Tuesday, February 24, 2009

Democracy and public good provision

Is democracy good for an economy? As discussed previously on this blog, there does not seem to be a link between income and democracy. But this does not mean that the political regime does not have an impact on an economy. For example, a democracy may care more about the provision of public goods.

This is what Sebastian Vollmer and Maria Ziegler explore empirically. Using a panel data analysis, they find that life expectancy and literacy are positiviely affected by democracy. This can be explained that as schools and health are publicly provided in most countries, the major dimension of change is how much (not if) governments care about schools and health, and democracies care more. Of course, there are always exceptions, such as the US where the government does not care that much and it is reflected in outcomes (after controlling for GDP, of course).

If democracies care so much, why are they not richer? It may be because redistribution, which the provision of public goods essentially is, is not necessarily growth enhancing. Autocracies care only for the elite (but not too much, or the common people will revolt), and the elite's income is mostly driven by aggregate GDP. But the large level of rent seeking in such economies drives GDP down. The point of my rambling here is that GDP should not be the focus of the analysis anyway. Thus, inequality and redistribution will matter for social welfare, and democracies appear to deliver this.

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