Confusions about democracy and prosperity

Spoiler: in a previous post, I claimed that there was a positive relationship between prosperity and high quality institutions. Some people go further and argue that democracy leads to growth and prosperity as this influential study argues. Other people think that the causality is reversed. The effects of democracy on growth and prosperity occur through better conditions for people to engage in entrepreneurial activities, to save, and invest in both physical and human capital. These conditions are determined by the quality of institutions.

Property rights, rule and law and control of corruption are regarded as key institutions for growth. But not everyone is convinced which you can see here. Critics of instutions’ role for growth and prosperity see the devleopments of traditional growth theory variables as independent of institutional changes.

In this post I will have a look at some countries where it seems that institutions don’t matter (much) or that growth precedes democracy and high-quality institutions. And maybe you can have high quality institutions that are good for growth without democracy. You can also find examples of countries where the regimes don’t seem to care a lot of growth, on the contrary, they fear growth as it may serve to undermine them.

If you’re not confused now, don’t worry. You will be.

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How Sweden chose lower growth

Spoiler: SwedishGDP per capita growth is declining. The decline is mainly due to decreasing growth of GDP per hours worked. While average hours worked, the employment rate and the labour force participation rate worked in the other direction, the contributions from these factors are small. The working-age population rate continue to decrease.

The declining growth rates of GDP per hours worked are a consequence of how patterns of consumption change when incomes increase. As incomes increase, demand shifts from goods to services. The relatively stronger demand for services leads to a reallocation of capital and labour towards these industries from goods-producing industries.

The shift leads to a change in the industrial structure which reduces overall GDP per capita growth through two channels. Firstly, increasing shares of services in overall consumption, increases the weight of services industries relative to manufacturing industries. Secondly, services industries’ productivity growth is lower than manufacturing industries’ productivity growth. Thus, the contribution of the less productive services industries, to GDP per capita growth, increase at the expense of the more productive manufacturing industries.  

This may not be as worrying as one might think. It is partly a consequence of increasing living standards. As our incomes increase, we spend more on services than on goods. The decreasing working-age population rate is also a consequence of increasing living standards. As incomes increase, people choose to have smaller families.

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Lukashenka and Putin spend more on their military than on healthcare.

Spoiler: Governments reveal their priorities every year when they allocate their expenditures. The choice of spending on education, elderly care, health, infrastructure, social security, communications, and other areas relative to military expenditures shows the governments’ priorities.

Military expenditures are made for aggressive and defensive reasons. Some governments spend large sums on the military for aggressive reasons, attack their neighbours and/or a domestic opposition. Other countries spend money on the military for defensive reasons, either their own or for protection of an allied country.

Autocratic countries tend to spend more on military expenditures than on health. Only two countries in Europe spend relatively more on the military, Belarus and Russia. Both are autocratic regimes which oppress their populations. One of them, Russia, is engaged in war against Ukraine and supporting the butcher Assad by bombing schools and hospitals. Furthermore, Russia also engages in wars and conflicts by using private military companies such as the infamous Wagner company.

NATO countries spend more on health.

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Albania unchained

Spoiler: The Stalinist Hoxha made Albania the poorest country in Europe. To paraphrase Marx and Engels, by overthrowing the communist regime, the Albanian proletarians had nothing to lose but their chains. Or perhaps a shotgun and a bunker, which were the average endowments of an Albanian household. When the communist era was over, the Albanian economy began to grow. And its growth rate has been higher than most other European countries.

The economy has improved more than the political situation. Even though free elections were held in 1991, the political situation in the country has been tumultuous. Manipulations of elections, repressions of political opponents and riots have from time to time plagued the country since the end of communism.

Assessments of how the political situation develops, vary. Albania is slowly moving, and sometimes backwards, from an authoritarian past towards a democracy with guaranteed civil rights.

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