Understand why democracy is good for the economy

The discussion periodically resurfaces: are authoritarian regimes positive for a country’s economy?

In 1999, in an article in the renowned Journal of Democracy, the Nobel Prize in Economics Amartya Kumar Sen pointed to the rise of democracy in the world as the most important event of the 20th century.

“There is no convincing general evidence that authoritarian governance and the suppression of political and civil rights are beneficial to economic development,” the Harvard professor wrote.

Since then, China has emerged as a rival power to the US, and authoritarian countries in the Middle East have been transformed in just a few years with the exponential increase in their wealth, heating up the debate.

More recently, the populist wave in stable nations has thickened the broth of discussion. Studies from the last three decades are divided between two conclusions: 1) authoritarian and democratic regimes would have a similar performance in the economy; 2) democracies do better in economic performance.

Among the conclusions of these surveys is that the characteristics of a participatory model would tend to generate more wealth — and more income distribution.

Are democratic regimes positive for the economy?

Different studies point out that it is. One of them, published in 2019 by researchers at the Universities of Chicago, Boston, Columbia and MIT, followed 175 countries between 1960 and 2010.

According to the research, a country that chooses democracy can achieve an increase in GDP per capita up to 20% above that of an autocratic nation in a period of 25 years.

The findings suggest that democracy “contributes to growth by increasing investment, encouraging economic reform, improving education and health, and reducing social unrest.” According to the results, growth is independent of the initial level of economic development.

What explains this relationship?

Economy is exchange and needs social ties, says political scientist Josué Medeiros, a professor at the Federal University of Rio de Janeiro. “The market is not just a monetary relationship in which one pays and the other receives, as if people do not relate to each other”, says the researcher. “In a country in civil war, for example, the economy goes down because you can’t even talk anymore.”

If, at first, repression can give a feeling of stability, the chances of groups in a country becoming radicalized are great. In the long run, democracies tend to be more peaceful because they internalize society’s conflicts, proposing institutional paths to them.

In contrast, authoritarian governments repress. “You produce a potential for an escalation of violence that ends any type of predictability, stability and social bond”, says Medeiros.

Why does democracy attract business?

Stability and predictability are keywords for business and the reason why authoritarian outbursts often precede market shake-ups. For Ricardo Jacomassi, partner at investment company TCP Partners, “the less noise there is, the better for investments”.

“The democratic environment encourages private investment. When we compare, we see how beneficial it is to have a competitive environment, in which the rules are clear and will not be changed by a pen.”

In the case of Brazil, an institutional rupture would have the potential to do great damage, considering the country’s dependence on exports and on investments and technology from abroad. “It is unthinkable to make large investments in infrastructure, energy and oil, for example, if we do not have these capitals present”, says economist Clemens Nunes, professor of economics at FGV-SP.

Although there are private investments in dictatorships, Nunes says that this is never a comfortable situation for companies. “An autocrat can be replaced, and then you lose the advantageous position you had.”

Can democracy reduce economic inequality?

In the field of inequality, poverty and schooling indices, there is a strong consensus among researchers: democracy is the best regime to improve them. come out ahead.

“In a dictatorship, the forum for complaints is very restricted. Institutions closer to society are frozen to the detriment of a centralized political elite”, says Carolina Botelho, a professor of political science at Mackenzie Presbyterian University.

Transparency is also important. Research that shows pockets of poverty, gender inequality and public health problems is central to public policymaking, but it can damage the image of the current leader — and be banned or manipulated by authoritarian governments.

Why are there authoritarian countries with thriving economies?

The fact that democracies tend to have greater economic growth does not eliminate the existence of good performances in dictatorships, but there is also no evidence that the success of these nations is due to authoritarianism. The case of China, for example, may be related to a regional conjuncture.

“There are countries that have had a decade of very rapid growth, but the kind of transformational, double-digit growth for more than two decades has basically only occurred in East Asia,” says Nicolas van de Walle, a professor at Cornell University and an expert in democratization.

The simple fact of not being able to change rulers, in itself, is a negative point of dictatorships for the economy, according to Walle. “You can’t get rid of a bad leader,” he says. “There’s a lot of evidence of dictators who were good for the first four or five years and then got progressively worse.”