) (0.246) (0.254) (0.253) (0.246) (0.241)

Interaction 0.001 0.001 0.002 0.001 0.046 0.049 0.038 0.020(0.002) (0.001) (0.002) (0.002) (0.028) (0.020) (0.014) (0.013)

Observations 4281 4909 5525 6336 5300 5300 5300 5300



Summary of Results on Growth

From 1960 to 2010, democratizations were associated with a 20% increasein GDP in the 30 years following the event.

Key fact to inform the debate of whether democracy causes growth.Under plausible assumptions, causal.

Previous literature did not reach a consensus because of failures toaddress the empirical challenges we identified.

Some evidence on channels (but more needed), and that democracydoes not need development to work.

However, we still need a better understanding of what makes somedemocracies (or nondemocracies) more successful:

When and why are democracies more responsive to broader segmentsof society than non-democracies?Is this always good for growth? or excess redistribution?When is the distribution of political power induced by democracystable?What is the role and interaction of some particular components ofdemocracy (e.g, checks and balances and free elections)?



What about inequality? Does Democracy equalize?

Meltzer and Richard’s (1981) equalizing effect of democracy:

Application of the median voter theorem: the franchise extensionmakes the median voter poorer and hence more likely to favorredistribution.

Democratizations lead to higher taxes, more redistribution and a moreegalitarian post tax distribution of income.

Equalization may occur through other policies (besides transfers)

Democracy may increase investment on public goods, speciallytargeted at new groups wielding political power (i.e, middle class).

Democracy may accelerate the “Structural Transformation” byremoving barriers that kept rural labor abundant and cheap. Thesebarriers benefited landed elites that lost some of their political power.



The equalizing effects of democracy:

−10

010

2030

Per

cent

cha

nge

of to

tal g

over

nmen

t rev

enue

as

a pe

rcen

tage

of G

DP

−10 0 10 20Years around democratic transition

Figure: Tax revenue as a percentage of GDP around a democratization.Constructed using the five-year panel.



The equalizing effects of democracy:

−2

02

4N

et g

ini c

oeffi

cien

t

−10 0 10 20Years around democratic transition

Figure: Gini coefficient of net income around a democratization. Constructedusing the five-year panel.



Why democracy may fail to reduce inequality:

Capture and Cnnstraints

Elites may compensate the erosion of their de jure power by investingin de facto power (lobbies/media/electoral manipulation/violence) orcountervailing institutions (political parties/judges).

Can include “constraints” on redistribution: capital flight, tax evasion.

New market opportunities:

Democracy opens market opportunities for a broad section of thepopulation who had their wages/income compressed by previousrestrictions.

Particularly middle class with endowments but no representation.

Director’s law:

Democracy empowers the middle class, and the middle class may notnecessarily favor redistribution, or may redistribute to itself.



The Effect of Democracy on Inequality

Our main econometric specification is

zit = ρzit−5 + γdit−5 + X ′it−5β + µt + ψi + uit , (1)

Fixed effects: democracies are different due to permanentunobservable characteristics.

Lagged dependent variable: democratization following turmoil,instability and drops in GDP per capita.

Estimated in an unbalanced five-year panel of 183 countries from1960 to 2010.



The effect of democracy

Table: Effects of democratization on tax revenue as a percentage of GDP, Fiveyear panel.

Assuming AR(1) coefficientGMM ρ = 0 ρ = 0.25 ρ = 0.5 ρ = 0.75 ρ = 1

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Democracy lagged 14.995∗∗∗ 11.713∗∗∗ 11.266 18.676∗∗ 14.630∗∗ 14.995∗∗∗ 11.919∗∗∗ 8.842∗∗∗ 5.765∗∗ 2.689(4.328) (3.379) (7.228) (8.778) (5.979) (4.328) (3.268) (2.546) (2.477) (3.106)

Dep. Var lagged 0.267∗∗∗ 0.273∗∗∗ 0.291∗∗∗ 0.334∗∗∗

(0.057) (0.098) (0.075) (0.076)Observations 944 944 816 816 816 944 944 944 944 944Countries 128 128 125 125 125 128 128 128 128 128Numer of moments 81 61 61Hansen p-value 0.12 0.05 0.06AR2 p-value 0.92 0.83 0.79Democracy changes in the sample 92 92 82 82 82 92 92 92 92 92Long run effect of democracy 15.00 15.97 15.49 26.35 21.97 15.00 15.89 17.68 23.06 .P-value for the long run effect 0.00 0.00 0.11 0.03 0.01 0.00 0.00 0.00 0.02 .



The effect of democracy on inequality

Table: Effects of democratization on inequality (net income Gini), Five year panel.


(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Democracy lagged 0.62 -0.74 -2.01 -2.60 -1.60 -0.42 -0.67 -0.92 -1.17 -1.42(0.78) (0.88) (1.59) (1.63) (1.51) (0.93) (0.89) (0.89) (0.93) (1.00)

Dep. Var lagged 0.32∗∗∗ 0.35∗∗∗ 0.39∗∗∗ 0.32∗∗∗

(0.07) (0.10) (0.12) (0.12)Observations 657 537 420 420 424 537 537 537 537 537Countries 127 113 100 100 100 113 113 113 113 113Numer of moments 81 61 61Hansen p-value 0.60 0.69 0.30AR2 p-value 0.02 0.03 0.01Democracy changes 65 47 31 31 31 47 47 47 47 47Long run effect 0.62 -1.10 -3.12 -4.28 -2.36 -0.42 -0.90 -1.84 -4.67 .P-value 0.43 0.40 0.21 0.12 0.30 0.65 0.45 0.31 0.21 .



The effect of democracy on inequality

Table: Effects of democratization on inequality (gross income Gini), Five yearpanel.


(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Democracy lagged -1.22 -1.50 -1.45 -1.88 -1.22 -1.51 -1.50 -1.50∗ -1.49∗ -1.49(0.99) (0.90) (1.44) (1.59) (1.27) (1.15) (1.00) (0.90) (0.87) (0.92)

Dep. Var lagged 0.50∗∗∗ 0.64∗∗∗ 0.64∗∗∗ 0.76∗∗∗

(0.06) (0.11) (0.11) (0.11)Observations 657 537 420 420 424 537 537 537 537 537Countries 127 113 100 100 100 113 113 113 113 113Numer of moments 81 61 61Hansen p-value 0.54 0.29 0.37AR2 p-value 0.59 0.57 0.48Democracy changes 65 47 31 31 31 47 47 47 47 47Long run effect -1.22 -2.98 -3.99 -5.26 -5.15 -1.51 -2.00 -3.00 -5.97 .P-value 0.22 0.11 0.36 0.30 0.42 0.19 0.14 0.10 0.09 .



Hetergeneous effects of democracy

Explore mechanisms above:

Does democracy increase inequality more when landed elites are morepowerful?

Does democracy increase inequality more in less-developedeconomies?

Does democracy increase inequality more when world frontiertechnology and organization more disequalizing?

Does democracy increase inequality more when non-democracy ismore equal?



Democracy heterogeneous effects: capture

Table: Effects of democratization on inequality, Five year panel. Interaction withland Gini.


(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Dependent variable: Gini coefficient, net income.


Lagged democracy × Land Gini 0.18∗∗∗ 0.11∗∗ 0.23∗∗ 0.33∗∗∗ 0.27∗∗∗ 0.15∗∗∗ 0.12∗∗ 0.09 0.06 0.03(0.04) (0.05) (0.10) (0.10) (0.10) (0.05) (0.05) (0.06) (0.07) (0.08)

Dep. Var lagged 0.35∗∗∗ 0.36∗∗∗ 0.33∗∗∗ 0.34∗∗∗

(0.07) (0.08) (0.08) (0.10)Observations 485 407 326 326 329 407 407 407 407 407Countries 86 78 72 72 72 78 78 78 78 78

Dependent variable: Gini coefficient, gross income.

Democracy lagged -2.89∗∗ -2.51∗∗ -2.47∗ -4.38∗∗ -2.57∗∗ -2.88∗ -2.69∗∗ -2.50∗∗ -2.30∗∗ -2.11∗∗

(1.32) (1.04) (1.28) (2.07) (1.29) (1.48) (1.21) (1.03) (0.96) (1.05)Lagged democracy × Land Gini 0.22∗∗∗ 0.18∗∗∗ 0.27∗∗∗ 0.46∗∗∗ 0.29∗∗∗ 0.24∗∗∗ 0.21∗∗∗ 0.18∗∗ 0.15∗∗ 0.12

(0.08) (0.07) (0.08) (0.12) (0.07) (0.09) (0.08) (0.07) (0.07) (0.07)Dep. Var lagged 0.48∗∗∗ 0.56∗∗∗ 0.49∗∗∗ 0.66∗∗∗




Table: Effects of democratization on inequality, Five year panel. Interaction withshare of nonagricultural employment.


(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)



Lagged democracy × non-agricultural pop. in 1968 0.12∗∗∗ 0.11∗∗ 0.16∗ 0.16∗∗ 0.13∗ 0.13∗∗∗ 0.12∗∗ 0.10∗∗ 0.09 0.08(0.03) (0.05) (0.08) (0.07) (0.07) (0.05) (0.05) (0.05) (0.06) (0.06)

Dep. Var lagged 0.31∗∗∗ 0.29∗∗∗ 0.29∗∗∗ 0.36∗∗∗



Democracy lagged -0.81 -0.85 -0.40 -1.15 -0.71 -0.72 -0.79 -0.86 -0.92 -0.99(0.98) (0.76) (1.22) (1.43) (1.18) (0.97) (0.83) (0.76) (0.79) (0.90)

Lagged democracy × non-agricultural pop. in 1968 0.15∗∗∗ 0.13∗∗ 0.21∗∗∗ 0.23∗∗∗ 0.19∗∗∗ 0.17∗∗∗ 0.15∗∗∗ 0.13∗∗ 0.11∗∗ 0.08∗

(0.05) (0.05) (0.08) (0.08) (0.07) (0.07) (0.06) (0.05) (0.05) (0.04)Dep. Var lagged 0.48∗∗∗ 0.54∗∗∗ 0.55∗∗∗ 0.66∗∗∗




Democracy heterogeneous effects: market opportunities.

Table: Effects of democratization on inequality, Five year panel. Interaction withU.S. top 10 share of income.


(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)


Democracy lagged 0.68 -0.76 -2.35 -3.06∗ -0.88 -0.46 -0.70 -0.94 -1.18 -1.42(0.79) (0.89) (1.57) (1.64) (1.52) (0.94) (0.90) (0.90) (0.93) (1.00)

Lagged democracy × Top 10 share in the U.S. 0.22∗ 0.19∗ -0.10 -0.12 0.22 0.27∗ 0.21∗ 0.14 0.08 0.01(0.13) (0.11) (0.19) (0.19) (0.17) (0.15) (0.12) (0.10) (0.09) (0.10)

Dep. Var lagged 0.31∗∗∗ 0.35∗∗∗ 0.36∗∗∗ 0.47∗∗∗



Democracy lagged -1.04 -1.55 -0.68 -0.71 0.44 -1.61 -1.58 -1.54 -1.51∗ -1.48(0.98) (0.95) (1.46) (1.76) (1.69) (1.18) (1.04) (0.94) (0.89) (0.91)

Lagged democracy × Top 10 share in the U.S. 0.72∗∗∗ 0.36∗∗∗ 0.25 0.28 0.37∗∗ 0.72∗∗∗ 0.52∗∗∗ 0.33∗∗∗ 0.13 -0.06(0.17) (0.11) (0.18) (0.21) (0.16) (0.19) (0.15) (0.11) (0.09) (0.10)

Dep. Var lagged 0.46∗∗∗ 0.61∗∗∗ 0.60∗∗∗ 0.71∗∗∗




Democracy heterogeneous effects: Director’s law.



(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Democracy lagged 18.75∗∗∗ 14.54∗∗∗ 20.93∗∗∗ 21.97∗∗ 19.86∗∗ 18.75∗∗∗ 14.50∗∗∗ 10.24∗∗∗ 5.99∗∗ 1.74(4.88) (3.72) (8.02) (9.86) (8.55) (4.88) (3.46) (2.48) (2.52) (3.54)

Lagged democracy × Top share -0.10∗∗∗ -0.08∗∗∗ -0.22∗∗ -0.19∗∗ -0.20∗∗ -0.10∗∗∗ -0.08∗∗∗ -0.06∗∗∗ -0.03∗ -0.01(0.04) (0.03) (0.09) (0.08) (0.10) (0.04) (0.03) (0.02) (0.02) (0.02)

Dep. Var lagged 0.25∗∗∗ 0.23∗∗∗ 0.25∗∗∗ 0.30∗∗∗

(0.06) (0.09) (0.08) (0.08)Observations 843 843 730 730 730 843 843 843 843 843Countries 113 113 110 110 110 113 113 113 113 113Democracy changes in the sample 72 72 67 67 67 72 72 72 72 72Long run effect of democracy 18.75 19.32 27.22 29.16 28.30 18.75 19.33 20.49 23.96 .P-value for the long run effect 0.00 0.00 0.01 0.02 0.02 0.00 0.00 0.00 0.02 .




Table: Effects of democratization on inequality, Five year panel. Interaction withincome held by top decile over bottom 50th.


(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)



Lagged democracy × Top share -0.01 -0.01 -0.02 -0.02 -0.01 -0.01 -0.01 -0.01 -0.01 -0.01(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

Dep. Var lagged 0.30∗∗∗ 0.29∗∗∗ 0.30∗∗∗ 0.32∗∗∗



Democracy lagged -0.76 -1.29 -1.73 -2.30 -1.55 -1.02 -1.16 -1.30 -1.45 -1.59(0.93) (0.85) (1.31) (1.41) (1.30) (0.98) (0.89) (0.85) (0.88) (0.97)

Lagged democracy × Top share -0.00 -0.00 0.00 -0.00 0.00 -0.00 -0.00 -0.00 -0.01 -0.01(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

Dep. Var lagged 0.48∗∗∗ 0.52∗∗∗ 0.54∗∗∗ 0.60∗∗∗







(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Democracy lagged 18.72∗∗∗ 14.44∗∗∗ 18.47∗ 22.49∗∗ 17.16∗∗ 18.72∗∗∗ 14.42∗∗∗ 10.11∗∗∗ 5.81∗∗ 1.50(5.18) (3.98) (9.43) (10.35) (8.34) (5.18) (3.70) (2.61) (2.49) (3.45)

Lagged democracy × Bottom share 5.04∗∗∗ 3.88∗∗∗ 7.34 9.31∗ 6.36 5.04∗∗∗ 3.87∗∗∗ 2.70∗∗ 1.54 0.37(1.88) (1.46) (4.84) (5.58) (5.54) (1.88) (1.44) (1.14) (1.12) (1.38)

Dep. Var lagged 0.25∗∗∗ 0.24∗∗∗ 0.24∗∗∗ 0.30∗∗∗

(0.06) (0.09) (0.08) (0.07)Observations 843 843 730 730 730 843 843 843 843 843Countries 113 113 110 110 110 113 113 113 113 113Democracy changes in the sample 72 72 67 67 67 72 72 72 72 72Long run effect of democracy 18.72 19.22 24.42 29.43 24.54 18.72 19.22 20.22 23.23 .P-value for the long run effect 0.00 0.00 0.04 0.02 0.04 0.00 0.00 0.00 0.02 .




Table: Effects of democratization on inequality, Five year panel. Interaction withincome held by bottom decile over 50th.


(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)


Democracy lagged 0.92 -0.41 -2.11∗ -2.64∗ -1.93∗ -0.07 -0.35 -0.64 -0.92 -1.21(0.78) (0.85) (1.28) (1.35) (1.14) (0.91) (0.88) (0.88) (0.93) (1.01)

Lagged democracy × Bottom share 0.52∗ 0.67∗∗ 0.94∗ 0.71 0.58 0.71∗∗ 0.68∗∗ 0.65∗∗ 0.62∗∗ 0.59∗∗

(0.29) (0.28) (0.56) (0.51) (0.44) (0.30) (0.28) (0.27) (0.28) (0.30)Dep. Var lagged 0.30∗∗∗ 0.33∗∗∗ 0.35∗∗∗ 0.43∗∗∗



Democracy lagged -0.68 -1.24 -1.57 -2.35∗ -1.58 -0.95 -1.10 -1.25 -1.40 -1.55(0.95) (0.86) (1.26) (1.42) (1.24) (1.00) (0.91) (0.87) (0.89) (0.97)

Lagged democracy × Bottom share 0.29 0.28 -0.08 -0.24 0.09 0.31 0.29 0.28 0.26 0.25(0.37) (0.31) (0.52) (0.56) (0.49) (0.37) (0.33) (0.31) (0.32) (0.35)

Dep. Var lagged 0.48∗∗∗ 0.58∗∗∗ 0.60∗∗∗ 0.66∗∗∗




Interpretation 1: Whig History

Democracy increases responsiveness of state to citizen demands.

When we disaggregate measures: civil liberties and politicalcompetition seem to matter the most.

See effects on lowered barriers to entry as well as increased publicgoods:

e.g. Taxes go up, market reforms increase, and public and privateinvestments also go up.See positive effects on health, education, and lower social conflict.But market opening and public goods can increase or decreaseinequality.



Interpretation 2: Bourgeois Rule

Post-1950 Democracy as increasing political power of upper middle class.

Democratizations in our sample are partial consolidated democracies.

Consolidated means that elite need to be left not much worse off.

Democracy allows elite to share power with upper middle class.

Middle class understood as class with economic resources butexcluded from political power.

Thus see policies that are complementary with private investment,and thus growth, but no equalization of incomes.



Conclusion

Effect of democracy more complex than simple median voter modelsuggests.

Refine measure of democracy.

Control for dynamics of dependent variable (growth, inequality).

Find strong evidence that democratization leads to higher growth.

Variety of channels, including structural change and increased size ofgovernment.

More nuanced results on inequality: inequality does not change onaverage.

But heterogeneity in effects suggests mechanisms (e.g. Director’sLaw) that may be at work.

Plenty of future research needed to explore detailed mechansismsbehind these results as well as implications.


democracy, growth, and inequality - centro uc...

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