Working Paper: CEPR ID: DP5273
Authors: Daron Acemoglu; Simon Johnson; James A. Robinson; Pierre Yared
Abstract: We revisit one of the central empirical findings of the political economy literature that higher income per capita causes democracy. Existing studies establish a strong cross-country correlation between income and democracy, but do not typically control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We also present instrumental-variables estimates using two different strategies. These estimates also show no causal effect of income on democracy. Furthermore, we reconcile the positive cross-country correlation between income and democracy with the absence of a causal effect of income on democracy by showing that the long-run evolution of income and democracy is related to historical factors. Consistent with this, the positive correlation between income and democracy disappears, even without fixed effects, when we control for the historical determinants of economic and political development in a sample of former European colonies.
Keywords: democracy; economic growth; institutions; political development
JEL Codes: O10; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| past savings rates (D14) | income per capita (D31) |
| changes in incomes of trading partners (F10) | income per capita (D31) |
| income per capita (D31) | democracy (D72) |
| income per capita (D31) | democracy (D72) |
| country fixed effects (C23) | statistical association between income per capita and democracy (F40) |