Economic Origins of Dictatorship and Democracy

by Daron Acemoglu

  The situation in relatively democratic Colombia is remarkably similar to that in Costa Rica. In Costa Rica and Colombia, political elites concentrated much more on finance and the purchase and export of the crop rather than coffee production (see Paige 1997 and Mahoney 2001 on Costa Rica; see Palacios 1980 and Nugent and Robinson 2000 on Colombia). One outcome was that labor-market institutions were considerably more “labor-repressive” in Guatemala and El Salvador. Forced labor was in operation in Guatemala until the initial creation of democracy in 1945, something that did not survive the early 1820s in Colombia. The importance of this for democracy was that in Guatemala and El Salvador, the elites invested in land also anticipated losing their preferred labor-market institutions if they democratized, as indeed they did in Guatemala in 1945.

  More generally, the literature on comparative development within the Americas is predicated on the idea that initial conditions in Spanish and Portuguese colonies led to economic institutions that were designed to extract rents from indigenous peoples and control colonial elites (Lockhart and Schwartz 1983; Coatsworth 1993; Engerman and Sokoloff 1997; Acemoglu, Johnson, and Robinson 2001, 2002, 2004). These institutions, such as forced labor, absence of well-defined property rights or equality before the law, and highly mercantilistic policies, persisted over time. They appear to have played a major role in the inability of Latin American countries to industrialize during the nineteenth century. They also help explain why inequality became so high. Long-run economic divergence within the Americas is, therefore, at least in part explained by the persistence of different economic institutions, the origins of which lie in different initial conditions in the colonies (e.g., the population density of indigenous peoples).

  These arguments suggest that particular sets of economic institutions persist over long periods. Indeed, if institutions did not persist, they would hardly be able to structure social, economic, and political life in the way that they do. This also suggests that not all or even most economic institutions can freely be changed when political regimes change. Despite the interesting examples of correlations among democratizations, coups, and changes in economic institutions that we discuss in this section, this is a primary reason that we have not analyzed them in detail. The situation here is similar to the discussion in Chapter 6 about political institutions. Once created, institutions - both political and economic - have strong tendencies to persist (see Acemoglu, Johnson, and Robinson 2001 for a discussion of explanatory mechanisms). In any society, the institutions that currently exist are the outcome of complex historical processes. In Guatemala and Britain, at one level, there were important changes in economic institutions at the time of democratization; at another level, there were significant historically determined differences in economic institutions. This means that in proposing an explanation for why democratization occurred more rapidly in Britain than in Guatemala, it is useful to treat these differences in economic institutions parametrically. Ultimately, however, one would wish to develop a theory for which the joint evolution of economic and political institutions are accounted. Such a theory is beyond the scope of this book but is an exciting area for future research (see Acemoglu, Johnson, and Robinson 2004 for the outline of such a theory). Finally, the relationship between economic institutions and the political regimes that support them provides another link between inequality and political development ; for example, societies with economic institutions favoring a narrow elite may remain nondemocratic and, in turn, continue to maintain such economic institutions and generate high levels of inequality, whereas other societies may transition to democracy and choose more egalitarian economic institutions.

  10. Human Capital

  The models in this chapter showed that in a society that was more (physical) capital-intensive, repression and coups become more costly and democracy becomes less radical and threatening. As a consequence, such societies ought to democratize more readily and be more prone to consolidate their democracies. Over the past half-century, land and even physical capital have become less important and human capital and technology even more important. Indeed, Goldin (2001) refers to the twentieth century as the “human capital century.” In this section, therefore, we extend the analysis of this chapter by focusing on what happens to democracy when human capital comes to dominate the economy.

  Human capital-the skills, knowledge, and education embodied in individuals - enters naturally into these mechanisms. First, the burden of repression or coups often falls on the indviduals who are killed during conflict. It is easier to damage or kill a human than to destroy a piece of land or a machine. Thus, we might anticipate that human capital suffers the greatest losses from repression, violence, and coups. Second, human capital is, of course, impossible to redistribute. Moreover, even the income generated from human capital is costly to tax because, unlike the output of a machine, the output generated from human capital only occurs if individuals exert effort. Effort is difficult to monitor; therefore, it is difficult for the government to force people to use their human capital, and it is easily dissuaded by high rates of income taxation. Thus, a democracy in a society where productive assets are dominated by human capital as opposed to physical capital or land is likely to be much less redistributive.

  This discussion immediately suggests that it is straightforward to apply an analysis similar to the previous one with h = H/ K as the human-capital intensity of the society rather than k = K/L, the physical-capital intensity of the society. Greater human-capital intensity of the elites makes them less willing to use force against democracy, moreover, it reduces the burden of democracy because human capital is more difficult to tax than physical capital or land. Both of these channels imply that as human capital becomes more important, democracy becomes more likely to arise and consolidate.

  In addition, as human capital becomes more important, we can think of the middle class (as in the analysis of Chapter 8) becoming richer and more numerous, which tends to make democracy more likely.

  Therefore, our analysis suggests a number of reasons for major interactions between human capital and democracy, providing useful channels to understand the empirical relationships shown in Chapter 3: specifically, Figures 3.7 and 3.8.

  11. Conjectures about Political Development

  The relationships between capital, both physical and human, and land intensity and democracy that we investigated in this chapter allow us to make some conjectures about the relationship between economic and political development. Although recent theories of economic growth sometimes emphasize the process of growth simply as an increase in the level of income of society, economic development is more than that. With economic development, productive relationships change significantly; both workers and firms migrate from rural areas to cities; physical capital and then later human capital and technology become more important ; and the entire economic structure becomes transformed. These themes were developed by earlier theorists of economic development- for instance, Singer (1949), Rosenstein-Rodan (1949), Nurkse (1953), Lewis (1954), Myrdal (1957), and especially Kuznets (1966). They were formalized to some extent by Murphy, Shleifer, and Vishny (1989); Matsuyama (1992); and Acemoglu and Zilibotti (1997, 1999).

  Thus, economic development and increases in per capita income come along with changes in the structure of the economy that are related to the concept of capital intensity that we used in this chapter. This perspective suggests that as an economy develops, capital becomes more important than land, industry becomes more important than agriculture, and our political framework suggests that opposition to and threats against democracy weaken. We might expect that countries with higher per capita income would also be more capital-intensive and that this would generate an empirical relationship between per capita-income and democracy.

  Such a relationship, first documented by Lipset (1959), is one of the most important “facts” in political economy. As Chapter 3 showed, this is a robust correlation in cross-country data. However, there is as yet no real
theoretical explanation for this empirical fact. Lipset traced the origins of his explanation to Aristotle and argued, like Aristotle, that “only in a wealthy society in which relatively few citizens lived in real poverty could a situation exist in which the mass of the population could intelligently participate in politics and could develop the self-restraint necessary to avoid succumbing to the appeals of irresponsible demagogues” (1959, p. 75). According to this view, the relationship between income and democracy reflects the fact that only in relatively rich countries are the citizens sufficiently “mature” and well informed enough to live the more complex lives associated with democracy. More recent scholars have focused on testing the robustness of this relationship rather than proposing explanations for it.

  The models developed in this book before the current chapter were constructed to be deliberately agnostic on this question because we designed them to give results that are invariant to the level of per capita income (e.g., by normalizing the costs of taxation). However, the results in this chapter may provide a plausible microfoundation for the relationship between economic and political development. They suggest that as an economy develops, factors of production accumulate, and per capita income rises, it is the change in the structure of the economy toward a more capital-intensive endowment of assets that leads to democracy and its consolidation.

  At this stage, this is only a conjecture lacking empirical support. Indeed, because the empirical work on the determinants of democracy has yet to convincingly establish that there is a causal effect of income on democracy, an investigation of the implications of mechanisms in this chapter for political development is an area for future research. It is plausible that the correlation in the data could be due to another omitted variable. Recall the discussion of the impact of economic institutions on democracy in the previous section. There, we argued that the different economic institutions in Guatemala, compared to Britain, may help explain why Guatemala historically has been so much less democratic than Britain. Obviously, the first-order effect of economic institutions is on economic incentives and performance. Thus, these differences in economic institutions may also explain why Guatemala is much poorer than Britain (Acemoglu, Johnson, and Robinson 2001). In this account, per capita income and democracy are positively correlated, but there is no causal relationship between the two. In fact, both are caused by something else: economic institutions (Acemoglu, Johnson, Robinson, and Yared 2004).

  12. Conclusion

  In this chapter, we developed a model in which the level and distribution of income are endogenous and showed how the structure of the economy may help to determine the creation and consolidation of democracy. We emphasized that how important physical and human capital are compared to land in the production process - what we called the capital intensity of the economy - can influence the costs of both repression and coups and the burden of democracy for elites. This occurs because (1) repression and the use of force is more costly for capitalists and industrialists than it is for landowners; and (2) democracies will rationally tax land and the income from land at higher rates than capital and the income from capital. The ideas presented are tentative and have not been empirically tested; nevertheless, they are consistent with many case studies, historical material, and mainstream approaches to the theory of economic development. They are also consistent with the observed correlation between per capita income and measures of democracy.

  Although we did not explicitly analyze the issue in this chapter, it is important that these results do not depend on the nature of political identities. Even if political conflict were along the lines of ethnic groups X and Z rather than socioeconomic classes, greater capital intensity would have similar consequences for democracy. To see how capital intensity influences democracy, assume that the elites of each group own capital and land, whereas the rest just have their labor. Even if conflict is between ethnic groups, greater capital intensity still reduces the desire of the larger group X to redistribute away from the smaller group Z because this will now be more expensive. This result is true as long as there are some capital owners and landowners in group Z. This reduces the incentives of group Z to mount coups once democracy has been created. Further, in nondemocracy, which here is rule by group Z, greater capital intensity makes repression more costly for Z, which facilitates democratization for the reasons discussed.

  It is interesting to compare the results of this chapter with those of Chapter 8 in which we contrasted the attitudes of the very rich and the middle class to democracy. We saw there that, consistent with the emphasis of Moore, the middle class is more pro-democractic because - given that their incomes are lower than those of the rich - they have less to lose than the rich from democratic taxation. As a result, they were less willing than the rich to support repression to avoid democratization. The analysis in Chapter 8 showed that the same considerations made the middle class more opposed to coups against democracy than the rich, who had more to gain from a switch to nondemocracy. The problem with those analyses was that there were no explicit economic bases corresponding to the labels “middle class” and “rich,” making it difficult to link economic changes to these potential changes in political attitudes. In this chapter, rather than focusing on these broad distinctions between the middle class and the rich, we emphasize the differences between industrialists and landowners. As with the middle class, industrialists have less to lose from democracy and perhaps more to lose from disruption and violence than landowners.

  10

  Globalization and Democracy

  1. Introduction

  In this chapter, we discuss how globalization of the world economy might affect democracy. The framework developed so far shows how the emergence and survival of democracy depends on the distribution of income and, by this channel, factor prices. Globalization, in the form of increased international trade and/or increased financial integration, affects factor prices and income levels, and hence, it may have an important effect on democracy.

  Many scholars have conjectured the existence of different connections between globalization and democracy, and the recent empirical literature in political science has begun to investigate some of the links. This literature finds significant correlations between democratizations and changes in the international economy. For example, Quinn (1997, 2002) shows that since the 1960s, measures of democracy averaged across countries are highly correlated with measures of capital and current account liberalization. Yet, this literature (Kubota and Milner 2005) has focused on the effects of democracy on international liberalization (seen as a subset of more general liberalization).

  To discuss the potential effects of globalization on democracy, we distinguish three dimensions of “globalization”:

  • increased international trade (market integration)

  • increased financial integration

  • increased political integration

  In this chapter, we treat these different facets of globalization as exogenous to a specific country and not amenable to control by politicians. Although whether a country is influenced by globalization is often - at least to some extent - under the control of domestic politicians, an important component of the recent wave of globalization is the decline in the costs of international trade and greater integration of the world economy, which politicians can do little to halt. Therefore, an analysis of the implications of exogenous globalization on political equilibrium is a useful starting point.

  More international trade typically tends to close the gaps in goods and factor prices across countries (Dixit and Norman 1980; Feenstra 2003). Specifically, in the absence of international trade, locally abundant factors have lower prices. For example, if a country is abundant in labor and scarce in capital, it will have lower wages and higher returns to capital than is true on average in the world. International trade, therefore, increases wages and reduces interest rates in such a country. Both consolidation of democracy against the threat of coups and transitions to democracy are p
roblems for relatively poorer countries that have not attained a stage in which democracy is fully consolidated. Recall, for example, from Chapter 3 that richer countries are typically democracies; it is the poorer countries that are nondemocratic or have a high risk of suffering a coup against democracy. Poor countries are also typically abundant in labor and scarce in capital. International trade, therefore, should reduce the income gap between the poor who earn their living from labor and the rich who are the capital holders.

  In the context of our models of politics, the reduction in the gap between the incomes of the poor and the rich implies reduced political conflict. For example, with a smaller gap between the rich and the poor, the poor have less reason to vote for highly redistributive policies and democracy is less of a threat to the rich. Therefore, international trade reduces the intensity of the conflict between the rich and the poor or, as it is sometimes stated in the popular press, globalization might weaken “class conflict.” With less intense conflict between the rich and the poor and lower taxes in democracy, the rich are less willing to incur the costs of a coup to revert back to nondemocracy, and democracy is more likely to consolidate. Therefore, globalization might contribute to democratic consolidation in developing nations. The same argument also implies that because democracy is less costly for the rich, nondemocratic societies that sustain themselves through repression might also be more likely to democratize; in this case, globalization should also contribute to democratization around the world. However, we should be careful in these conclusions because, as pointed out in Chapter 6, the relationship between inequality and democratization is in fact nonmonotonic. Consequently, the effects of changes in inequality on democratization depend on where we are in this relationship. If we start from a situation of relative equality, then greater equality- by removing the threat of revolution - can actually impede the creation of democracy. Nevertheless, when thinking of the consolidation of democracy, it is natural to presume that greater inequality destabilizes the democratic institutions in a relatively poor society, so we should expect a reduction in inequality induced by international trade to make democracy more durable once created - even if its general effect on the creation of democracy might be ambiguous. Overall, the exact effect of international trade on democracy is an empirical question, and we view the models in this chapter as most useful in framing future empirical investigations.