The Failure Of Democracy

The title is sheer hyperbole and sensationalist, but this is really a book review and a rather appropriate one given the news yesterday.

Now that I’ve got your attention, let me begin first by saying that democracy and democratic institutions are far superior to other forms of social organisation. The principle of one person one vote, while honoured as much in the breach as in the observance, encapsulates the desire for all peoples for self-determination and the pursuit of life, liberty and happiness.

Democracy has flourished and has helped underpin the development of global trade, the advance of technology and the free working of markets, that has brought about an increase in human welfare that is both unique and unprecedented in human history.

That doesn’t mean it’s perfect however, but then, nothing is.

Democracy And Natural Resources

In the popular imagination, democracy is the foundation for prosperity. Strong, trustworthy political and public institutions are a precondition for sustained economic growth and development. The empirical evidence however, is decidedly mixed – not a few studies find little to no evidence of a link, and some fund links going the other way i.e. income creates democracies but not the other way around.

This new working paper from the IMF partly explains why (abstract):

Income and Democracy: Lipset's Law Revisited
Hoeffler, Anke, and Bates, Robert H. & Fayad, Ghada

Summary: We revisit Lipset‘s law, which posits a positive and significant relationship between income and democracy. Using dynamic and heterogeneous panel data estimation techniques, we find a significant and negative relationship between income and democracy: higher/lower incomes per capita hinder/trigger democratization. Decomposing overall income per capita into its resource and non-resource components, we find that the coefficient on the latter is positive and significant while that on the former is significant but negative, indicating that the role of resource income is central to the result.

Markets In Everything: What Determines The Supply Of Politicians?

And now for something completely different…fresh from the NBER is this seriously scholarly paper, but which I had to read with my tongue firmly in my cheek (abstract):

Labor Supply of Politicians
Raymond Fisman, Nikolaj A. Harmon, Emir Kamenica, Inger Munk

We examine the labor supply of politicians using data on Members of the European Parliament (MEPs). We exploit the introduction of a law that equalized MEPs' salaries, which had previously differed by as much as a factor of ten. Doubling an MEP's salary increases the probability of running for reelection by 23 percentage points and increases the logarithm of the number of parties that field a candidate by 29 percent of a standard deviation. A salary increase has no discernible impact on absenteeism or shirking from legislative sessions; in contrast, non-pecuniary motives, proxied by home-country corruption, substantially impact the intensive margin of labor supply. Finally, an increase in salary lowers the quality of elected MEPs, measured by the selectivity of their undergraduate institutions.

Oh my, what fun…most of it conforms to intuition (raising salaries increases supply; politicians from more corrupt countries tend to put in less effort), but that last bit is priceless. Raising salaries, all things equal, reduces the quality of electoral candidates.

Singapore must be on the right track then, as they’ve just proposed cutting ministerial salaries by more than a third. Malaysia’s Budget 2012 on the other hand has offered to raise parliamentarians’ pay (*cough*).

Does this mean politicians are a type of inferior good?

Remember, I didn’t say anything.

Technical Notes

Fisman, Raymond and Nikolaj A. Harmon, Emir Kamenica & Inger Munk, "Labor Supply of Politicians", NBER Working Paper No. 17726, January 2012

Expected Versus Actual Democracy

Greg, you’re going love this. From VoxEU (excerpt):

The Democratic Transition
Fabrice Murtin Romain Wacziarg

As witnessed during this year’s Arab Spring, democracy doesn’t always emerge smoothly. This column examines the long march toward political freedom since 1800. It argues that while both income and education affect democracy, the rise in primary education has been the main driver of democratisation over 1870-2000.

Throughout history the march toward political freedom has not been a smooth process. It has happened in fits and starts, in waves, and was often reversed or interrupted. The collapse of several Middle Eastern authoritarian regimes in the wake of this year’s Arab Spring illustrates the point clearly...

...Whether democracy affects education and income or whether the causality runs the other way is the key source of disagreement in this debate. Studies examining the consequences of democratisation uncovered mixed results...

Democracy And Economic Development

Another paper from this week’s NBER working paper series – chalk this one up as adding to the literature over the ambiguous relationship between democracy and democratic institutions on the one hand, and economic growth and development on the other (abstract; emphasis added):

The Democratic Transition
Fabrice Murtin, Romain Wacziarg

Over the last two centuries, many countries experienced regime transitions toward democracy. We document this democratic transition over a long time horizon. We use historical time series of income, education and democracy levels from 1870 to 2000 to explore the economic factors associated with rising levels of democracy. We find that primary schooling, and to a weaker extent per capita income levels, are strong determinants of the quality of political institutions. We find little evidence of causality running the other way, from democracy to income or education.

Note that the paper defines the relationship very narrowly, examining the relationship between just three variables – education, income and democracy (here proxied by the Polity index). I can’t speak to the methodology used here as I’m not fully conversant with it, but I would be concerned over possible omission of other variables that might change the results. Single equation methods, even with a large panel dataset, might lead to spurious regression results.

Nevertheless, the results obtained here resonate with my own views. Economic institutions and legal frameworks (probably) matter for development and growth, political institutions not so much.

Technical Notes

Murtin, Fabrice & Romain Wacziarg, "The Democratic Transition", NBER Working Paper No. 17432, Issued in September 2011