Bryan Caplan  

Democracy, Dictatorship, and the Variance of Growth

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Attention Hoosiers... Glass-Steagall 2.0?...
Last night I was writing my lecture notes on dictatorship, and realized that I didn't have a source for a factoid I often tell my students.  Namely: Democracies and dictatorships have the same average growth rate, but dictatorships have higher variance.  The intuition: If you get a smart growth-oriented dictator, he follows the Nike strategy: "Just do it."  If you get a sociopathic dictator, he burns his country down.  In democracies, in contrast, mediocrity and compromise reign.

But what's the source?  It took me about fifteen minutes to track down a seemingly seminal 1991 paper by Sah in the JEP.  When I actually looked at it, however, there were no supporting empirics.  This left me wondering if my factoid was even true.  Yet eventually I found a good citation (Almeida and Ferreira, Economics and Politics 2002).  The variance of growth is 4.5 times larger in dictatorships than democracies.  There's even a pretty graph:

almeida.jpg

I wish the data were more up-to-date - especially since the numbers for the Communist bloc seem so bogus in hindsight.  But since fixing the data to account for all the economic disasters of the Communist world would strengthen the conclusion that dictatorships have higher variance, I think I can teach this result with confidence next semester.


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COMMENTS (12 to date)
Andy McKenzie writes:

It would strengthen the result for variance, but wouldn't it hurt the conclusion that the two types of gov's have the same average growth rate?

Kurbla writes:

What, you'd like to fix data so you can teach with confidence? Good one.

What exactly is the data you do not like?

US writes:

The graph does not, as far as I can see, support your assertion that average growth rates are the same. Why should they be, I can come up with all sorts of reaons why they shouldn't?

Also, why is it only the former Communist bloc numbers in the autocratic sample section that are obviously bogus? Do you trust Cuba's official growth numbers? Zimbabwe's? North Korea's? Iran's?

I know I don't.

Les writes:

Using Google Scholar, one can find many articles offering evidence that economic freedom is associated with economic growth (http://scholar.google.com/scholar?q=related:SrvGiO_cZxkJ:scholar.google.com/&hl=en).

How do you reconcile these articles with the Almeida and Ferreira article?

Javier writes:

I thought that the classic study is Democracy and Development by Przeworski et al....but I don't think their conclusions are that favorable to dictatorships in the end.

Joe Torben writes:

I fail to see why correcting the figures for the East bloc would keep variance. The variance came from some countries with high growth and others with low or negative growth. Moving one set of countries from high growth to low growth should, everything else being equal, lower variance as well as average growth.

I can buy the theoretical argument about a "smart growth-oriented dictator". In practice, however, the list is pretty much:

Smart, growth-oriented dictator:
Singapore

Evil thief:
Everyone else

botogol writes:

in what way can a dictator increase the growth rate of his country? I struggle to see how. It seems to me that any resource allocations made other than by the price mechanism will reduce efficiency (OK, unless by fluke, you cd get lucky)

Justin Martyr writes:

Botogol,

in what way can a dictator increase the growth rate of his country? I struggle to see how. It seems to me that any resource allocations made other than by the price mechanism will reduce efficiency (OK, unless by fluke, you cd get lucky)

1. Not true. The government will do a better job of regulating externalities with high transaction costs than markets.

2. The debate is not markets versus government. That assumes that everyone in society will happily go along with whatever increases the overall size of the pie, regardless of whether or not their piece will get smaller. That is not true for corrupt insiders (whether dictators or low-level bureaucrats).

The real debate is democracy versus dictatorship. The "Lee thesis" more or less holds that a dictator has an incentive to root out pervasive, low-level corruption - he is basically the residual claim holder for the entire nation. Lee Kuan Yew of Singapore has done a good job of this. IIRC, the Dominican Republic and Indonesia have been somewhat similar in this regard. But democracies suffer from a collective action problem - the only way to root out corruption is if voters do so collectively. That falls apart due to the free rider problem.

Norman writes:

Grier and Munger (of KPC fame) have a working paper connecting the dictator vs. democracy debate to regime duration. It's been a while since I read it (you can find it on Google scholar), but I'm pretty sure the conclusion was that dictators approach democratic outcomes only in the very best cases. So I think accurately presenting the state of the literature to your students would require noting the general lack of support for the average growth claim.

It's a bit like arguing that foreign aid is very effective at encouraging growth. The evidence doesn't definitively shoot the idea down, but there's probably a reason most empirical studies weigh against it.

Bryan Caplan writes:
Les writes:

Using Google Scholar, one can find many articles offering evidence that economic freedom is associated with economic growth (http://scholar.google.com/scholar?q=related:SrvGiO_cZxkJ:scholar.google.com/&hl=en).

How do you reconcile these articles with the Almeida and Ferreira article?

Les, the most obvious answer is that democracy is not associated with economic freedom... though I'll admit that it seems like all the data points from the Communist bloc should create such an association...
Mr. Econotarian writes:

in what way can a dictator increase the growth rate of his country?

By maintaining high levels (or at least increasing) economic freedom.

We can see that China's government has increased economic freedom over the last 30 years, brought 500 million people out of absolute poverty, created a new middle class of 100 million people, and is experiencing 10% GDP growth in good economic years (and 6% GDP growth in horrible economic years like this one).

Of course, such actions require the autocratic governor to give up power to the market, but he/she need not give up power to democracy.

It will be interesting to see if China hits a "brick wall" where no more growth can occur under a non-democratic regime.

Jeremy, Alabama writes:

Now average the dictatorships across generations.

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