Is Democracy the Best Setting For Strong Economic Growth?

Is Democracy the Best Setting For Strong Economic Growth? - WSJ.com: Do democratic institutions sustain economic growth, or vice versa?

Hoping to counterbalance the economic populism of Venezuela President Hugo Chavez, President Bush is on a weeklong tour of Latin America, bearing a message of optimism about democracy, trade and economic prosperity.

But what exactly do we know about the relationship between democracy and economic growth? Economies of less-than-democratic nations such as China have surged in recent years. Does a country's brightening economic picture boost the chance democracy may eventually blossom? Or is it the other way around? Are democratic institutions a key component of long-term economic growth? And what's the role of education?

Ed Glaeser writes: Rich countries are stable democracies. Poor countries tend to be political basket cases, careening between brutal dictatorships and unstable semi-republics. The relationship between democracy and wealth might suggest democracy naturally leads to prosperity.

Daron Acemoglu writes: First, there are different kinds of democracies. And second, it's important to consider that economic growth and democracy have a very different relationship over the long term -- that is for periods as long as 100 years -- than over the short or medium term.

Many societies counted as "democratic" using standard measures are really "dysfunctional democracies" where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation and even assassination. Colombia, which has had regular democratic elections for the past 50 years, is a typical example. In others, democratic institutions survive, but there is significant in-fighting between ethnic groups, religious groups or social classes. The situation in Iraq would be the most extreme -- but not a unique -- example. Finally, many democracies suffer economically from populist and irresponsible macroeconomic policies, which are often adopted after transitions from repressive dictatorships and during periods when politics are turbulent and conflicts over wealth distribution are strong.

On the second point, it's true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing because they have more equal distributions of political power than autocracies or monarchies.