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Monday
Jun232014

Back After an Extended Break

The Why Nations Fail blog took a semi-planned break as both of us got overwhelmed with other obligations.

We are now resuming our regular posts, first catching up with a few things that have been going on during our break.

Tuesday
Mar252014

Democracy, What Is It Good For?

In an earlier post, we reported on our research joint with Suresh Naidu and Pascual Restrepo, “Democracy, Redistribution and Inequality”, which showed very limited effects of democracy on inequality.

So one would be excused for paraphrasing Edwin Starr’s famous song and Ian Morris’s forthcoming book, War! What Is It Good for?, and ask “democracy, what is it good for?”

Certainly not economic growth, most would reason.

This conclusion is based on a consensus engulfing both academia and the popular press that democracy is at its best irrelevant for growth, and perhaps even a hindrance.

For example, Tom Friedman wrote in the pages of The New York Times:

One-party nondemocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century,”

Friedman wasn’t making this up. Robert Barro, who has written several papers on the topic, argued in his book Getting it Right: Markets and Choices in a Free Society:

More political rights do not have an effect on growth… The first lesson is that democracy is not the key to economic growth.

A recent survey of the recent literature similarly concludes:

The net effect of democracy on growth performance cross-nationally over the last five decades is negative or null.

Equally dominant is the view that democracy isn’t right for low-income countries (which are often the ones trying to turn their societies into democracies). The pages of The New York Times again summarize what most of the popular press seems to have accepted as axiomatic, this time in the words of David Brooks defending the Egyptian military coup,

It’s not that Egypt doesn’t have a recipe for a democratic transition. It seems to lack even the basic mental ingredients.

Judge Posner also agrees with this conclusion (even though, to the best of our knowledge, he does not go so far as supporting Egypt’s murderous generals), and writes

Dictatorship will often be optimal for very poor countries. Such countries tend not only to have simple economies but also to lack the cultural and institutional preconditions to democracy.

Our paper Democracy, Redistribution and Inequality” was in fact part of a broader project investigating the implications of democracy for both economic growth and inequality.

Our main paper (again joint with Suresh Naidu and Pascual Restrepo) is out, and as the title suggests “Democracy Does Cause Growth, it sharply disagrees with this consensus.

The curious thing is that our paper is not actually the first one to find a positive effect of democracy and economic growth, but it is true that the literature contains many papers that find no effects or sometimes even negative effects.

We think there is a simple reason for this, which can be seen in the next figure. This figure shows the evolution of GDP per capita following a democratization event compared to nondemocracies (all democratizations are lined up to date 0 so as to visually trace out average growth following democratization relative to the control countries in which there is no democratization).

 

The first thing that jumps out from the figure is that a typical democratization takes place when a country is undergoing an economic crisis (a point first emphasized in an earlier paper we wrote with Simon Johnson and Pierre Yared, “Income and Democracy”, and later investigated in greater detail in work by Markus Brückner and Antonio Ciccone.

What this implies is that unless one takes care of modeling the dynamics of GDP per capita carefully, one can reach any conclusion one likes from this pattern. Imagine, for example, aggregating the data into five-year intervals (as much of the previous literature does) and consider shifting where these five intervals start from in this figure. You will quickly convince yourself that one could easily find that democracy could be bad for growth (because GDP per capita is declining in the five-year interval in which democratizations are taking place).

Another major problem plaguing the previous literature is that many of the measures of democracy are ridden with measurement error. To deal with this problem, we follow work by Elias Papaioannou and Gregorios Siourounis, and constructed a 0-1 index of democracy using multiple sources, which minimizes the extent of measurement error (in particular by removing spurious movements in the democracy score of many low-income countries).

Using such an index, annual observations, country fixed effects (so as to control for various institutional and other country-level determinants of both democracy and economic growth) and econometric models that control for the dynamics of GDP per capita, we find quite well-estimated positive effects of democracy on growth.

In fact, once these 0-1 measures are used and the dynamics of GDP per capita are control for (even in a very rudimentary fashion), the positive effects of democracy on growth are very robust.

We also report instrumental-variables estimates, exploiting the fact that democratizations often occur in the form of regional waves (as noted by Samuel Huntington in The Third Wave). These estimates also show robust positive effects of democracy on GDP per capita of similar magnitude to the other models we report.

Our baseline estimates suggest that a country that democratizes increases its GDP per capita by about 20% in the next 20-30 years. Not a trivial effect at all.

Is there any evidence that democracy is only good for already developed economies? The answer is no. Though we do find that democratizations are associated with larger increases in GDP per capita in countries with higher levels of secondary schooling, there is no evidence that democracy is bad for economic growth in low income economies or even in economies with low levels of schooling.

In all, the evidence seems to be fairly clear that democracy is good for economic growth.

Why? This is a harder question to answer. Our evidence shows that democracies are better at implementing economic reforms, and also increase education. They also probably increase the provision of public goods (though the evidence here is a little less robust).

But none of this is conclusive evidence.

Our results from the two papers combined thus suggest an intriguing pattern: contrary to what many have presumed, democracy doesn’t have a huge effect on inequality. But also contrary to what seems to have been almost a consensus, democracy does have a robust and fairly sizable positive effect on economic growth.

Friday
Mar142014

Ukraine 

Some brief comments on Ukraine.

Tuesday
Mar112014

The Benefits of Social Capital? Bowling for Hitler.

In our discussion of David Laitin’s explanation for why Basque nationalism became violent but Catalan did not, we pointed out that this is partially explained by the Basque country having the type of “horizontal” or “bonding” social capital that Robert Putnam and his collaborators argued in their famous work, Making Democracy Work, to have been crucial for promoting democracy and good governance.

In our research on the politics of the paramount chieftaincy in Sierra Leone with Tristan Reed, which we discussed last year, we found a great deal of evidence to be skeptical about this. In Sierra Leone, the evidence suggests that no matter how you measure social capital, it is negatively correlated with both less accountable local political institutions and economic development.

Another powerful example of the drawbacks of social capital is provided in the recent paper “Bowling for Fascism: Social Capital and the Rise of the Nazi Party in Weimar Germany, 1919-33” by Shanker Satyanath, Nico Voigtländer and Hans-Joakim Voth. The authors collected data on the extent of social capital in Germany in the 1920s as measured by the “density of associational life” in effect the presence of different social groups such as sports clubs, choirs, animal breeding associations, or gymnastics club. Their measure of social capital in a city is the total number of such associations per 1,000 people. They show that where social capital was higher, the Nazi party rose faster in terms of membership and it also recorded higher vote totals.

Historical evidence suggests that like ETA in the Basque country, the Nazi party were very adept at exploiting the possibilities provided by social capital to recruit new members.

One conclusion to draw from all of this work is not that Putnam was wrong. Indeed, his arguments are plausible in the Italian case and have received empirical support there (for instance, as shown in the paper “Long-Term Persistence” by Luigi Guiso, Paola Sapienza and Luigi Zingales).

Rather, the correct conclusion would be that the impact of social capital is highly heterogeneous and crucially depends on how it interacts with other aspects of a society’s institutions and politics.

Satyanath, Voightländer and Voth capture a bit of this idea since they show that in Prussia, which had stronger institutions, the relationship between social capital and the rise of the Nazi party is much weaker. They conclude

Our results therefore suggest that strong, inclusive institutions can keep the “dark side” of social capital in check.

Music to our ears, though obviously it’s not just inclusive institutions that keep the dark side of social capital in check, since the Prussian state of the 1920s that did control this type of social capital was far from inclusive. Clearly, there is more to the mystery of social capital.

Thursday
Mar062014

Why is the Basque Country more Violent than Catalunya?

In our last post, we examined why Catalans in Spain had developed a distinct Catalan identity, to the point of pushing for an independent state, while those in France had not. Looking at the wider Spanish scene one sees the failure to create a Spanish identity more broadly. This is true not simply in Catalunya but in Galicia and perhaps most obviously in the Basque country.

But this observation raises other interesting questions because there is obviously a huge difference between the nationalism of Catalunya and that of the Basque Country: the former is not violent while the latter is. What could explain this?

Exactly this issue was addressed by political scientist David Laitin in his paper “National Revivals and Violence”. Laitin argued that in the Basque country, the nationalist movement ETA was very successful at tapping into local social capital and recruiting young men from small towns based on mountain-climbing clubs, called mendigoitzale, or youth gangs, or cuadrillas. In contrast Catalunya lacked these types of social groups and social capital. (This is related to the idea that social capital can be used for good or ill purposes, so its political implications are much more subtle than what one might at first conjecture, as we discussed in this post a while ago).

Laitin argues that, in the Basque country, small town life was dominated by patron-client ties to political parties and that economic groups, like trade unions were much more important. This provided a social base for political parties that were much more inclined to negotiate than fight.

Yet Laitin also argues that these different social structures only made recruitment easier in the Basque country, and they also leaned more towards violence in the sense that ETA, based on local social capital, did not have simple and effective channels of communication with Madrid, which could have facilitated negotiation (unlike the situation in Catalunya).

Paradoxically, what further precipitated violence was that it was “more costly” for people in the Basque country to become Basque nationalists, particularly from a linguistic point of view. Basque is a non-Indo European language and completely different from Spanish, while Catalan is very close. Hence in the Basque case it was more difficult to get local people to become nationalistic without using violence to ‘encourage’ them. In Catalunya it was much easier to speak Catalan, and moreover people probably also expected others to switch to speaking Catalan, something that was much less likely with Basque.

Laitin uses this language example as a bit of a metaphor for the fact that being Basque was harder than being Catalan, which meant that those trying to promote Basque nationalism were more prone to resort to violence.

The last piece of Laitin’s argument is more idiosyncratic. He also argues that early successes were important in sustaining the violent strategy of ETA. ETA commandos assassinated Luis Carrero Blanco, the Spanish Prime Minister and heir apparent to Franco and ETA membership quickly doubled in its wake. The execution of two ETA prisoners in 1975 yielded a general strike and turned the victims into martyrs, further boosting support for ETA. 

In the end Laitin’s analysis blends structural factors, the different nature of social capital, the different cost of being Basque, with idiosyncratic shocks which allowed particular violent strategies to consolidate themselves and appear successful.