Why democracy improves a country’s economy

Container cranes, helicopters and Statue of Liberty in silhouette in front of sun (© Julia Nikhinson/AP)
Container cranes at a port in New Jersey appear behind the Statue of Liberty, a symbol of freedom in the United States. (© Julia Nikhinson/AP)

One big reason democracy is successful, says President Biden, is that it unleashes human potential.

Democracies, says economist Daron Acemoglu, dedicate more spending to education and health care. As poorer segments of society gain access to health care and education, he says, they are more likely to reach their potential and contribute to local economies.

Steeve Biondolillo standing in library (© Kyle Green/AP)
Steeve Biondolillo, a sophomore at Northwest Nazarene University in Idaho, says he has “big goals and a big future.” (© Kyle Green/AP)

Countries that established democratic governments in the last 70 years grew their economies (PDF, 516KB), according to Acemoglu, an MIT professor and co-author of an analysis of 184 countries from 1960 to 2010. The report says that, on average, countries such as Portugal and South Korea saw 20% increases in gross domestic product per capita within two decades of democratizing.

Graphic showing GDP per capita before and after a democratization (Source: Journal of Political Economy)
(State Dept./M. Gregory)

After transitioning to democracy, Portugal and South Korea instituted several key reforms, such as expanding health care and education, the analysis finds (PDF, 404KB). Newly democratic South Korea stopped repressing unions. “Democracy in action,” Biden says, is when a worker can join a union. Advocacy for higher wages, better benefits or safe and healthy workplaces creates victories for all workers and raises the standard of living.

Elsewhere, Poland, Czechia and the Baltic states launched a series of democratic reforms in the 1990s after the collapse of communism. They established effective legal systems and joined the European Union, two of several moves that boosted their gross domestic product per capita, said William Tompson, head of the Eurasia division of the Organisation for Economic Co-operation and Development.

“That magnetic pull of these Western institutions … gave them an incentive to put their house in order,” Tompson said, noting that Poland’s GDP per capita in 2021 had more than tripled in real dollars from its 1990 amount.

Freedom to innovate

Democratic societies protect people’s right to express their views, champion the rule of law, enforce predictable governing rules, run competitive elections and support an independent media, says Darrell West, vice president of Governance Studies at the Brookings Institution.

Freedom of expression in democracies spurs creativity and innovation, West said, pointing to Silicon Valley. “There’s an environment [in the United States] that allows people to challenge authority, develop unconventional ideas, basically experiment in ways that often are not possible in authoritarian societies,” he said.

People carrying signs encouraging voting in Georgia (© Ben Gray/AP)
People rally in Atlanta to get out the early vote for Georgia’s 2022 Senate runoff election. (© Ben Gray/AP)

Freedom of expression fuels America’s higher education system and its consequent economic strength, West said. Colleges are typically among the largest local employers, propelling local economies. Moreover, many patents — most notably computer chips — come out of universities and drive business ideas.

Democracy, historically

The word “democracy” originates from two Greek words meaning people (demos) and rule (kratos). The first known democracy was in Athens, a form of government that ancient Greeks developed around the fifth century B.C.E.

Alexis de Tocqueville, the French political philosopher who in the early 1800s wrote Democracy in America, observed even then that the variety of organizations in this country was behind the country’s success. “He thought that our vibrant civil society was a strength for the United States,” West said.

There is a circularity about political freedom and economic success, according to MIT’s Acemoglu. They combine to create a vibrancy that de Tocqueville saw almost two centuries ago.