Do rising incomes lead to democracy? Daron Acemoglu and his co-authors fail to find "a significant causal effect of income on democracy": Reevaluating the Modernization Hypothesis. ( also available as a National Bureau of Economic Research working paper - Reevaluating the Modernization Hypothesis, August 2007).
Here's the abstract:
This paper revisits and critically reevaluates the widely-accepted modernization hypothesis which claims that per capita income causes the creation and the consolidation of democracy.
We argue that existing studies find support for this hypothesis because they fail to control for the presence of omitted variables. There are many underlying historical factors that affect both the level of income per capita and the likelihood of democracy in a country, and failing to control for these factors may introduce a spurious relationship between income and democracy.
We show that controlling for these historical factors by including fixed country effects removes the correlation between income and democracy, as well as the correlation between income and the likelihood of transitions to and from democratic regimes.
We argue that this evidence is consistent with another well-established approach in political science, which emphasizes how events during critical historical junctures can lead to divergent political-economic development paths, some leading to prosperity and democracy, others to relative poverty and non-democracy.
We present evidence in favor of this interpretation by documenting that the fixed effects we estimate in the post-war sample are strongly associated with historical variables that have previously been used to explain diverging development paths within the former colonial world.
"But", they ask, "if income does not cause democracy, then what does?"
In the second part of the paper, we discuss whether... the relationship between prosperity and democracy is underpinned by the divergent development paths of the countries in our sample….
... we focus on the sample of former European colonies, since for this sample there is a specific theory of political and economic development related to divergent development paths, and there is also data related to the determinants of these different paths during the critical junctures facing these former colonies…. we build on Acemoglu, Johnson, and Robinson (2001, 2002) who exploit the quasi-natural experiment provided by the colonization of many diverse societies by European powers after 1492. They show that the institutional differences created at the critical juncture of European colonization persisted and significantly contributed to the large differences in both the form of government (particularly the extent of constraints on the executive) and the economic success of these societies. They also show that the different paths of economic and political development are systematically related to a number of historical variables which influenced the costs and benefits of different sets of institutions.
Institutional variation within the former colonies was influenced by the types of initial conditions that the European powers encountered. In colonies where there were initially large densities of indigenous peoples, where the mortality environment was unfavorable for European settlements, and which were relatively prosperous, extractive institutions designed to transfer rents to Europeans emerged. Such institutions did not create effective property rights except for small minorities, they did not generate incentives for investment, education, or innovation, and they consequently retarded economic growth. The political institutions in such societies were complementary to the extractive economic institutions; they were coercive, hierarchical, and authoritarian, aimed primarily at controlling indigenous populations, and focused on maintaining and perpetuating a fundamentally unequal order. Since institutions have a tendency to persist, the colonial economic and political institutions created in these extractive colonies persisted into the 19th and 20th centuries and continued to benefit relatively small elites. These elites had a lot to lose from democracy, not just because it would have directly taken away their formal political power, but also because the change in the distribution of power would have undermined their preferred set of economic institutions. Consequently, in these societies, elites were prepared to fight harder to stop democracy (see Acemoglu and Robinson, 2006). Moreover, given that such societies were based on relatively coercive institutions, elites were better able to repress those who pushed for democracy, and subsequently, if democracy was conceded, they were better able to undermine it by mounting coups. Therefore, the development path starting with extractive institutions was nondemocratic and associated with relatively slow economic growth.
In colonies with different initial conditions, where there were few indigenous peoples, where the disease environment was relatively benign for Europeans, and which were initially poor, very different economic institutions emerged. Since there were few people to exploit and little to extract from indigenous peoples, relatively non-coercive societies emerged. Such societies, best exemplified by the settler colonies in North America and Australasia, developed economic institutions providing most inhabitants access to land, secure property rights, and equality before the law. They also quickly developed political institutions placing effective constraints on the exercise of power. The incentives for investment and innovation in these societies paved the way for economic growth. This situation is well illustrated by the development path of North America, where already during the colonial period a relatively egalitarian society emerged with representative assemblies in each state where free adult males could vote. This institutional nexus provided relatively good economic incentives for the non-slave population and provided weaker incentives for the political elites to pursue strategies to block economic development or undermine democracy. Moreover, these initial institutions implied that later political elites, even when they tried, were unable to tilt the balance away from growth promoting and democratic institutions.
We confirm the importance of the critical junctures emphasized in Acemoglu, Johnson, and Robinson (2001, 2002) by showing that the expected effects estimated in the post-war data are very strongly related to factors linked to the past colonization experiences of these countries. In particular, we show a very strong relationship between these expected effects and the mortality rates faced by European settlers, the indigenous population density before colonization, the constraint on the executive at (or shortly after) independence, and the date of independence. Settler mortality and indigenous population density before colonization proxy for the initial conditions affecting the colonization strategy and the subsequent development path (Acemoglu, Johnson, and Robinson, 2001, 2002); constraint on the executive at independence is the closest variable we have to a direct measure of relevant institutions during the colonial period; and date of independence is another measure of colonization strategy, since non-extractive colonies gained their independence typically earlier than the extractive ones.
We also investigate the relationship between other variables, such as geography, religion and ethno-linguistic fragmentation, on the propensity of a society to be democratic. Interestingly,conditional on the historical variables related to the colonization strategy pursued by Europeans, these variables seem to have no correlation with the expected effects for democracy.