Democracy and economic growth

There have been many studies of the impact of democracy on economic growth, with widely varying results. What conclusion should we draw from such a broad and contradictory body of evidence?
A new article by Marco Colagrossi, Domenico Rossignoli, and Mario Maggioni (all Università Cattolica del Sacro Cuore in Italy), published in the European Journal of Political Economy (open access, but just in case here is an earlier ungated version), uses meta-analysis and meta-regression to provide an answer.

Meta-analysis is a method of combining the results of many previous studies to generate a single (and usually more precise) estimate of the effect size. In this case, Colagrossi et al. combine the results of 2047 regression models from 188 different papers, and find that the effect of democracy on economic growth is:

...positive and strongly significant (p < 0.01) in all meta-analytic models.

This is despite only one-third of individual estimates being positive and statistically significant. The effect is sizeable, being about one-third of the size of the effect that human capital has on economic growth. The authors then go on to use meta-regression to investigate which features of the different estimates are most associated with finding a positive effect of democracy on economic growth. They find that:

Effect sizes are mostly driven by spatial and time differences in the sample, indicating that the democracy and growth nexus is largely dependent on the world’s regions and periods considered.

More specifically, if the sample includes data from sub-Saharan Africa or from high-income countries, then it is more likely that a positive relationship between democracy and economic growth will be found. The opposite (less likely to find a positive relationship) is true if the sample includes countries from South Asia. They authors reason that:

In South Asia, the lobbying power of some labour and industrial groups can lead to an inefficient investment allocation in democratic regimes promoting rent-seeking behaviours and, consequently, economic inefficiencies at the aggregate level. Against this background, authoritarian political elites can have the autonomy needed to promote economic growth without being restrained by rent-seekers’ pressures....

In terms of time periods, if the sample includes observations from the 1960s, the 1970s, or the 2000s, it is less likely that a positive relationship between democracy and economic growth will be found. The authors note that:

This result is consistent with the fact that during the 1960s and part of the 1970s a relevant subset of democratising countries was experiencing the decolonisation phase. Thus, despite a formal increase in their democracy levels, they were also experiencing economic turmoils, hence low (or even negative) growth rates. The 2000s crises, as well the economic booming of autocratic China, drive instead the negative and significant coefficient of this dummy. Conversely, including the 1980s largely increases the probability of obtaining a positive relationship. The gradual stabilisation of the decolonisation processes, and the begin of the downturn of the Soviet block, could be interpreted as a golden age of the democracy and growth relationship.

Overall, this paper is a model for how a meta-analysis and meta-regression should be undertaken. The methods and results are very well explained throughout. Even if you are not interested in this particular topic, if you are thinking about meta-analysis, then this paper would be an exemplar to follow. On top of that, it answers an important question: it does appear that democracy is associated with higher economic growth. [*]

*****

[*] When they test for the effect of controlling for endogeneity within their meta-regressions, they find that the effect size gets larger. That provides some evidence that this relationship (from democracy to economic growth) may be causal.