Free to Squander? Democracy, Institutional Design, and Economic Sustainability, 1975-2000
37 Pages Posted: 22 Dec 2004
Date Written: May 2005
While democracy's effect on economic growth has come under intense empirical scrutiny, its effect on economic sustainability has been noticeably neglected. We assess the effects of regime type and democratic institutional design on economic, or "weak" sustainability. Sustainability requires that the total stock of aggregate capital does not depreciate in value over time. The World Bank gauges the rate of net investment in manufactured, human, and natural capital, a unified indicator of weak sustainability (the genuine savings rate). All four indicators of democracy we examine show that freer societies are more sustainable because they have higher levels of investment in human capital, create less CO2 damage per economic unit produced, and extract fewer natural resources in production, even if they show lower net investment in manufactured capital. Democracies may trade off immediate material welfare gains for future pay-offs. This finding justifies why scholars should assess the effects of regime type on more than just immediate growth, or the rate of change of manufactured capital. Among democracies, we find that mixed presidential-parliamentary systems exhibit a lower genuine savings rate than either of the pure systems. Proportional representation electoral systems fare worse than plurality when it comes to genuine and net national savings, even though they do better on education spending. The results taken together show that difference in regime type and democratic institutional design allow different trade-offs. The results are robust to a range of specifications and a developing country sub-sample.
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