Economic Origins of Dictatorship and Democracy

by Daron Acemoglu

  The reason that the elites might want to change political institutions, from democracy to nondemocracy, is similar to the reason that the citizens want democratization. What the elites care about is changing policies in their favor, and political turbulence and the alignment between their interests and those of the military might give them the opportunity to do so. However, there is the issue of the transitory nature of de facto political power. They will have this opportunity today but not necessarily tomorrow. Any promise by the citizens to limit the extent to which policy is pro-majority in the future is not credible within the context of democratic politics. Tomorrow, the threat of a coup may be gone and democratic politics will again cater to the needs of the majority, therefore choosing the policies it prefers without worrying about the elite undermining its power via a coup. However, this is precisely what made democracy so costly for the elite in the first place. To change future policies in a credible way, the elites need political power. A coup is their way of increasing their de jure political power so they can pursue the policies they like. In other words, a coup enables the elites to turn their transitory de facto political power into more enduring de jure political power by changing political institutions.

  A related reason that a coup may arise is that, in the midst of political and social turbulence, the military and the elite segments of society may be, perhaps rightly, worried about the future sustainability of democracy and even of the capitalist system and want to preempt a potential move farther toward the left or even a revolution.

  6. Determinants of Democracy

  Now that we have a theory of democratization, we can ask which factors make the emergence and consolidation of democracy more likely. We have so far explained how our theory can account for transitions from nondemocracy to democracy and possibly back again to nondemocracy. However, just as important are the comparative statics of the equilibrium, meaning how the equilibrium changes when some underlying factors change. These comparative statics enable us to explain why some countries transition to democracy whereas others do not, and why some countries remain democracies whereas democracy collapses in other countries. These comparative statics can then guide empirical and historical work in understanding the incidence of democracy.

  6.1 Civil Society

  6.1.1 Democratization

  Our framework implies that a relatively effective threat of revolution from the citizens is important for democratization. When the citizens are not well organized, the system will not be challenged and transition to democracy will be delayed indefinitely. Similarly, when civil society is relatively developed and the majority is organized, repression maybe more difficult. Therefore, some degree of development in civil society is also necessary for democratization. We take such development as given in this book and it plausibly represents the outcomes of long-run historical processes (e.g., Putnam 1993).

  6.1.2 Consolidation

  The strength and nature of civil society is as important for the consolidation of democracy as it is for its creation in the first place. Not only is a well-organized civil society necessary to push for democracy, it is also necessary to protect it. When civil society is better organized, coups are easier to resist, more costly to undertake, and less likely to succeed. Hence, democracy is more likely to be consolidated.

  6.2 Shocks and Crises

  6.2.1 Democratization

  In our theory, democratizations occur because of the transitory nature of de facto political power. In some situations, the collective-action problem is easier to solve, opponents to the regime are easier to coordinate, and revolutions are easier and less costly to carry out. These are typically times of crises - for example, harvest failures, economic depressions, international financial or debt crises, and even wars. Such crises and macroeconomic shocks are intrinsically transitory and lead to short-term fluctuations in de facto political power. Our theory, therefore, predicts that democratizations are more likely to arise in a situation of economic or political crisis. A clear example is the democratization in Argentina after the Falklands (Malvinas) War in 1983.

  6.2.2 Consolidation

  Just as opponents of dictatorship can gain temporary de facto power when there are political or economic crises, so can opponents of democracy. Our analysis suggests that, as with democratizations, coups are more likely to arise in situations of crisis. An illustrative example is the coup against Allende in Chile in 1973, which came during the first big rise in oil prices and a large economic depression.

  6.3 Sources of Income and Composition of Wealth

  6.3.1 Democratization

  Another important determinant of the trade-off between democracy and repression is the source of income for the elites. In some societies, the elites are heavily invested in land, whereas in others, the elites are those with investments in physical and human capital. There are likely to be three major differences in the attitudes of landowners and (physical and human) capital owners toward democracy and nondemocracy. First, land is easier to tax than physical and human capital. Therefore, landowners have more to fear from democracy than nondemocracy, which makes them more averse to democracy. Second, social and political turbulence may be more damaging to physical and human capital owners who have to rely on cooperation in the workplace and in the trading process, which makes landowners more willing to use force to preserve the regime they prefer. Third, different sets of economic institutions are feasible in a predominantly agrarian economy, which influence the relative intensity of elites’ and citizens’ preferences over different regimes. For instance, labor-repressive institutions, such as slavery, are relatively more efficient with agricultural technology than in industry (Eltis 2000). This implies that democracy is worse for elites because the changes in collective choices that it brings undermine their preferred set of economic institutions. All three considerations imply that democratization is more likely in a more industrialized society where the elite own significant physical and human capital than a more agricultural society where the elites are mainly invested in land. Stated differently, democracy is more likely when the elites are industrialists rather than landowners.

  Although the nature of revolutions is not the focus of this book, these ideas also have interesting implications for the incidence of revolutions. For example, they can help account for why most revolutions - for example, in Russia, Mexico, China, Vietnam, Bolivia, and Nicaragua - take place in primarily agrarian societies. We suggest that this is because landed elites favor repression rather than concessions and, when repression fails, revolutions take place. In more urbanized and industrialized societies, where the elites are invested in capital, concessions are favored and revolutions are observed less often.

  6.3.2 Consolidation

  The source of income for the elites also impacts the decision of whether to mount a coup. If the elites are heavily invested in land, then coups may tend to be less costly. More important, democracy is relatively worse for such individuals given that land can be taxed at higher rates than capital, and also that economic institutions under democracy are further from those preferred by the elites. In contrast, when the elites’ wealth is mostly in the form of physical and human capital, coups are more expensive for them and democracy is less threatening. As a result, democracy is less likely to consolidate when the elites are landowners than when they are capitalists.

  6.4 Political Institutions

  6.4.1 Democratization

  Our framework also suggests that the nature of democratic political institutions may be crucial for explaining why some societies democratize but others do not. In particular, when the elites can use repression to avoid democratizing, they do so because they anticipate that democracy will be harmful for their interests. So far, our characterization of democracy as the rule of the majority has been overly stylized in order to communicate the main elements of our analysis. In reality, one person’s vote may be worth more than another’s and, in particular, the elites may be able to exercise more or less influ
ence over what happens in a democracy-even though their influence is relatively less than it is in a dictatorship.

  One way they can do this is through the design of democratic institutions. In his 1913 book, An Economic Interpretation of the U.S. Constitution, Beard argued that the constitution was written by rich property holders with an eye to maintaining the worth of their assets (including, one should add, their slaves) in the face of likely radical democratic pressures.4 Beard argued that

  inasmuch as the primary object of a government, beyond the mere repression of physical violence, is the making of the rules that determine the property relations of society, the dominant classes whose rights are thus to be determined must perforce obtain from the government such rules as are consonant with the larger interests necessary to the continuance of their economic processes, or they must themselves control the organs of government. In a stable despotism the former takes place; under any other system of government, where political power is shared by any portion of the population, the methods and nature of this control become the problem of prime importance - in fact, the fundamental problem in constitutional law. The social structure by which one type of legislation is secured and another prevented - is a secondary or derivative feature arising from the nature of the economic groups seeking positive action and negative restraint. (1913, p. 13)

  Even the notion of representative democracy, as opposed to participatory or direct democracy, can be seen as an attempt to dilute populist pressures and undermine the power of the majority (as argued by Manin 1997).

  Clearly, then, democratic political institutions can be structured to limit the power of the majority. A more recent example is the constitution written during the dictatorship of General Pinochet in Chile, which attempted to minimize the threat of socialism in Chile by engaging in systematic gerrymandering and the underrepresentation of urban areas, and which otherwise attempted to cement the veto of the military over democratic decision making (Londregan 2000; Siavelis 2000).

  Another example, discussed in Chapter I, is the way that the South African constitution was written in an attempt to protect the interests of whites under democracy.

  If a nondemocratic regime or elite can design or manipulate the institutions of democracy so as to guarantee that radical majoritarian policies will not be adopted, then democracy becomes less threatening to the interests of the elites. Less threatened, the elites are more willing to create democracy in the first place. For instance, when democracy is less threatening, it will be less attractive to use repression to avoid it. Thus, Pinochet’s constitution, according to our framework, facilitated democratization in Chile. It may even be the case that, as in South Africa, the majority of citizens are themselves willing to restrict their policy options to facilitate a transition to democracy. As we discuss in Chapter 6, the ANC realized that it had to make concessions to the whites about the structure of democratic institutions. For the ANC, this was better than carrying on with the fight against the apartheid regime. By giving the elite credible guarantees, a process of democratization is facilitated that might otherwise not take place.

  6.4.2 Consolidation

  Just as the structure of democratic institutions influences democratization in the first place, so it helps to determine whether democracy consolidates. In particular, institutions that place limits on pro-majoritarian policies in democracy are likely to help consolidation. In fact, the elites may be quite influential in democracy because they control a strong upper house, like the Prussian Junkers in nineteenth-century Germany, or the British aristocracy in the House of Lords, or because they control the party system. Knowing that in democracy they will be able to insure against the most excessively majoritarian policies, the elites will be less willing to undertake action against democracy.

  An interesting example in this context is the links between the elite and both traditional ruling parties in Colombia. Throughout the twentieth century, the Liberal and Conservative Parties managed successfully to avoid the entry of left-wing parties by manipulating electoral institutions, particularly the form of proportional representation. Without a left-wing party, highly redistributive political agendas did not emerge in Colombia. Interestingly, Colombia has one of the most consolidated democracies in Latin America, although there are often complaints that the system does not represent the interests of the majority.

  Another example of the connection between political institutions and democratic consolidation is the claim that presidential democracies maybe more unstable than parliamentary democracies and more prone to coups (Linz 1978, 1994). This idea makes sense in our framework because, whereas in a legislature checks and balances and lobbying may allow the elites to block radical policy proposals, a directly elected president is more likely to represent the preferences of the majority in society and, therefore, to be more populist. Hence, presidential systems may be more threatening to the interests of the elites and thus induce more coups.

  Paradoxically, then, this perspective might also help explain why the consolidation of democracy in Chile may have run smoothly after the systematic gerrymandering that General Pinochet arranged in the electoral rules. This manipulation underrepresented urban areas at the expense of more conservative rural areas, thus reducing the political power of the left. The consequence was a less redistributive but more stable democracy. Turkey and Thailand provide other examples in which constitutions written or commissioned by the military may have helped democratic consolidation. Haggard and Kaufman (1995, p. 110) note:

  Ironically, the greater security for the armed forces during the initial years of the transition probably reduced the threat to civilian authority in Chile, Turkey, and Korea.

  However, whereas increasing the power of the elites in democracy may promote democracy, giving the elites too much power will undermine it. In our framework, democracy arises from conflict between elites and disenfranchised majorities who are prepared to accept democracy rather than something more radical because it gives them more political power than nondemocracy. If the elites have too much power in democracy, democracy will do little to improve the welfare of the majority. In this case, democracy is not a solution to social conflict, and the result will either be revolution or an elite that keeps itself in power through repression.

  6.5 The Role of Inter-Group Inequality

  6.5.1 Democratization

  Our framework makes predictions about the effect of inter-group inequality - inequality between groups - on the creation and consolidation of democracy. For convenience, we outline these using the word inequality to refer to inter-group inequality. However, these predictions about inter-group inequality may not translate into statements about standard measures of inequality and income distribution (e.g., the labor share or the Gini coefficient). This is particularly true when political conflict is not rich versus poor but rather along other lines, perhaps between ethnic or religious groups.

  Everything else being equal, greater inter-group inequality makes revolution more attractive for the citizens: with revolution, they get a chance to share the entire income of the economy (minus what is destroyed in revolution), whereas in nondemocracy, they obtain only a small fraction of these resources. Because an effective threat of revolution is the spark that ignites the democratization process, greater inter-group inequality should be associated with a greater likelihood of democratization.

  There is also another reason why inter-group inequality might contribute to democratization. Recall that democratization occurs as a credible commitment to future redistribution, when the promise of redistribution is not sufficient to stave off the threat of revolution. The stronger the threat of revolution, the more likely it is that this promise will be insufficient and that the elite will be forced to create democracy. Because greater inter-group inequality contributes to the strength of the threat of revolution, it makes democratization more likely via this channel as well.

  This discussion of the role of inter-group inequality is one-sided, however.
It highlights how greater inequality increases the threat of revolution and thus the demand for democracy by the citizens. However, inter-group inequality may also affect the aversion that the elites have to democracy. To see why consider a standard model of redistributive taxation as in Meltzer and Richard (1981). Note that as the gap between the elites and the citizens rises (i.e., as inter-group inequality increases), the burden placed on the elites, even at a constant tax rate, rises. This is because with greater inequality, a larger share of total tax revenues will be raised from the elites, who now command a greater fraction of the resources in the economy. Therefore, greater inter-group inequality typically increases the burden of democracy on the elites, even if the tax rate remains constant or changes little. Moreover, many approaches suggest that greater inter-group inequality should increase the tax rate, contributing to this effect. If this is so, there would be another reason for greater inequality to increase the burden of democracy on the elites. With greater inequality, the benefits from redistribution increase, inducing the citizens to prefer higher levels of taxation.5 Overall, therefore, it seems compelling that the costs of redistributive taxation and democratic politics to the elites and, hence, their aversion to democracy should be generally higher for the elites in a society where the difference in incomes between the elites and the citizens is greater.