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The book The Dictator's Handbook claims in several places that democracies are more productive than autocracies. It's central to their argument of lower taxation rate in democracies giving more wealth than higher taxation in autocracies.

They further claim that democratizing an autocratic nation will make everyone more productive, and increase wealth available in the country.

Is this true? Is it accepted among economists that democratization leads to wealth?

Glorfindel
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honestSalami
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    If you want to read more and really deeper in this subject my highly recommended book is ; Democracy – The God That Failed by Hans-Hermann Hoppe https://www.amazon.com/Democracy-Economics-Politics-Perspectives-Democratic/dp/0765808684 – Ali Mehdizadeh Mar 29 '21 at 11:45
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    @AliMehdizadeh You recommended a crackpot. "Hoppe has expressed criticism towards democracy, stating that a monarchy would preserve individual liberty more effectively". If you read "The Dictator's Handbook" you would immediately see that it's a bad idea, as without democracy monarchy is asking for extractive institutions. – KarmaPeasant Mar 30 '21 at 06:57

1 Answers1

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In economics, it is accepted that countries with good 'inclusive' institutions, such as strong property rights, are more productive and able to develop faster (or even develop at all) than countries with bad 'extractive' institutions, such as forced labor (see Acemoglu 2008, Acemoglu & Robinson 2000a, 2000b, 2001, 2006, 2008; Olson 1984, Bates 1981, 1983, 1989 and sources cited therein*)

Democracies do adopt inclusive institutions more often than dictatorships but not always (e.g. see Lindert 2004, 2009 + sources from previous paragraph). Furthermore, the ability of country to develop and become more productive and prosperous, or fall of a country in terms of prosperity and productivity may not only depend on a single institution but rather whether country predominantly has inclusive or extractive institutions (although some inclusive institutions like property rights are more important than others).

Consequently, it would be fair to say that it is accepted that democracies tend to be more economically prosperous, but it is all conditional on the institutions they adopt. For example, a Venezuela is de jure a democracy but in indexes that measure strength of property rights it gets very low scores (e.g. see evolution of their property rights index (0-100) between 1995-2020). On the other hand consider China that is clearly a dictatorship both de jure and de facto, but their property rights index score between 1995-2020 got better.

To sum it up, given the above it would be fair to say that the view that democratization leads to better economic outcomes** has some merit but with caveats. It is not that democracies are more productive by virtue of being democracies, it is thanks to their better (inclusive) and more robust institutions and in principle dictatorships could adopt the same institutions, but they tend not to. This is because while the extractive institutions might be bad for a country as a whole, as their name suggest, they help political leaders to extract economic resources for themselves.

* Note this research is also summarised in Acemoglu & Robinson: Why Nations Fail? which is book that is written in a way that is more accessible to laymen readers than the papers mentioned above).

** Meaning, among other things, government can often in the end collect more revenue even with lower tax rates because tax bases critically depend on size of output being taxed (e.g. $10\%$ tax on tax base 1,000,000€ gives government more revenue than $50\%$ tax on tax base 1,000€).

1muflon1
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  • Can you elaborate on what "inclusive instituion" means in context of your answer? – KarmaPeasant Mar 28 '21 at 09:31
  • @user161005 inclusive institutions here follows the common definitions of those in economics and economics of development literature. Inclusive institutions are institutions that allow people (more broadly) participate in economic activity e.g. an example of inclusive institutions as mentioned above would be property rights. Other inclusive institutions would be ability to make enforceable contracts, legal access to labor markets and so on. Have a look at Acemoglu & Robinson Why Nations Fail and sources cited therein for more details if this is still not clear – 1muflon1 Mar 28 '21 at 09:39
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    @user161005 here at wikipedia there is a summary https://en.wikipedia.org/wiki/Why_Nations_Fail – 1muflon1 Mar 28 '21 at 09:45
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    By the way, do I understand correctly that institutions that prevent/amend superconcentration of wealth/income/capital/market share (like maybe anti-trust agency, progressive taxation) in hands of few agents, even if this superconcentration happened without State interference (i.e. "naturally"), would be considered "inclusive"? – KarmaPeasant Mar 28 '21 at 11:22
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    @user161005 antitrust laws would be considered inclusive because trusts block entry into industry. The inclusivity here refers to whether institutions allow people to participate or not. Progressive taxation in itself is not an institution, so that does not count here but some instiutions funded by taxes would count as inclusive. When it comes to concentration of wealth that does not necessary connects to either institution. A monarchy where only royalty is able to accumulate wealth etc, but with limits which means that overall distribution would be still flat would be extractive institution – 1muflon1 Mar 28 '21 at 11:37
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    on the another hand institutions that guarantee right to freely set up a business could lead to more inequality but still be inclusive institutions. However, there are also inclusive institutions that would reduce inequality and extractive institutions that would make it worse. But generally, inclusivity of institution is not tied up with redistribution. E.g. in literature USA, UK, Denmark and Sweden would be examples of countries with predominantly inclusive institutions but those countries have different policies when it comes to redistribution – 1muflon1 Mar 28 '21 at 11:42
  • The question mentioned tax rates. The answer should perhaps do the same (even if just to say that they are irrelevant) – Stig Hemmer Mar 29 '21 at 07:54
  • @StigHemmer thanks for the comment I added a footnote about that in last paragraph – 1muflon1 Mar 29 '21 at 08:52
  • Now I wonder whether things like landlordship are "inclusive" or "extractive". Can an inclusive institution later morph into an extractive one? – user253751 Mar 29 '21 at 10:12
  • @user253751 they can change because it does not matter what the name of institution is it matters what it does (see previous comments or sources). If property rights would say that only one king is able to hold property it would be extractive institution. However nowadays most institutions have defined names in literature e.g. regardless what laws of country say property rights have set definition in taxonomy of institutions. I am not sure what you mean by landlorship institution - i know what a landlord is but in lit it was never mentioned as an institution- so I cannot comment on that. – 1muflon1 Mar 29 '21 at 10:18
  • To make it clear an inclusive institution (or more inclusive this can be on spectrum) is defined as institution that allows the wides(t/er) strata of people to participate in it. This is slightly confusing but opposite is not exclusive but extractive institution (because virtually in all relevant cases institutions that exclude groups of people can be used to extract income/wealth from them). Eg property rights for any adult is inclusive institution property right for a small group of nobles (e.g serfs get punished for stealing from nobles but not other way around) would be extractive – 1muflon1 Mar 29 '21 at 10:30
  • The whole point of being an autocrat is that you are the law. If you allow courts or laws to limit your power to take things you want, you're something else. – T.E.D. Mar 29 '21 at 14:19
  • @T.E.D. but institutions are not just laws that limit power, at least not as understood by economists or in economics literature. E.g. absolutist monarchy, is an example of institution (although political not economic), yet in it there are no limits on power. Also, dictatorships can have some limits, both in China or in Chile under Pinochet the autocrats had some limits on their power by law (even in China laws will protect your private property to a degree), yet they are dictatorships (at least as understood in econ literature, if you come from different field maybe definitions differ). – 1muflon1 Mar 29 '21 at 14:44