Does Democracy Enhance Economic Growth?

My research accounts for the democratic favor channel by revisiting seminal research on the effect of democracy on economic growth between 1960 and 2010. After accounting for sanctions on nondemocratic countries, the effect of democracy on economic growth generally becomes insignificant or negative. The effect becomes even weaker or more negative after accounting for the aggressiveness of democracies’ worldwide sanctioning efforts. The effect was most negative in the Cold War era, when Western nations promoted democracy less often to justify sanctions.

My findings do not suggest that democracy did not cause economic growth between 1960 and 2010. Rather, my analysis suggests that powerful democracies favored other democracies during this period, which caused economic growth. In other words, democracy did cause growth—especially after the collapse of the Soviet Union—but we should not conclude that democracy caused growth due to its intrinsic institutional qualities.

My critique is rooted in historical examples of Western foreign policy explicitly favoring democracies. This approach to foreign policy often hinges on the belief that it is democratic nations’ moral obligation and in their military and economic interests to democratize authoritarian regimes. For example, democratic peace theory is among the most popular theories of war and peace and argues that democratic nations do not war with each other. Additionally, prior research has shown that a significant share of sanctions was imposed explicitly to promote democracy and human rights, and military operations were often explicitly aimed at the autocratic nature of the target, such as President Bill Clinton’s Operation Uphold Democracy against a Haitian dictator. Those sanctions and military actions are likely to affect the economic outcomes of target countries. The broad consensus is that sanctions inflict significant economic damage on the target countries. Similarly, military allyship with the United States also affects the economies of allied nations by bolstering their national security. Therefore, it is plausible that analyses that ignore pro-democracy foreign policy create a misleading interpretation that democracy inherently enhances economic growth.

Moreover, there are at least two reasons to believe that the democratic favor channel is likely to be even stronger than what my empirical findings suggest. First, there are many cases in which Western nations came close to implementing sanctions and engaging in military confrontations due to the autocratic nature of the target countries but did not. For instance, although the Tiananmen Square massacre motivated the US House of Representatives to vote to revoke normal trade relations with China, it did not pass in the Senate. Prior research has found that the increased uncertainty in trade policy following this incident hampered business relations with China, but my analysis does not account for this effect. In another example, President Jimmy Carter contemplated withdrawing US troops from South Korea in the late 1970s as South Korea’s authoritarian suppression intensified, but concerns about communist expansion in the Korean peninsula convinced the president otherwise. Worsening relations between the United States and South Korea concerned businesses at that time, but my analysis does not capture these economic impacts.

Another reason to believe that the democratic favor channel is even more influential than what my analysis suggests is that the West’s tendency to condemn foreign autocratic oppression has often led to the dissolution of military allyship with other countries—even in cases where the West did not intend to cut military ties. For example, the US government condemned the Andijan massacre committed by the Uzbek government, and this led President Islam Karimov to close the US air base in Uzbekistan.

In summary, my work critiques prior research on the economic effect of democracy using historical examples and an empirical revisitation of existing studies. Prior research has not considered a plausible explanation that links democracy with economic growth, and this has led to a hasty conclusion about the institutional qualities of democracy compared with other systems. Future research should take the democratic favor channel into account when evaluating democracy’s effect on economic growth.

Note:
This research brief is based on Ziho Park, “A Critique of Comparative Institutional Economics: The Neglected Role of International Political Economy,” Social Science Research Network, September 2024.