What is the effect of political regimes from democracies to dictatorships on the economy? This is a key policy question that has received attention from researchers in economics in the past 10 years. We may believe in, and hope for, a positive relationship between economic growth, or GDP levels, and democratization. On the other hand, military dictatorships have to deliver benefits to the people in order to continue in power, and higher economic growth may be one way of achieving this.
To summarize the findings till now, Barro (1996) and Rodrik (1997) find no impact of democracy on economic growth. These results are in line with the study of Przeworski, Alvarez, Cheibub, and Limongi (2000) who find no differences in long-term growth between democratic and autocratic regimes. Almeida and Ferreira (2002) show that the variance of growth rates is significantly higher in societies under autocracy than in societies under democracy. Focusing on the dynamic effects of democracy, Minier (1998), Rodrik and Wacziarg (2005) find a positive effect of democratization on economic growth. More recently, Persson and Tabellini (2006) show that democracies need to be consolidated in order to stimulate growth.
Far less has been written on how political regimes affect the nature of growth. To the best of our knowledge, the only exception is Minier (1998) who shows that democratic and authoritarian countries utilize production factors in a different way.
The lack of understanding about the way political institutions affect the determinants of economic growth is somewhat surprising since this is where the differences are likely to be explained. Different political institutions may affect the impact of the determinants of economic growth and therefore it is likely that the aggregate production function of an economic is sensitive to whether the country is democratic or not.
Moreover, democracy is a widespread recognized universal value and this goes beyond its effects on economic prosperity. Living in a democratic society has been internationally recognized as a basic human right. It is clearly expressed in the Universal Declaration of Human Rights (articles 21 and 29) adopted and proclaimed by the United Nations in 1948. If democracy is a goal in itself (and a human right), a clear understanding of the sources of democratic economic growth becomes indispensable. This paper provides a contribution in this direction by comparing the determinants of economic growth under democracies and autocracies in Latin America.
Latin American history in the 20th century provides an excellent setting in which to investigate the relationship between growth and different political institutions. There are several reasons for this.
Latin American countries share many cultural patterns and have arrived at their present conformations through a historical process with a common departing point: independence from Iberian colonial rule. All these countries have to some extent similar dependence on specialization based on commodities and agricultural goods. They have also followed similar waves of development strategies (outward oriented until the 1940s, import substitution until the 1980s and economic liberalization during the 1990s). For these reasons, and in line with the purposes of this investigation, it is reasonable to consider Latin America as a relatively homogenous area.
Yet, these countries offer heterogeneous patterns in terms of political and economic evolutions. Oscillations between democracy and autocracy have been a common feature of Latin American countries. We illustrate four leading cases in Figure 1: Argentina underwent 5 military coups, one democratically elected government but accused of autocratic practices (1945-1955), 2 pseudo democratic regimes (1959-1962 and 1963-1966), characterized by proscription of the majoritarian political party, and only 3 democratic periods (1916-1930, 1973-1976 and since 1983 to the present day). Furthermore, Guatemala experienced at least 7 political transitions as well as Ecuador. Interestingly, some countries have been more politically volatile than others. Costa Rica is a good example of a long lasting democracy whereas Paraguay and the Dominican Republic provide cases of stable dictatorships throughout most of the century.
The volatility and fluctuating pace of Latin American economic growth as well as the disparity of economic prosperity across these countries is also a well established fact.
For the purposes of this paper, we construct a (pseudo) panel of 18 Latin American countries. The main time span of the analysis covers the period 1960 to 2000 but it goes back until 1900 in some specifications of our analysis. The relative homogeneity of Latin America makes the use of a panel data more appropriate. On the other hand, the diversity in terms of economic and political outcomes generates the necessary variability to establish well founded results.
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