This should be rather intuitive: As people obtain more political rights they also will tend to demand more economic rights (such as secure property rights, enforceable contracts, equal economic opportunities, etc.). This development from more inclusive political institutions to more inclusive economic institutions, however, does not happen automatically. It can happen, but it is by no means a law of nature.
Indeed, A&R provide many examples in their book that show how more inclusive economic institutions have evolved over time as the result of political power struggles between different classes of society (aristocrats vs. peasants, capitalists vs. labor class, etc.). The outcome of these political struggles is, however, far from certain ex-ante. For example, nobody could have predicted in advance the outcome of the Glorious Revolution in Great Britain in 1688. A&R identify this critical juncture as the event that gave larger parts of the British population more political liberties and also significant checks and balances were imposed on the power of the monarch. Subsequently, increased political power also led to more economic liberties over time, thus providing the foundation of the Industrial Revolution. Great Britain is thus one of the countries that followed the blue development path.
However, in what follows I will mainly discuss the path described by the read arrows, that is, modernization theory. There exist actually several different versions of modernization theory (M.T.). The most recent and prominent formulation of the theory asserts that countries are more likely to democratize, as they get richer. The intuition behind this result is relatively straightforward. Rising levels of income are accompanied by the emergence of a middle class, industrialization, investments in human capital, etc. It seems plausible that all these socio-economic changes should increase the likelihood of democratization (i.e. a change towards more inclusive political institutions) within a country.
And indeed, just by looking at the following two maps one can see that there is a very high correlation between political freedom (measured by the Freedom House index) and GDP per capita.
Level of political rights and liberties
Yellow: Partly Free
Blue: Not Free
GDP (PPP) per capita
I actually wrote a very short article about Modernization Theory at the Australian National University for the one and only Political Science Course I took over there (“Comparative Politics: Asia Pacific”). I will thus quote from my own article called “An essay about economic development and democratization”. Not just because I CAN, but also because it is obviously related to the topic at hand. :D
In the introduction I refer to the clear correlation between income per capita and political freedom that is apparent from the two maps above.
Many high-income countries are in fact democratic regimes whereas only a minority of low-income countries can claim to be true democracies. The direction of causality is, however, not very clear. Higher income could cause democratization, but it also might be that democratization leads to economic development, or that causality goes in both ways.
…economic development vastly increases the probability that democratization occurs within a given country (Inglehart & Weizel, 2009).
Acemoglu et al. (2008) investigate whether a country is more likely to become relatively democratic as it becomes relatively richer. They empirically show that there is no relationship between changes in income per capita and changes in democracy. Once controlled for various omitted variable biases, such as historical factors influencing both political and economic development, they find out that there is no statistically significant causal effect of income on democracy. Przeworski (2004) backs up this result. He shows that the income levels at which democracies emerge vary widely. Furthermore, the probability that a democracy arises does not increase monotonically with per capita income. In fact, beyond a certain threshold this probability eventually decreases again, that is dictatorships in countries with high levels of per capita income are actually less likely to democratize. All these results therefore strongly contradict M.T., as democratization can occur randomly at a very wide range of income levels.
Also the result that authoritarian regimes are somewhat more likely to survive with higher per capita income levels is actually not that surprising. Max Weber identified the state with having a monopoly on legitimate violence in society. There is thus a degree of centralization needed so that the state can enforce law and order in society. This, however, is not given in so-called failed states such as Somalia, Afghanistan, etc., where no such centralization exists. In these cases violence is exercised by many different groups/tribes instead and state authorities, if existent, fail to impose law and order. It is easy to see how dictatorships could fail in these kind of very low-income countries because state centralization cannot be achieved. It thus seems very sensible that the survival of authoritarian regimes does increase with rising income, at least at low levels.
So how to explain the high correlation between democracy and income?
Acemoglu et al. (2008) suggest that changes in income and democracy are caused by the fact that countries have experienced different development paths from some point in time onwards during the last 500 years. According to them, political and economic development is highly interlinked. So-called “critical junctures”, crucial events in the past, explain the divergence of development paths of countries. Due to path dependency, these events were consequential and determined why some nations embarked on democracy and economic growth why others experienced dictatorship and reduced growth. Przeworski (2004), however, advocates a different explanation. He observes that the probability that a democracy survives is monotonically increasing with GDP per capita. The high correlation between economic development and democracy therefore does not exist because development causes democratization, but simply because democracies have a much higher survival rate at higher income levels.
So what do we make of all that?
Proponents of M.T. often invoke China as the example that supposedly is going to follow the red path in the diagram shown above. A&R, however, are more skeptical. It is true that China has seen enormous growth rates over the last 3 decades. This, however, is not in contradiction with Acemoglu and Robinson’s theory. Many authoritarian regimes have experienced episodes of rapid economic growth. (Think of the Soviet Union in the 1960s/1970s, which managed to fabricate a growth spurt by moving millions of people from unproductive activities into industries). Something similar happened in China where again millions of people migrated over the last decades from the unproductive agricultural sector into the modern sector, that is, industries. A&R claim that these growth spurts are not sustainable since only countries with both inclusive political and inclusive economic institutions can engineer sustainable growth in the long-run.
The crucial ingredients to sustainable growth, however, are missing in China. There are significant barriers to entrepreneurship, there are hugely inefficient state enterprises that are not exposed to any kind of competition, property rights are not secure, creative destruction (a key ingredient to economic growth) is largely missing, and corruption seems to be a huge problem: How else can one explain that the fifty wealthiest members of Congress in China have accumulated a total wealth of roughly 95 billion US-$ (see this very interesting graph from the Economist below). Chinese officials are able to amass significant amounts of wealth by holding public office. Such rent-seeking activities are obviously bad from an economic point of view. Furthermore, A&R argue that such a setup will create instability because of infighting between the current mebers of the elite (any member will try to maximize his/her own part of the pie) and also because current outsiders will try to overthrow the elite in order to get a part of the pie for themselves.
Despite all that, it seems likely that China will still be able to engineer some “catch-up” growth in the next one or two decades just by maintaining the current modus operandi: That is, copying and adopting foreign technologies, moving even more people from the countryside into the modern sector, and maintaining very high saving rates (capital accumulation).
However, based on all the missing ingredients to long-run sustainable growth just mentioned above, A&R claim that China will most likely remain trapped at some medium level of income if political and economic institutions do not change significantly (and this seems to me like a very plausible assumption).
But the truth is that nobody can really predict what is going to happen in the following decade. Based on the last couple of years it is doubtful that China suddenly starts to democratize. It could happen that some big political event (maybe something similar to the student protests in 1989, but this time with a more positive outcome), leads to major institutional change. But this does not seem to be very likely at the moment. It is much more plausible that China’s institutions will remain relatively static over the next decade and this will in the medium-run definitely affect the country’s capacity to engineer sustainable catch-up growth.
PS: Readers might have realized that this topic was borderline Economics/Political Science. I strongly believe that A&R as economists with their institutional hypothesis come out on top of some of the political scientists who believed in M.T., and based on that belief predicted in the past that China would be a democracy by 2010, 2012, 2015…(I kid you not. I actually had to read some of these articles). So I guess I can still change my profession and become a successful political scientist in case Macroeconomics is not going to work out for one reason or the other. Also this is going to be the last post on this topic and I will go back into more familiar territory for me (i.e. some Macro related stuff) next time.
Acemoglu and Robinson: ’Why Nations Fail’
Acemoglu, D., Johnson, S., Robinson, J. A., & Yared, P. (2008). Income and
democracy. American Economic Review, 98(3), 808-842.
Freedom House (2013). Freedom in the World 2013. Retrieved from
Inglehart, R., & Weizel, C. (2009). Development and democracy: What we know
about modernization today. Foreign Affairs, 98(2), 33-41.
Przeworski, Adam. 2004. “Democracy and Economic Development.” 2004. In Edward D. Mansfield and Richard Sisson (eds.), The Evolution of Political Knowledge. Columbus: Ohio State University Press.