Is democracy a catalyst that also fosters economic growth? The question is more than academic: The two powers that dominated the communist world for decades have adopted radically different approaches in seeking to spur development. The republics of the former Soviet Union and its eastern European satellites have stressed widespread democratic reforms as a precondition for economic takeoff, while China has chosen to limit democracy while moving toward a market economy.
Mver the long term, one might think that the former Soviet Union, despite its current problems, would come out ahead in this race. After all, political and civil liberties would seem to enhance entrepreneurship and individual initiative and to reinforce the contractual rights that permit businesses to function. And all of the leading industrial nations are fully developed democracies.
But a new study by economist John F. Helliwell of the University of British Columbia and Harvard University suggests that things aren't that simple. Helliwell analyzed data covering real per capita income and the level of democracy in some 125 countries for each year from 1976 to 1985. Not surprisingly, he found a strong correlation between income and democracy--that is, the higher the level of per capita income in a country, the more likely it was to have a high degree of democracy.
When he looked at the question of whether democracy enhances economic development and income growth or is itself promoted by such growth, however, Helliwell found that income levels were clearly the dominant factor. That is, as economies grow and incomes rise, nations tend to adopt democratic reforms. The direct effect of democracy on growth, on the other hand, seems to be negligible or slightly negative, although democracy does appear to lay the groundwork for later economic growth by fostering education.
As Helliwell puts it: "The desire for democracy appears to be highly income-elastic, but the effect of democracy on growth seems insignificant." Such findings suggest that the pressure for democracy in China will grow if its economic reforms prove successful, while democratic reforms in eastern Europe, desirable as they may be in their own right, will not necessarily help in the quest for economic advancement.