Democracy and Growth?

One of interesting puzzles from those who seek to associate democracy with development is this: to what extent democracy influences growth? This is a worth-pondering question. In the time when the works about China/Singapore growth model have become more frequent, I think this question needs to seriously reexamine. This question virtually highlights another important question such as why countries need to democratize? Or what cost they might lose if they choose not to democratize? Let say a country x that has gone through a democratic transition (I know “democratic transition” itself is such a vague term), does not experience satisfactory growth after particular periods, then why should they care about democracy if it does not contribute for change?    

A recent major study by Acemoglu and Robinson (2014) shows how democracy and growth is actually inter-connected. “Democracy causes growth by promoting more investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest.” That’s a pretty straightforward argument. And I guess one way to make a valid judgment of their finding is by picking a country that has gone through an experience of being ruled by both authoritarian and democratic regimes and compare to another country that has been ruled endlessly by an undemocratic government. 

GDP might be one of proper measurements to figure out how captivate the growth under democracy is. We can do descriptive statistics by looking at the general tendency of GDP in the aftermath of democratic transition. If the overall propensity of GDP over the course of time remains steady, we may infer there is no significant influence of democracy to GDP. Or in other words, the forms of government have no impact to GDP. Whereas on the other hand, if we find that the overall propensity of GDP before and after democratization is very different (either growing or declining), we may conclude the opposite.

Indonesia and Malaysia may represent our puzzle. Indonesia underwent transition in 1998 after a series of uprising successfully overthrew President Suharto while, conversely, since proclaiming its independence in 1957 Malaysia has been ruled by the soft-authoritarian of UMNO regime. One interesting addendum might be useful: From 1980s to 1990s, both countries, along with Singapore, and a handful of East Asian countries were regarded as the “developmental model” for developing countries, marked by a great deal involvement of the states in the economy. How powerful the “developmental model” before and after democratization? Take a look at the Indonesian and Malaysian GDP of 1980s-1997 and 1998 onwards.

As we can see in the graph, the growth of both countries tends to increase slowly in the period of 1980 to 1997. Then the crisis came and led to the declining of GDP in 1998. From 1998 onwards, Indonesia and Malaysia took different trajectories. And the graph shows how both countries managed to raise their GDP in the post crisis year. Nonetheless, the percentage increase is so much different. While Malaysia experienced roughly 300% GDP growth from 1998 to 2013, within the same period Indonesia accelerated more than 800% of its economic size. The highest growth particularly ensued since 2004 (when President SBY came to power), the time when some pundits refer as “stable democracy” after passing through a messy period of transition. Interestingly, in the aftermath of 1998 crisis, both countries had almost the same GDP (approximately 100 billion USD), but the gap goes wider and wider since then.

Doesn’t it confirm Acemoglu and Robinson’s claim? Does democracy cause and accelerate growth? Looking forward to hearing any comments. 

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