What Actually Affects the Economic and Political Outcomes of Countries?

How does a country become rich? When it reaches a high economic standard, how does it continue to hold up this wealth? What kind of political regime needs to be adapted for a country to be successful with its policies? These are only a few of the questions politicians and economists are faced with when making important decisions for their countries. These are questions that have more than one correct answer, and yet, at the same time, questions that may have no specific answer at all. Many scholars have attempted to answer these questions addressing variables such as wealth, trade, education, and geographic location. While there are different opinions about the connection between these variables and the economic and political outcomes of countries, and while these variables are joined together in many ways, it seems that the most significant debate is that of the importance of democracy.

In order to better understand why democracy stands out as the most important variable for a country’s economy and politics, we must look also address the other issues scholars point to. Like education, for example. Some scholars believe that education has a large impact on the outcome of a country’s economy and politics. Education has shown relevance in the survival of democracy, for example. Democratic countries that provide their citizens with higher education are more likely to remain democracies. While elementary school education has actually shown to significantly matter for democratization, the rate of economic growth and investment relates more to secondary and higher schooling. (Barro: S170) In terms of economics, the significance is obvious: educated people find higher-paying jobs and therefore contribute more to the country’s economy. Education also plays a part in the spreading of diseases, like the AIDS issue in Africa. The number of HIV positive men and women in Africa is growing every day, mainly because they are poorly educated about this issue, and also because they don’t have enough doctors. This significantly affects the African economy.

The next issue we must address is migration. When people start leaving one country to go to another country, the country they migrate from and the country they migrate to will both feel a positive and negative effect from this migration. Mass migration, as was the case for Scandinavia between 1870 and 1913, affects labor and therefore affects the economy. When Scandinavians began moving to America, the price of labor in Scandinavia increased while the price of land dropped. Another similar issue here is how much geography affects a country’s economy. “The geography hypothesis claims that differences in economic performance reflect differences in geographic, climatic, and ecological characteristics across countries.” (Acemoglu: 29) The idea here is that the country’s climate (based on its location) has a direct effect on income and economy because it affects the kind of work that country can do. Geographic location also adversely affects a country’s ability to trade.

Trade is also seen as an important determinant for political and economic outcome. Trade is very important for a country’s economy. Trade allows for specialization among countries which allows for faster and cheaper production around the world. Making one product at home while purchasing a different product from another country allows for more available labor to put into the making of the country’s own product, and also allows the country to sell its item at greater quantities. It allows countries to “make the best use of their scarce productive resources, and to improve their overall consumption by producing certain things themselves and obtaining other goods and services from other nations.” (Grieco: 21) Autarky, or not trading, has shown to have a very negative effect on a country’s economy and also decreases overall satisfaction and consumption. In short, trade is beneficial and it definitely plays a role in the economic outcome of a country.

Some scholars point to wealth as the key issue in determining political and economic outcomes. This is the point where scholars are also faced with the ‘Origins problem’ of which comes first – wealth or democracy? Some data has shown that poor countries have a faster growth rate than rich countries and that these poor countries converge at a faster rate. Some evidence has also shown that countries which were poor 500 years ago are rich today, and countries which were rich 500 years ago are poor today. Rich countries generally tend to be democracies, however, other types of governments may also be wealthy. And while these other governments don’t usually succeed politically, the wealth their country has acquired does not necessarily breed democracy or political success. If a dictatorship, for example, survives “in a country that became sufficiently wealthy, transition to democracy is less likely.” (Przeworski: 6) These arguments then also tie into the importance of earlier colonization and the institutions that are chosen and adapted.

Countries that were rich and populated tended to have power concentrated in the elite and tended to have extractive policies. Countries that were poor and scarcely populated had private property institutionalized and were more democratic. The areas that had institutionalized private property industrialized, while the areas with extractive institutions failed. In conclusion, institutions are important as they facilitated or blocked industrialization, and the choice of institutions by colonial powers determined subsequent economic development and later wealth. The institutions that remained in countries today are also then important in determining their outcomes. Democracies and dictatorships are important to look at here.

Democracy tends to have a positive and a negative effect on a country’s economy. “On the positive side, democratic institutions provide a check on governmental power and thereby limit the potential of public officials to amass personal wealth and to carry out unpopular policies. But on the negative side, more democracy encourages rich-to-poor redistributions of income and may enhance the power of interest groups.” (Barro: S158) In a democracy the people choose their leader by voting for the candidate they feel will provide them with better living standards. This leader then wants to keep the economy growing and to provide the people with everything they need because he represents a party and he must not destroy this party’s reputation. Economy also grows when there is investment from the nation’s citizens, but in order for citizens to invest they must have some kind of security for their investments. Democracy provides this security and therefore prospers from individual investments. There is less redistribution and lower tax rates in the democracy.

In terms of politics, democracy gives a country’s citizens certain rights that other governments don’t. Democracy gives people freedom. It protects property rights just like it would protect any other civil right. It provides citizens with a sense of security. Democracy, even when it works very badly, “does not give the leader of the government the incentive that an autocrat has to extract the maximum attainable social surplus from the society to achieve his personal objectives.” (Olson: 571) Basically, the leader in a democratic country cannot manipulate the citizen’s and the state as much as a dictator can.

A dictatorship, while still better off economically than in anarchy, is not economically efficient. A big reason why a dictatorship economy will not grow rich is because investment is necessary for growth and dictatorships do not succeed in this area. Most dictatorships do not provide their people with the sense of security that is necessary for individuals to invest, so people don’t invest. There are high tax rates and monopoly rents are charged, which is good for the leader, but not for the people. While some dictatorships have grown wealthy, it is only a short-term growth and does not last.

When looking at the survival rate of a dictatorship, it seems that they die out at some point under a broad variety of conditions. (Przeworski: 7) Dictatorships do not last. Mainly because there is no sense of security. People do not know what will happen tomorrow, or in a few years. Those who are well off are afraid to invest because there is no security that they will benefit. There is also no security about property because property rights are not fully developed in a dictatorship and they are not protected.

Basically, the conclusion we come to is that a democratic government will positively affect the political outcome of a country. It will remain stable and its citizens will continue to be satisfied. Economically, a democracy will generally prosper because the people will invest their capital, knowing it is secure, and the leaders will not be able to manipulate the fund and steal money from the people. A dictatorship, having only one ruler, will eventually die out. Whether with the death of the leader, or in some other way, dictatorships do not survive as well as democracies do. Economically, a dictatorship can grow wealthy but only for a short period. A dictatorship’s per capita growth is much lower than that of a democracy. Factor productivity is also much lower than in a democracy. A dictatorship simply will not grow economically as fast as a democracy will.

While many factors affect the outcome of a country’s politics and economics, some stand out as more important than others. Trade has a very important role in a country’s economy, and economic institutions highly affect the political outcome of a country. But of all the variables scholars look at in determining their importance for economic and political outcomes, democracy seems to have the greatest affect on these results. Democracy greatly affects a country’s economy, more positively than negatively. Politically, it also seems to have the greatest importance in future outcomes of a country. Democratic institutions affect politics and economics more than trade, migration, and any other variable we have looked at.

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