Economic Origins of Dictatorship and Democracy

by Daron Acemoglu

  It now only remains to determine when the elites wish to repress. Consider the region where the elites can stay in power by redistributing. They will choose repression when κ < , whereis defined by (6.9).is an increasing function of θ when inequality is higher, the elites have to redistribute more when they make concessions, and repression is more attractive. Similarly, when democracy or repression is the relevant option, repression is optimal if κ <, whereis defined by (6.10). Finally, to complete the figure, note that for any value of θ,>. This is so because democracy is always more redistributive than the promise of concessions. For clarity, only part of these functions are plotted in the figure.

  We can do some interesting thought experiments in terms of these pictures. For example, we can introduce the possibility that a dictatorship can manipulate democracy to make it less pro-citizen. The only effect this has on the picture is to shift down, which implies that the cost of repression has to be less for it to be optimal - given that once democracy can be manipulated, it is less threatening to the elites. The effect of this is to expand the area in which we get democracy. This possibility is shown in Figure 6.5.

  Finally, let us note that Figure 6.4 is the basis for Figure 2.1 in Chapter 2. The only difference is that we simplified Figure 2.1 by ignoring the possibility that nondemocratic regimes could stay in power by redistributing income. If we ignore this possibility in Figure 6.4, we erase the vertical line at θ*, and we need to extend the upward sloping line that showsas a function of θ. This results in Figure 6.6, which is the same as Figure 2.1.

  Figure 6.5. Manipulating Democracy. Making democracy less redistributive expands the region of democratization.

  14. Equilibrium Revolutions

  Figure 6.6. Democracy or Repression.

  We have so far assumed that repression definitely works and prevents a revolution. History is full of heavy-handed repression strengthening the threat of a revolution and ultimately leading to revolution or significant disruption. In this section, we briefly discuss the possibility that repression does not always work; in particular, assume that following repression, the citizens may actually revolt with probability r. Thus, we allow repression to fail. To do this, we again develop the static extensive-form game model of Section 6 rather than the full-dynamic model. The game tree in Figure 6.7 draws this game. This modification, naturally, does not affect the payoffs from democracy and nondemocracy without repression. Moreover, it does not affect the circumstances under which the elites can stay in power by promising to make policy more pro-citizen. In consequence, the formula for µ*

  Figure 6.7. Democratization or Revolution.

  is unchanged. However, allowing repression to fail does change the payoffs from repression. In particular, the value functions from repression are now given by:

  and

  That is, with probability r, repression in the state fails and there will be revolution. In this case, both parties receive their payoffs from a revolution.

  This changes the cutoff values for the cost of repression in an obvious way. More specifically, let(r) be the threshold that makes the elites indifferent between repression and redistribution. Thus:

  or, in other words:

  (6.29)

  Next, define the threshold for the elites to be indifferent between repression and democratization as:

  or, more explicitly:

  (6.30)

  where we index the threshold values by r. Clearly,(r)
  The fact that these cut-off values depend on the probability that repression will fail does not radically change the analysis, however. In particular, we can characterize the equilibria in this game with the following proposition, which is similar to Proposition 6.2. The main difference is that in the cases where the elites choose to repress, there is a revolution with probability r.

  We now have the following result:

  Proposition 6.6: There is a unique subgame perfect equilibrium {r, p} in the game described in Figure 6.7, and it is such that:

  • If θ ≤ µ, then the revolution constraint does not bind and the elites can stay in power without repressing, redistributing or democratizing.

  • If θ > µ, then the revolution constraint binds. In addition, let µ* be defined by (6.6) and (r) and (r) be defined by (6.29) and (6.30). Then:

  (1) If µ ≥ µ* and κ ≥ (r), then repression is relatively costly and the elites redistribute income to avoid a revolution.

  (2) If µ < µ* and κ < (r) or κ ≥ (r) and (6.7) does not hold, or if µ ≥ µ* and κ < (r), then the elites use repression. With probability r, repression fails and a revolution takes place.

  (3) If µ < µ*, (6.7) holds, and κ ≥ (r), then concessions are insufficient to avoid a revolution and repression is relatively costly so the elites democratize.

  This extension shows how equilibrium revolutions can emerge as a calculated risk by the elites to avoid democratization. It also predicts that revolutions are more likely when the society is highly unequal, so that despite the risk of a revolution, the elites choose repression rather than democratization.

  15. Conclusion

  In this chapter we built our basic model of democratization. To do this, we discussed in general terms why it is that political institutions, not simply political power, are important. We showed that to understand the role that political institutions play, we have to recognize the explicitly dynamic aspects of people’s calculations. Institutions matter because they influence the future allocation of de jure political power; political actors wish to control and change institutions because they want to lock in their current political power. Because institutions influence the allocation of future political power, they also provide commitment-an aspect of institutions that is key to our theory.

  We derived some basic predictions about the factors that lead to democracy under the working assumption that once created, democracy consolidates. So, when do democratizations occur? One important factor could be increasing inter-group inequality. We showed that democracy arises when inequality is sufficiently high that the disenfranchised want to contest power but not so high that the elites find it attractive to use repression. Consider a cross-section of societies. With low inequality, we would tend not to observe democracy. At higher levels of inequality, we would still not observe democracy because nondemocracies can maintain their power by engaging in temporary policy concessions to defuse potential challenges. As inequality gets even higher, we observe democracy. Even though the elites in a nondemocracy would like to use policy concessions to stay in power, current concessions in the absence of promised future concessions are not sufficient to stave off a revolution. However, if the elites maintain their monopoly of power, they cannot credibly promise such future concessions; thus, they have to give away their power - democratize - to avoid a revolution. However, as inequality gets even higher, democracy starts to become threatening for the elites because they will face highly adverse policies such as punitive rates of redistribution if they democratize. In consequence, repression begins to be attractive. Democratization is, therefore, not monotonically increasing in inter-group inequality, and we expect an inverse-U-shaped relationship between inequality and democracy, with democracy happening at intermediate levels of inequality.

  Nevertheless, inter-group inequality is only part of the story, and we began to see how other factors influence the creation of democracy. For instance, we saw that the power of the elites in nondemocracy, and perhaps their ability to manipulate the form of democracy, can influence democratization. As we continue to develop our analysis, many other factors will enter this picture. There are important roles for the form that the elites hold their wealth; there are roles for the extent of globalization and the evolution of the international economy; and there is a key role for the middle class.

  The analysis of this chapter suggests that there are int
eresting dynamic relationships between inequality and democracy, aspects of which we investigated in Acemoglu and Robinson (2000a, 2002). There we showed how rising inequality could - by tightening the revolution constraint - initially force the elites to democratize. After democracy is created, its redistributive nature could interact with the process of capital accumulation to lead to a subsequent fall in inequality. Thus, these papers showed how an endogenous process of capital accumulation, inequality, and democratization could account for the Kuznets curve like patterns of inequality discussed in Chapter 3.

  Although it is not the main focus of our research, it is useful to briefly consider whether democratization promotes efficiency. Recall from Chapter 4 that the most useful way to discuss this is in terms of total surplus. If we simply used the Pareto criterion we would not be able to compare democracy with nondemocracy. In democracy, the citizens are better off; in nondemocracy, the elites are better off. The Pareto criterion cannot rank the two sets of institutions. However, we can make more progress with total surplus. Taking the simplest model in which the only type of policy is redistributive taxation, it is immediate that when repression is not used, total surplus is higher with nondemocracy. Redistribution, because it is costly, simply reduces total income and thus surplus. Because the elites do not support redistribution and they get their way in nondemocracy, democratization leads to a less efficient outcome. This conclusion is partly the result of the simplified model we used to communicate the basic ideas. First, if redistribution takes the form of investment in public goods rather than fiscal redistribution, the elites will wish to undersupply public goods (whereas the citizens wish to oversupply them). When there is inequality, the ideal point of neither coincides with the surplus-maximizing level of provision. In this case, democratization may increase efficiency by increasing the supply of public goods. Second, once nondemocracies stay in power by using repression, democracy begins to look more attractive from the efficiency point of view. Repression wastes resources simply to affect the distribution of resources between the elites and the citizens. In this case, democracy may be efficient even when redistributive taxation causes substantial distortions.

  7

  Coups and Consolidation

  1. Introduction

  So far, we studied situations in which democracy once created persists indefinitely- there are no reversals in the march toward democracy. The reality is quite different, however. There are many instances in which countries become less democratic and democratic regimes are overthrown by military coups, reverting to dictatorship.

  The recent history of many Latin American countries is particularly marred by oscillations in and out of democracy. In Argentina, for example, universal male suffrage became effective in 1912, but it was soon overthrown by a coup in 1930 (see Chapter 1). Democracy was reinstated in 1946 but fell to a coup in 1955, re-created again in 1973, subverted again in 1976, and finally reinstalled in 1983. In between, several semidemocratic regimes fell to coups in 1943, 1962, and 1966. Why are there coups against democracy? Why has mass democracy been durable in many Northern European countries, and why has it been so difficult to consolidate this set of political institutions in less developed countries such as those in Latin America?

  This chapter provides a framework for analyzing coups against democracy and then combines those ideas with the models developed in Chapter 6 to build a framework to analyze the creation and consolidation of democracy, as well as potential switches between democracy and nondemocracy.

  In building our theory of coups, we emphasize the same economic and political incentives that featured prominently in understanding the creation of democracy. So far, we have emphasized that in democratic societies, the majority of the citizens are able to alter policies in their favor and against the interests of the elites. This makes the citizens pro-democratic while simultaneously giving the elites an incentive to oppose democracy. These contrasting incentives determine when and how democracy emerges. The same basic forces also determine the incentives for coups. Because the elites prefer nondemocracy to democracy, they may - under certain circumstances - support a coup against democracy that would lead to policies more favorable to themselves in the future.

  Why undertake a coup rather than demand more pro-elite policies? The answer is the same as in the discussion about transitions to democracy: the elites not only care about policy today but also about policy in the future and, in democracy, future policies are decided by the median voter, who is not a member of the elite. Therefore, democracy can promise policies today to appease the elites but cannot commit to pro-elite policies in the future, especially if the political power that the elites have is transitory. Hence, a change in political institutions again emerges as a way of shaping future policies by changing the allocation of (de jure) political power.

  One result of our analysis is that coups are more likely in societies where there is greater inequality between the elites and the citizens. The amount of redistribution away from the elites is increasing in the degree of inequality. Therefore, in an unequal society, the elites have more to gain by changing the regime than in a more equal society. As usual, whether this claim maps into a statement about inequality as conventionally measured depends on the identity of the elites and the citizens.

  When we combine our theory of coups with our model of democratization, we obtain a dynamic framework that allows equilibrium democratizations and coups. In this framework, highly unequal societies may experience frequent switches between democracy and dictatorship. In nondemocracy, the citizens have much to gain by challenging the system, leading to frequent democratizations; in democracy, the elites are unhappy because of the high degree of redistribution and, in consequence, may undertake coups against the democratic regime. This insight suggests a reason why democracy has been relatively difficult to consolidate in Latin America, where many societies have significant economic inequality.

  Our analysis also reveals a useful distinction between fully consolidated and semiconsolidated democracies. We say that a democracy is fully consolidated when there is never any effective coup threat. OECD countries are examples of fully consolidated democracies. An unconsolidated democracy is one that falls prey to coups. A semiconsolidated democracy can prevent coups, but it does so by changing the equilibrium policies from those that would have obtained in the absence of the coup threat. Therefore, semiconsolidated democracies live under the shadow of a coup, which is different from the situation in fully consolidated democracies where voters and parties can effectively ignore the threat of a coup in making their policy choices.

  Another interesting result is a nonmonotonic relationship between inequality and income redistribution. Higher inequality typically leads to a greater amount of redistribution (with the caveats discussed in Chapter 4). However, in a model where there may be coups, highly unequal societies oscillate, between democracy and dictatorship, and thus do not redistribute as much as less unequal societies.

  Also of interest is that in consolidated democracies, because the threat of coups is not important, there is little or no variability in the amount of redistribution. In contrast, highly unequal societies are either semiconsolidated or unconsolidated. In unconsolidated regimes, fiscal policy is more volatile because as a society fluctuates between different political regimes, the amount of fiscal redistribution changes. In semiconsolidated democracies, there are no equilibrium coups, but the amount of redistribution fluctuates to prevent coups from taking place. This pattern is consistent with the evidence presented by Gavin and Perotti (1997) that fiscal policy in Latin America is more variable than in Europe.

  There is a major academic debate on the issue of how to define democratic consolidation and it leads back to the question of whether the Schumpeterian . definition of democracy is the correct one. Linz and Stepan (1996) state that

  ... we mean by a consolidated democracy a political situation in which ... democracy has become “the only game in town.” Behaviorally, democrac
y has become the only game in town when no significant political groups seriously attempt to overthrow the democratic regime. (p. 5)

  Nevertheless, despite providing this initial definition, Linz and Stepan - in line with most of the recent political science literature - go on to add a number of other conditions that must be satisfied for a democracy to be consolidated. To be a consolidated democracy, a country must have:

  a state ... if a functioning state exists, five other interconnected and mutually reinforcing conditions must also exist or be crafted for a democracy to be consolidated. First, the conditions must exist for the development of a free and lively civil society. Second, there must be a relatively autonomous and valued political society. Third, there must be a rule of law.... Fourth, there must be a state bureaucracy that is usable.... Fifth, there must be an institutionalized economic society. (p. 7)