March 2007

Is Democracy the best setting for strong economic growth?

That is what the Wall Street Journal asked economists Daron Acemoglu and Ed Glaeser. You can read their debate on this very controversial issue in the WSJ online.

CIPE posted a quick summary of their discussion:

Glaeser: Data does not back up the idea that democracy is a key ingredient in economic growth

Acemoglu: There are different kinds of democracies, what you define as democracy matters.  Further, the relationship between democracies and economic growth differs, depending which view you take (short-term vs. long-term)

Glaeser: Democracies are not necessarily more stable than dictatorships.  More stable, successful democracies invest in human capital - and there is data to back this up.

Acemoglu: Education is important, but if you look around the world today it is evident that education is not necessarily more likely to consolidate democracy.

Glaeser: The link between education and democracy works, because: 1) educated people often lead political uprisings 2) educated people can craft better constitutions 3) educated people stand up and fight for democracy

Acemoglu: Educated countries may be more democratic and prosperous, but it does not mean that they are democratic and prosperous because they are more educated - the fact that they become more educated does not necessarily mean they are more likely to become more democratic.

Like every Friday, from Raj Nallari and Breda Griffith's lecture notes on Economic Policies for Poverty Reduction.

Education, Growth and Poverty Reduction

One of the major contributions to the new economic growth literature has been the recognition that human capital is critical in explaining growth differences across countries, with human capital in turn relying on a strong education system. Education directly benefits the individual and has positive spin-off effects for society in terms of increased productivity, higher rates of innovation and invention, and adaptation of new technologies.  However, the focus on ‘school attainment’ has generated criticism in recent years. Researchers note that while school attainment may be correlated with economic growth, this does not suggest a causal relationship.  Moreover, the relationship is sensitive to alternative estimates of school attainment and the underlying assumptions. 

Terry McKinley and Alex Izurieta write about global economic imbalances in UNDP International Poverty Centre's February one pager.

According to this paper, the US is running a deficit about 3.5 times larger than the deficits of all other OECD countries combined. The average US current account deficit in recent years has been one third higher than the total GDP of sub-Saharan Africa.

Source: UNDP - International Poverty Centre

Current global imbalances not only pose huge dangers; they also cause a grossly inequitable distribution of global resources. Capital is ‘flowing uphill’ to rich countries—overwhelmingly to one rich country, the US.

…

The money that many middle-income countries are now investing in the US could make a major contribution to development if it were redirected to poorer countries, or even kept within these middle-income countries. Because more goods and services would become available domestically, the population in such countries would enjoy a higher standard of living.

…

Since the US is enjoying the fruits of this inequitable imbalance in resource flows, it has limited motivation to correct it. An impending US economic collapse is probably the main factor that could impel national policymakers into action. An alternative solution, mutually beneficial to all, could be a coordinated effort by both developed and developing countries to stimulate domestic demand in regions other than the US.