Want higher GDP? Focus on democracy

Illustration: TBS

When nations fail economically, they do so because of extractive political institutions that concentrate power in the hands of a few, according to Daron Acemoglu and James A Robinson's influential book 'Why Nations Fail'.

The argument is simple: when political systems close themselves off, economies stagnate. When they open up through democracy, prosperity follows.

This is no longer an abstract academic theory. Recent research by Vanessa Williamson makes the case that democracy is not only good for citizens' rights but also for markets, growth and business itself. 

But in a world where democratic erosion is on the rise, the role of business in defending these institutions has become increasingly questionable.

Democracy and prosperity

Over the past two decades, social scientists have used rigorous methods to test the relationship between political systems and economic outcomes. A study by economists Acemoglu, Robinson, Suresh Naidu, and Pascual Restrepo, covering 175 countries between 1960 and 2010, showed that democratisation increases GDP per capita by between 20% and 25% over 25 years.

"Democracy's effect on growth is significant and sizable," they conclude. For instance, during the booming 1990s, it took the US just a decade to achieve 25% growth in real per capita GDP.

Williamson's research also shows similar results. "Democracies thrive because they are better at ensuring the provision of public goods, including education, public health, and infrastructure; because they manage markets more effectively; and because they channel contestation into political compromise rather than political violence," she concluded.

Autocracy, on the other hand, is consistently a burden on the economy. Its consequences are stagnation, cronyism, brain drain, and even violence. According to the findings published in the American Economic Review, populist leadership, whether left or right, has been associated with a 10% decline in GDP per capita over 15 years.

Lessons from history

Hungary under Viktor Orbán tells a cautionary tale. 

Since 2010, Orbán has gradually dismantled democratic safeguards, from media freedom to judicial independence, creating what scholars call an 'electoral autocracy'. The economic results have been predictable: unstable policymaking, corruption, and emigration of talent.

Freedom House notes that business success in Hungary is now "somewhat dependent upon its owner's government connections." Transparency International ranks it as the most corrupt country in the EU. Cronyism has benefited Orbán's inner circle, friends and family, who have secured state lands and lucrative EU subsidies, while multinationals face arbitrary taxes and regulatory reversals.

Moreover, Hungary lost nearly 50,000 people to emigration in 2019, disproportionately young and educated workers. Doctors have emigrated in greater numbers than new graduates, leaving industries and investors grappling with labour shortages. 

"A conspicuous beneficiary was his wife," remarked one analyst of Orbán's farm subsidy programme, indicating how personalised and extractive such systems have become.

A study by economists covering 175 countries between 1960 and 2010 shows that democratisation increases GDP per capita by between 20% and 25% over 25 years.

America itself does not need to look far back. For much of the 20th century, the Jim Crow South was a regional autocracy within a democracy. Its economy lagged, followed by low wages, poor education, and mass emigration.

Roughly 3,000 Black Americans were lynched, and countless others faced state-sanctioned violence. Economist Lisa Cook found that racial violence depressed Black patent activity by more than 15% annually, a chilling reminder of how political exclusion suppressed innovation and growth.

Eventually, economic revival of the South came when democracy expanded with New Deal programmes, wartime mobilisation, and when the Civil Rights Movement overturned Jim Crow's stranglehold. Once political inclusion advanced, so too did wages, productivity and investment.

Can businesses defend democracy?

Autocracy imposes uneven economic costs, with a small circle of favoured businesses sometimes thriving in the short term while most others face serious risks.

Williamson identifies seven groups as particularly vulnerable: companies heavily dependent on government contracts or regulation; those reliant on public investment or services; firms making long-term capital commitments; businesses that require a highly educated workforce; media, entertainment, and communications companies; firms in science, medicine, and education; and in-person services such as tourism, which are especially sensitive to political violence.

As she warns, under autocratic regimes, taxation and licensing often become tools of punishment, government services are discriminatory, and political contributions extortionate.

History suggests that businesses can play a decisive role. 

Political scientist Daniel Ziblatt argues that democratic consolidation has often hinged on whether conservative, business-aligned parties embraced democratic rules or sided with anti-democratic forces. Business is a core constituency of the centre right, and its choices matter.

In the United States, the record is mixed. After the 2020 election, the US Chamber of Commerce and the AFL-CIO jointly called for all votes to be counted, while some corporations paused donations to lawmakers who challenged the outcome. Yet many companies quietly resumed contributions months later.

Washington Post columnist Jennifer Rubin noted that business leaders often "imagine they can cut deals with autocrats or that persecution of disfavoured groups will have no impact on the business environment. The economic and political upheaval an autocrat brings never fails to surprise those who insisted they could control him."

More than economics

Williamson's research highlights two urgent steps for protecting businesses under threat from autocracy. 

First, business leaders need education to help them distinguish between ordinary policy disagreements and existential threats to democracy, recognising that while political contributions can amplify their voice in democracies, in autocracies, such contributions often amount to extortion.

Second, revitalised, nonpartisan business organisations are essential, as they can coordinate with civil society to defend democracy by promoting voting rights, safeguarding election integrity, and raising public awareness of democracy's economic value.

John Stuart Mill once wrote that under even the most benevolent despotism, people "are without any potential voice in their own destiny." The case for democracy is moral as much as it is economic.

'Why Nations Fail' reminds us that prosperity is never automatic. It is the product of inclusive political institutions. To defend democracy, business must now defend itself.