Correlation between Democracy and Economic Development

2212 words (9 pages) Essay in Economics

12/04/19 Economics Reference this

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Which is most essential for the emergence and maintenance of democracy: economic development or non-economic factors? Illustrate your argument with empirical examples.

Another way of simplifying the question is to determine if, and to what extent, there is a correlation between democracy (measured by the Democracy Index – DI) and economic development (measured by the Human Development Index – HDI). Any correlation does not necessarily rule out the causal relationship of non-economic factors. Before examining the correlation, the essay will look at Modernization Theory by Lipset (1959) as well as Przeworski’s influential study on the link between economic development and democracy. Finally, the essay will look at some anomalies in this correlation such as China, Iran, Saudi Arabia, the Holy See and Brunei.

Before the 1970s, economic development was defined in terms of indicators such as GDP, GNP, trade balance etc. Nobel prize winner Amartya Sen and Pakistani economist Mahbub ul Haq argued that economic development should be measured with other indicators to reflect the totality of economic development. Their work led to the Human Development Index in 1990 which measured four factors. By 2010, the HDI had been revised and combined three factors;

  1. life expectancy
  2. education
  3. gross national income (GNI) per capita

Today, the HDI is the most commonly used indicator of economic development.

Trying to come up with a definition of democracy, or what constitutes a democracy, which all academics agree upon is fraught with difficulties and there is certainly no consensus on how it should be measured (Kekic, 2007). For the sake of using a working definition for this essay, we can define a democracy as;

practices and principles exercised by a government equally and fairly to all its citizens without benefitting one group or set over another

If we work with that definition, then the most accurate measurement to date is the Economist Intelligence Unit’s Democracy Index which measures democracy based on five categories using 60 indicators examining 167 countries and territories. Democracies are classified as;

  1. Full democracies
  2. Flawed democracies
  3. Hybrid regimes
  4. Authoritarian regimes.

The field of research that examines the link between democracy and economic development was first popularised by Seymour Martin Lipset in Some Social Requisites of Democracy: Economic Development and Political Development 1959. His most famous summarization was, “the more-well-to-do a nation, the greater the chance that it will sustain democracy” (Lipset, 1959). Lipset was able to argue what has since been regarded as conventional wisdom; there is a correlation to how well an economy is doing and the type of democratic institutions it has.

By conducting a comparative empirical study on the subject, Lipset was able to show the factors like industrialization, urbanization, wealth, and education are closely correlated with the politics of a state. Lipset insisted that for any democratic regime to survive it must achieve continuous economic development. According to Lipset, economic equality invariably leads to an effective democracy because “a society divided between a large impoverished mass and a small favored elite would result either in oligarchy (…) or in tyranny” (Lipset 1959, 75). When workers are granted economic rights, they become more tolerant towards democratic rights and indeed expect it.

Since Lipset’s research, most studies have found the same positive correlation between democracy and economic development while a few haven’t. Whether a relationship can be established or not has often depended on several factors which have skewed a majority of empirical studies. That is to say that the correlation between democracy and economic development has often depended on the following;

  1. What countries were included in the research and when it was carried out;
  2. Whether countries were examined in one snap shot (cross sections) or over a longer period of time (time-series);
  3. What indicators were chosen for economic development (e.g. GDP, trade surplus, education) and what definition was used for democratic states (the conceptualization of democracy).

Lipset’s work remained the foremost authority on the subject until Przeworski et al revisited the question of economic development and democracy by conducting a much larger study forty years later.  Przeworski et al examined 135 countries and looked at their dataset from 1950 to 1990 with the view to discovering if economic development encouraged democracy (endogenous democratization) or merely maintained an already existing democracy (exogenous democratization). In other words, if a country passes a certain economic benchmark/threshold, Przeworski et al argue that their democratic institutions will be maintained and it is inconceivable that the country will revert to a non-democratic state.

In other words, Przeworski et al believed that economic development maintains democracies but does not necessarily kick start them therefore exogenous democratization of economic development holds true. According to Przeworski et al, economic development makes democracies endure but not emerge. Some of the most interesting arguments made by Przeworski et al is that democratic states occur because of a configuration of random factors therefore every state or territory faces a similar chance of development regardless of how they started out. The gap in this argument is that there is no explanation as to how they arrived at this assumption.

Since the seminal study by Przeworski et al, others have examined their data to challenge some of their assumptions. Welzel (2006) examined the same set of data and calculated the ratio of regime shift to democracy and regime shifts to autocracy for varying levels of GDP per capita. Welzel concluded that it would appear that economic developments do seem to make democracies appear practically contradicting the conclusions reached by Przeworski et al. Epstein et al (2006) also analysed the dataset of Przeworski et al and concluded that economic development does encourage democracies to emerge and indeed sustains them.

If we are to go back to the original question, current standardized measurements make it a lot easier to address the problem; measurements that were absent when Lipset first proposed the Modernization Theory. After a plethora of studies in this field of research, it has become much easier to use statistical methods and standardized datasets to see if there is a correlation between economic development and democracies. With standardized datasets collected by non-governmental agencies, establishing the relationship is a lot more straightforward. However, explaining causality is still difficult because examples are always present that do not follow the correlation.

As explained earlier, defining democracy is difficult and measuring it even more so. However, the Economist Intelligence Unit’s Democracy Index is the best measure available. The 2016 Democracy Index shows that half the countries in the world are not even considered democracies with only 19 countries out of 160 considered “full democracies”.  In this essay, I compiled a list of the top 30 countries in the Democracy Index as shown in Figure 1 in the second column.

Earlier, I explained the significance of the Human Development Index as a proxy for economic development. Figure 1 also has a list of the top 30 countries on the HDI 2016. Now a simple comparison of the two indices shows that there is a significant correlation between the two. It is clear that barring a few countries, most of the countries in the Democracy Index are also in the Human Development Index. The outliers have been highlighted in red.

Figure 1. Democracy Index vs Human Development Index

One has to note that the HDI does not completely capture economic development but merely a proxy that is weighted more towards education and life expectancy as economic indicators. In fact one could argue that these are non-economic factors therefore the HDI has twice as many non-economic factors as economic factors. This limitation is the reason that several countries that do not appear in both lists and actually contradict some of the research findings cited above. Be that as it may, HDI is still the standard measurement for economic development.

China presents a very interesting case that easily contradicts every study cited so far and the assumption that economic development makes democracies emerge and endure. In fact China, proves the contrary. Since 1949, the People’s Republic of China has been a communist state and has developed economically to the point that it is the second largest economy in the world, some would argue the largest economy in the world based on purchasing power parity. In fact according to Joseph Stiglitz who received the Nobel Prize in Economics in 2001, China has overtaken the United States as the world’s largest economy[i].

Furthermore, China has surpassed the US as the world’s largest trading nation,[ii] China is the world’s largest holder of foreign currency reserves[iii], China is the world’s largest exporter[iv], and China has lifted more people out of poverty than any other country.[v] Despite these developments, it is still not in the top 30 countries in the Human Development Index. China’s economic development is unquestionable and yet it still remains a non-democratic country. Another country that could be classified as such is Saudi Arabia that has a high economic development but still remains an absolute monarchy. Iran and the Holy See are in equally similar positions; theocracies that have attained a high economic development.

Despite all the theories presented about the correlation between economic development and democracies, there are still no answers as to what is the most essential to the emergence and maintenance of democracies. Lipset et al have shown that economic development is essential to the maintenance of democracy and few would argue with that given the preponderance of data to suggest that. But what contributes to the emergence of democracy is a little hard to answer. Przeworski et al.

have clearly argued that economic development is not needed for the emergence of democracy. Even looking at examples around the world, we can see that there are communist states and theocracies that have achieved economic development and are clearly nor democracies. Undoubtedly, there will be more examples in Asia and Brunei is another example of an absolute monarchy with a high economic development. The truth of the matter is that Lipset’s Modernization Theory still hold true today; economic development is likely to maintain democracies but we are no closer to the explanation of what causes democracies; economic development or non-economic factors?

References

  • Acemoglu, Daron and James A. Robinson. 2001. A Theory of Political Transitions. American Economic Review. 91:938-963. URL (cited 7 April 2017): http://www.jstor.org/stable/2677820.
  • Arat, Zehra F. 1988. Democracy and Economic Development: Modernization Theory Revisited. Comparative Politics. 21: 21-36. URL (cited 7 April 2017): http://www.jstor.org/stable/422069.
  • Boix, Carles and Susan Stokes. 2003. Endogenous Democratization. World Politics. 55: 517-549, doi:10.1353/wp.2003.0019.
  • Lipset, Seymour Martin. 1959. Some Social Requisites of Democracy: Economic Development and Political Legitimacy. American Political Science Review. 53 (March): 69-105, doi:10.2307/1951731.
  • Muller, Edward N. 1988. Democracy, Economic Development, and Income Inequality. American Sociological Review. 53: 50-68, doi:10.2307/2095732.
  • Przeworski, Adam, Jose Antonio Cheibub, Michael E. Alvarez, Fernando Limongi. 2000. Democracy and Development: Political Institutions and Material Well-being in the World, 1950-1990. Cambridge: Cambridge University Press. URL (cited 7 April 2017): http://books.google.co.uk/books?id=8uocGV0fptMC
  • Siegelman, Lee. 2006. Top Twenty Commentaries: The American Political Science Review Citation Classics. American Political Science Review. 100: 667-687, doi:10.1017/S0003055406212565.
  • Welzel, Christian. 2006. Democratization as an Emancipative Process: The Neglected Role of Mass Motivations. European Journal of Political Research. 45: 871-896, doi:10.1111/j.1475-6765.2006.00637.x.
  • Welzel, Christian and Ronald Inglehart. 2008. The Role of Ordinary People in Democratization. Journal of Democracy. 19(1): 126-140. URL (cited 7 April 2017):

[i] http://www.vanityfair.com/news/2015/01/china-worlds-largest-economy

[ii] https://www.theguardian.com/business/2014/jan/10/china-surpasses-us-world-largest-trading-nation

[iii] http://www.bbc.co.uk/news/business-22567974

[iv] https://www.weforum.org/agenda/2016/06/8-facts-about-chinas-economy/

[v] Ibid,

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