Propping Up Democracy: Sanctions and the Reversal of Democratic Effects

Abstract

A large literature in political science and economics attributes differences in economic performance between democracies and non-democracies to domestic institutions. I challenge this approach by showing that the positive effects of democracy documented in influential studies (e.g., Papaioannou and Siourounis 2008; Acemoglu et al. 2019) disappear or turn negative either when controlling for whether a country is sanctioned by the US, G7 countries, and the UN, or when restricting the sample to the pre-1991 period, when non-democracy was less frequently used as a justification for punishment. This is consistent with the interpretation that democracy appeared to cause positive outcomes because powerful hegemons have systematically provided favors to democracies, not because democracies possess intrinsically superior institutions. I further show that sanctions targeting non-democracies constitute a plausible mediating channel through which democracy has appeared to "cause" growth. Moreover, controlling for sanctions, democracy is associated with significant declines in TFP. I argue that the intrinsic positive impact of democracy is likely to be even smaller-or more negative-given that democratic hegemons have also favored democracies through many other tools, including defense alliances, economic integration, and both public and private aid flows.

Keywords: O43, F5 Institution, Democracy, Autocracy, Sanction