Democratic Capital

Economic and Political Change

The dynamics of political and economic change, building on two ideas. The first idea concerns the economic effects of democracy. If democracy influences economic performance, this must largely happen via investment decisions and hence through expectations. The prospects of future democracy then become a crucial determinant of current economic performance. This means that, to correctly assess the economic consequences of democracy, we must look beyond the current regime, to expectations about its stability. The second question comes in to examine what make democracies stable. Consolidation of democracy requires that citizens learn to cherish and respect democracy as a method of government. A common perception of democracy as a valuable form of government will not pop up overnight, or in a vacuum. Rather, a gradual appreciation of democracy can be envisaged as an accumulation of a stock of civic and social assets that takes place through a country’s learning from its own historical experience or from its neighboring countries. This consolidation process is referred to as the accumulation of "democratic capital".

A combination of these two ideas suggests rich dynamic interactions between economic and political change, including a positive feedback loop between democracy and economic development. As democracy consolidates and becomes more stable, income grows more rapidly. This feeds into more democratic stability, and yet more economic growth. At the same time, accumulation of democratic capital brings about yet more stability and further growth. Countries ruled by autocrats, instead, are more likely to stagnate because they do not have any chance of initiating this virtuous circle of consolidation and growth. If they happen to become democracies, they remain vulnerable and unstable until they have accumulated enough democratic capital. As instability hurts economic development, it feeds into itself.

Sustained economic growth is driven by investment, which depends on expected returns. If productivity is higher in democratic than autocratic regimes, growth in democracies is negatively affected by the probability of regime change. The probability of a regime change is determined in a global game, where individual citizens decide whether to participate in defending democracy (or overthrowing a dictator). This decision reflects society’s endowment of democratic capital. In equilibrium, higher democratic capital implies a lower probability of autocracy in the future. Therefore, more democratic capital has no direct effect on growth, only a positive indirect effect via higher expected returns (and investments).

Democratic capital has two components: one domestic and one foreign. Domestic democratic capital depends on the country’s own historical experience: it accumulates in periods of democracy and decumulates in periods of autocracy. Foreign democratic capital depends on current experience elsewhere: it accumulates with the incidence of democracy abroad and decumulates with the incidence of autocracy in other countries, with weights depending on geographic distance.

The study found that democratic capital is unambiguously good for growth. The results are not only statistically robust but also quantitatively important. Consistently with the within-regime estimates, the positive effect of democratic capital on growth is only present in democracies. A higher stock of democratic capital makes autocracies more likely to fall, but this effect is not conducive to faster growth as long as the regime remains autocratic.

The notion of democraticcapital refers to variables that influence the stability of democratic regimes, but have no direct effects on economic outcomes. The importance of culture in economic (as opposed to political) development is significant. Several political scientists have discussed the role of masses vs. elites in regime transitions — see, in particular, Collier (1999), Geddes (1999), and Bermeo (2003). Opp (1999) and Gibson (1997) rely on survey data to document how citizens’ decisions to participate in the uprise against socialist autocracies at the turn of the 1990s was motivated by strategic and social considerations.

A number of mechanisms could make a long-standing democracy more resilient to a coup than a short-standing one, including the build-up of formal and informal institutions from political parties to social norms. The same institutions would make the re-institution of democracy more likely in a nation lapsing into autocracy.

Two prominent avenues for future research emerge. One priority would be to allow for more heterogeneity between countries. The task is easier for democracies, because we can exploit a large literature in comparative politics that has studied a variety of democratic institutions, such as the electoral rule (majoritarian vs. proportional), the form of government (presidential vs. parliamentary), and the degree of centralization (federal vs. unitary). These forms of democracy may entail different degrees of political participation. If democratic capital accumulates through active participation, its accumulation and depreciation rates may systematically differ across different forms of democracy. But the empirical findings suggest that understanding the differences between various types of autocracies may be even more important.

A related avenue for future research is to make more precise the notion of democratic capital. Can we better understand just which values and norms are essential and how these relate to cultural and sociological attitudes of the population at large? How important is the contribution of education in the accumulation of these values and norms? Does democratic consolidation require the rise of a middle class with democratic values? Just how essential are independent media in mobilizing support for democracy? Telling these forces apart and more precisely pinpointing their specific roles in the process of democratic capital accumulation is an important priority for further work.

Source: Democratic capital:The nexus of political and economic change, Nuffield College, Economic working paper, March 2006.