Income and Democracy

We revisit one of the central empirical findings of the political economy literature that higher income per capita causes democracy. Existing studies establish a strong cross-country correlation between income and democracy but do not typically control for factors that simultaneously affect both variables. In the post-war sample, we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We present instrumental-variables estimates using two different strategies that also show no causal effect of income on democracy. Moreover, in a sample spanning the entire 20th century, the inclusion of country fixed effects again removes the statistical association between income and democracy. The cross-country correlation between income and democracy instead reflects longer-run changes, in particular, a positive correlation between changes in income and democracy over the past 500 years. We suggest a possible explanation for this pattern based on the idea that societies may have embarked on divergent political-economic development paths at certain critical junctures over the past 500 years. Consistent with this, the 500-year correlation between changes in income and democracy is significantly weakened or disappears when we control for potential determinants of these divergent development paths.