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CHAPTER 2
INTRODUCTION:
2.1. STATEMENT OF THE PROBLEM:
The statement is THE IMPACT OF DEMOCRACY AND DICTATORSHIP ON
ECONOMY.
2.2. OBJECTIVE:
To know about various impacts of democracy and dictatorship on economy.
2.3. RESEARCH QUESTION:
What is the impact of democracy and dictatorship on economy.
2.4. HYPOTHESIS:
Pakistan being an underdeveloped country has an imediate need to announe its political
system. Since 1947, Pakistan has gone through various reigns of democrcay and dictatorship
but yet has not be able to define a single applicable political system for itself. As dictatorship
can eliminate corruption but also it can cause the economy to fall 10 years back. On the other
hand, democacry can increase GDP but it involves diffrent economic hazards. Both at the
same time, suffer with great advantages and disadvantages.
2.5. SCOPE OF THE RESEARCH:
The research contains a discussion of plus and minus points of both democracy and
dictatorship on the economy affecting our GDP, GNP and various other factors.

CHAPTER 3
LITERATURE REVIEW:
3.1. Democracy:
It consists of four basic elements:
1. A political system for choosing and replacing the government through free and fair
elections.
2. The active participation of the people, as citizens, in politics and civic life.
3. Protection of the human rights of all citizens.
4. A rule of law, in which the laws and procedures apply equally to all citizens.
Democracy is a means for the people to choose their leaders and to hold their leaders
accountable for their policies and their conduct in office.
The people decide who will represent them in parliament, and who will head the government
at the national and local levels. They do so by choosing between competing parties in
regular, free and fair elections. Government is based on the consent of the governed.
In democracy, the people are sovereign; they are the highest form of political authority.
Power flows from the people to the leaders of government, who hold power only temporarily.
Laws and policies require majority support in parliament, but the rights of minorities are
protected in various way. The people are free to criticize their elected leaders and
representatives, and to observe how they conduct the business of government. Elected
representatives at the national and local levels should listen to the people and respond to their
needs and suggestions. Elections have to occur at regular intervals, as prescribed by law.
Those in power cannot extend their terms in office without asking for the consent of the
people again in an election. For elections to be free and fair, they have to be administered by
a neutral, fair, and professional body that treats all political parties and candidates equally.
All parties and candidates must have the right to campaign freely, to present their proposals to
the voters both directly and through the mass media. Voters must be able to vote in secret,
free of intimidation and violence. Independent observers must be able to observe the voting
and the vote counting to ensure that the process is free of corruption, intimidation, and fraud.
There needs to be some impartial and independent tribunal to resolve any disputes about the
election results. This is why it takes a lot of time to organize a good, democratic election. Any
country can hold an election, but for an election to be free and fair requires a lot of
organization, preparation, and training of political parties, electoral officials, and civil society
organizations who monitor the process.
Citizens have an obligation to become informed about public issues, to watch
carefully how their political leaders and representatives use their powers, and to express their
own opinions and interests. Voting in elections is another important civic duty of all citizens.
But to vote wisely, each citizen should listen to the views of the different parties and
candidates, and then make his or her own decision on whom to support. Participation can also
involve campaigning for a political party or candidate, standing as a candidate for political
office, debating public issues, attending community meetings, petitioning the government,
and even protesting. A vital form of participation comes through active membership in
independent, non-governmental organizations, what we call civil society.
These organizations represent a variety of interests and beliefs: farmers, workers, doctors,
teachers, business owners, religious believers, women, students, human rights activists. It is
important that women participate fully both in politics and in civil society.
This requires efforts by civil society organizations to educate women about their democratic
rights and responsibilities, improve their political skills, represent their common interests, and
involve them in political life. In democracy, participation in civic groups should be voluntary.

No one should be forced to join an organization against their will. Political parties are vital
organizations in a democracy, and democracy is stronger when citizens become active
members of political parties. However, no one should support a political party because he is
pressured or threatened by others. In a democracy, citizens are free to choose which party to
support.
Democracy depends on citizen participation in all these ways. But participation must be
peaceful, respectful of the law, and tolerant of the different views of other groups and
individuals.
In democracy, every citizen has certain basic rights that the state cannot take away
from them. These rights are guaranteed under international law. You have the right to have
your own beliefs, and to say and write what you think. No one can tell you what you must
think, believe, and say or not say. There is freedom of religion. Everyone is free to choose
their own religion and to worship and practice their religion as they see fit. Every individual
has the right to enjoy their own culture, along with other members of their group, even if their
group is a minority. There is freedom and pluralism in the mass media. You can choose
between different sources of news and opinion to read in the newspapers, to hear on the radio,
and to watch on television. You have the right to associate with other people, and to form and
join organizations of your own choice, including trade unions. You are free to move about the
country, and if you wish, to leave the country. You have the right to assemble freely, and to
protest government actions. However, everyone has an obligation to exercise these rights
peacefully, with respect for the law and for the rights of others.
Democracy is a system of rule by laws, not by individuals. In a democracy, the rule
of law protects the rights of citizens, maintains order, and limits the power of government.
All citizens are equal under the law. No one may be discriminated against on the basis of
their race, religion, ethnic group, or gender. No one may be arrested, imprisoned, or exiled
arbitrarily.
If you are detained, you have the right to know the charges against you, and to be
presumed innocent until proven guilty according to the law. Anyone charged with a crime has
the right to a fair, speedy, and public trial by an impartial court. No one may be taxed or
prosecuted except by a law established in advance. No one is above the law, not even a king
or an elected president. The law is fairly, impartially, and consistently enforced, by courts that
are independent of the other branches of government. Torture and cruel and inhumane
treatment are absolutely forbidden. The rule of law places limits on the power of government.
No government official may violate these limits. No ruler, minister, or political party can tell
a judge how to decide a case. Office holders cannot use their power to enrich themselves.
Independent courts and commissions punish corruption, no matter who is guilty.
If democracy is to work, citizens must not only participate and exercise their
rights. They must also observe certain principles and rules of democratic conduct. People
must respect the law and reject violence. Nothing ever justifies using violence against your
political opponents, just because you disagree with them. Every citizen must respect the
rights of his or her fellow citizens, and their dignity as human beings. No one should
denounce a political opponent as evil and illegitimate, just because they have different views.
People should question the decisions of the government, but not reject the governments
authority. Every group has the right to practice its culture and to have some control over its
own affairs, but each group should accept that it is a part of a democratic state.
When you express your opinions, you should also listen to the views of other people, even
people you disagree with. Everyone has a right to be heard.

Dont be so convinced of the rightness of your views that you refuse to see any merit in
another position. Consider different interests and points of view. When you make demands,
you should understand that in a democracy, it is impossible for everyone to achieve
everything they want. Democracy requires compromise. Groups with different interests and
opinions must be willing to sit down with one another and negotiate.
In a democracy, one group does not always win everything it wants. Different combinations
of groups win on different issues. Over time, everyone wins something. If one group is
always excluded and fails to be heard, it may turn against democracy in anger and frustration.
Everyone who is willing to participate peacefully and respect the rights of others should have
some say in the way the country is governed.
I want to conclude with a few words about what we in the United States and other
democracies around the world owe the Iraqi people, as you seek to build the first true Arab
democracy.
3.2. Dictatorship:
A dictatorship is a form of government characterized by the absolute rule of one
person or a very small group of people who hold all political power. While a dictatorship is a
form of government in some nations, just as monarchy or representative democracy is the
form of government in others, dictatorships are seen by non-dictatorships as dangerous and
cruel because of the way they tend to treat their citizens.
You won't find a dictator who calls himself a dictator. Instead, dictators have
ordinary titles such as president, emperor, great leader and similar monikers. That's because
'dictator' is a pejorative term assigned to certain rulers by other nations, particularly the
developed nations of the West - that is, countries with thriving economies - such as the United
States, Canada, the United Kingdom and many others.
To be considered a dictatorship means that a country is known to be run by one person
without any checks and balances on his power. Dictators make unilateral decisions that affect
their countries without having to consult any other branch of government. That's because
there's no other branch of government that is not controlled by the dictator. Human nature
being what it is, dictators don't rise to power for the good of their nations (though they
usually claim otherwise). They seize power to benefit themselves, their families and their
close political allies.
Dictators usually come to power through some kind of violent struggle, rather than
the peaceful passage of power that we take for granted in the United States. In modern times,
it's not unusual to hear news stories about dictators being elected by their citizens, when in
fact the elections are manipulated through intimidation of voters to ensure the dictator's
victory. A cult of personality often surrounds a dictator, driven by myths - typically
perpetuated by the government-controlled media - about the ruler that are designed to build
him up in the minds of the citizens as an all-knowing divine being who is the only one
capable of bringing prosperity to the nation. In cases such as the late Kim Jong-il in North
Korea, the ruler is even worshiped as a god.
Unfortunately, dictatorships seldom usher in a nation's prosperity. In the most brutal
dictatorships, the citizens live in extreme poverty because the government withholds food and
supplies in order to keep the people under control. One of the more dramatic examples of this
kind of human rights abuse occurred in Myanmar in 2008. When a cyclone swept over the
country, killing hundreds of thousands and leaving millions without food or shelter, the
country's military dictatorship blocked humanitarian aid from reaching the people until it
could hold a sham election.
The rigging of elections is just one example of how citizens in a dictatorship have
little to no personal freedom. Unlike in the United States and other similar nations, the people

living in a dictatorship have no rights of free speech, freedom of religion, a free press or even
the right to hold an opinion in opposition to the ruler and ruling party.
3.3. ISSUE OF IRAQ:
People in the United States are still divided about whether we should have gone to war in
Iraq. But the overwhelming majority of Americans support what we are trying to do here now
to assist the emergence of a new Iraq. We in the United States, and in the international
community, are going to spend more money and energy to help you build a democracy and
rebuild your economy than we have spent to help any other country in the last fifty years.
Over the coming months and years, this assistance will help you develop your political
parties and civic organizations, your legislatures and local governments, your elections and
your courts.
It will go to rebuild your schools and your mass media, your electricity grids and roads, and
all the different foundations of your economy and infrastructure as well. Most Americans
support this workwhether they are Republicans or Democrats, whether they will vote to
reelect George Bush as president this year or vote for his opponent.
Building a democracy out of the ruins of a brutal dictatorship requires great
courage, effort, and patience on the part of ordinary people. It takes a long time. We
understand how difficult it is. We know how important it isnot only to the future of Iraq,
but to the whole Arab world. We do not wish to dictate who will rule you. That is for Iraqis
to decide. Our desire is to see that Iraqis be free to choose their leaders and speak their minds,
while living at peace with themselves and their neighbors.
If you choose this path of democracy, freedom, and peace, the democratic peoples of the
worldnot only the US, but the European Union, Japan, Canada, and so onwill all be with
you.

3.4. Impact of democracy on Economy:

Not everyone is convinced of the socio-economic potential of democratic rule; far
from it. There are even those who believe that autocratic governments maybe more successful
in demolishing barriers to development. The opposite is true, in fact: Democratic rule draws a
dividend in the form of development. Its economic advantages are obvious, although it entails
enormous challenges, and the ultimate success of democratisation processes is by no means a
foregone conclusion. The influence of political and institutional frame-work conditions on the
socio-economic development of a society is crucial. Institutions reduce uncertainties.
Contractual and legal certainty as well as political stability will boost the economic
development of any society. Democratic rule not only promotes the development of a
countrys national economy, it also invigorates other factors of development such as, for
instance, the quality of public health. The reason lies in the competitive character that is
essential to democracy. After all, the mechanisms of democracy aim to regulate the state
monopoly on governance in conformance with the rules of competition an objective that is
served by free and fair elections as much as by the freedom of association and the press or the
competition among political parties. Autocracies, on the other hand, are not exposed to
competition. Instead, they formulate their own economic-policy rules to serve their own
interests and generate economic privileges. The lack of any corrective impulse from
competing policies that might express the economic interests of the citizens impedes
needless to say the development of the economy as a whole. There is no dispute that the
rule of law as well as democratic structures are capable of promoting socio-economic
developments in Africa, Asia, and Latin America. However, consolidating democratic rule is
fraught with challenges, and there are many young democracies that show considerable
functional defects. Most outstanding among them are those that are illegitimate and

characterised by intransparency, corruption, and a total lack of constitutional governance,

leaving little room for the development dividend of democratic rule. But if a constitutional
democracy is indeed so much more oriented towards the common good than any autocratic
rule, and if its economic advantages are indeed as marked as they appear, why is it that the
path from autocracy to democracy is so stony? Why are there so many challenges involved in
the process of democratisation? Building a democracy calls for coordinating all players in the
reform process. What is more, those players should be willing to create new rules for their
game. At the same time, the disruptiveness of the coordination issue is enhanced by the
problems of distribution that are inherent in any process of democratisation. After all, the
groups that are disadvantaged by an autocratic regime will naturally endeavour to secure for
themselves a share in there distribution of the economy, while the profiteers of autocracy will
just as naturally fight to retain their privileges. If democratisation should be accompanied by
decentralisation, similar distribution problems would occur between the central and the
subordinate levels of government. Thus, the problem that arises when a pluralist system of
interest management is introduced is related to collective action. There is a distinct danger of
the players in the game pursuing short-term, particularist objectives instead of agreeing
collectively on a set of rules. The consequence would be corruption, legal uncertainty, and
intransparency, so that the development dividend of democratisation would fail to
materialize. The misdirected developments described above are often most clearly reflected
in the functional incapability of the political parties. Normally, it is their duty to represent the
particular interests of a specific group, and to cast the interests of a large segment of society
in the form of political programmes at the same time. This is exactly where problems arise
whenever distribution conflicts increase in intensity. Needless to say, not all processes of
transformation end in a defective democracy. Thus, for example, Uruguay, Chile, Botswana,
Mauritius, and Taiwan symbolize the successful implementation of democratization processes
and their related socio-economic benefits. There are three factors that should be named in this
context. First, the intensity of the distribution conflicts that accompany any such
transformation depends on the intensity of exploitation and favouritism under the late
autocratic regime. Second, the success of any transition process depends on how many
,building sites of reform operate in parallel. And third, the influence of external factors on
the process itself should not be underestimated. Such factors include, for example, the
inducements offered by the EU, the prospect of EU membership, and the benefits of
international development cooperation as such. From all this, it is permissible to conclude
that democratic rule promotes socio-economic development, while autocracies, on the other
hand, are always confronted by endogenic stability problems, inertia in economic policy, and
the reluctance of foreign investors. However, it is precisely the collective benefits of
democracy that make related transformation processes so difficult. For the liberties acquired
by the citizens in the struggle permit them to articulate their economic rights more
extensively which, in turn, leads to disputes over distribution. Coordinating divergent
interests becomes a problem, and democracy pays no socio-economic dividend. It would be
both meaningful and desirable for the international community to support transition
processes. However, any such commitment that is based on relations maintained with still
extant authoritarian systems would be harmful; democracy promotion must be credible,
meaning that any sanctions should reflect actual political changes but not short-term exportrelated and/or diplomatic interests. To provide any truly substantial impulses for the transition
processes going on in countries that are striving for democracy, the international community
would have to enhance the scope of its coordinated efforts far beyond the level shown in the
past.

3.5. IMPACT OF DICTATORSHIP ON ECONOMY:

Dictatorship is bad for the economy. Researchers say a countrys finances go into freefall
after 10 to 15 years of totalitarianism. The tell-tale characteristics are decreasing growth and
increasing inflation.
The longer a dictator is in power, the worse the economic performance, concludes
economic historian Jan Luiten van Zanden from Utrecht University. Hes studied the
economies of 55 dictatorships and there is no denying that, if one person has all the power,
the economy suffers.
It comes as no surprise that dictators tend to tell another story. Former Libyan leader
Muammar Gaddafi wasted no opportunity to stress that he had brought his country nothing
but prosperity. Some economists think this kind of story makes sense. A strong man without
an opposition neednt make concessions: he can push thorough whatever is best for the
economy of - his country.
Driving Seat:
In practice, though, its different. That becomes glaringly obvious the longer a dictator is in
the driving seat. Van Zanden:
With the passage of time, the balance shifts from the countrys interests to private interests
and that is disastrous for the economy. The quality of governance declines, the clique
surrounding the Great Leader is corrupt and loots the treasury. Whats more, as everything
goes downhill, they start to print money with the result that inflation rockets.
Of all the authoritarian regimes in Africa and the Middle East Van Zanden has studied,
he thinks the most striking examples, besides Libya, are Zimbabwe, Congo and Ivory Coast.
Its no coincidence that these are countries which have been ruled by one man for years. Van
Zanden:
On average, African presidents are in power for over a decade. So far, Gaddafi wins the
prize with 42 years at the top, but Zimbabwes Robert Mugabe (32 years in power) and
Ugandas Yoweri Museveni (26 years) are not doing too badly. Just compare that to the
Western World, where presidents and other government leaders average three to four years in
power. Theres a reason for this. Power corrupts.
Sanctions:
Just how much can a dictator be blamed though? Is poverty and economic malaise also not
often caused by economic sanctions? Van Zanden:
They definitely influence things and contribute to the decline. Zimbabwe is a good example
of this. Economic sanctions, though, only come into play in a few of the dictatorships
researched. I think you first have to look at the positive side to these punitive measures:
imposing sanctions is one of the few things the international community can do to try to
change these kinds of dictatorships.
Costs:
Van Zanden argues its a fact that regime change would benefit the population of a
dictatorship on economic grounds alone. The extent of the benefit can even be worked out:
his research details the costs to the economy of these dictatorships.
Every year under a dictator reduces growth in GDP by between 0,10 and 0.15 percent. That
means, if a dictator is in power for 20 years, average growth will be about 2.5 percent lower
than in a comparable country without an all-powerful leader. That is a really major effect.
Africa and the Middle East pay a high price for their dictators.

3.6. Democracy, dictatorship and economic growth:

A number of political regimes have throughout history conducted economic policies
that are widely recognized to generate poor macroeconomic performance. In order
to understand why such policies are selected, one needs to develop Theories of Bad
Policy (Robinson 1998), and ask questions such as Are good policies good politics (Moene 2011)? A general argument that recurs throughout this thesis is that
different political regime types generate different incentives for politicians regarding
policy choices. Along these lines, the theoretical models presented in Chapters 5 and
7 indicate that some dictators and their close associates, when compared with democratic politicians, have stronger incentives and better opportunities for conducting
policies that hurt, for example, economic growth, but which serve the political elites
own interests.
It would not have passed democratic political processes, especially in a country where most
citizens lived in utter poverty. Maos
Great Leap forward, which ended not in industrialization but in hunger catastrophe
for Chinese farmers with possibly 30 million dying of famine (see e.g. MacFarquhar
1983), was a type of policy experimentation no electorate likely would have approved of. Nor would democratic electorates have approved of the education and
infrastructure policies of various Russian Tsars and Austrian (Habsburg) Emperors,
who opposed the building of railways and infrastructure and did not attempt
to develop an effective educational system (Acemoglu and Robinson 2006a, 129).
These were policies the rulers mainly pursued with an eye to reducing the risk of
revolution, and which were thereby followed mainly because of self-interested political survival purposes. Along the same lines, the North Korean requirement for a
permit to visit Pyongyang is both unpopular and bad for economic efficiency, but
nevertheless a way for Kim Jong Il to reduce the probability of demonstrations, or
16 even revolutions, in his capital.
These are only a few of the countless examples that could have
been invoked to illustrate the economic dangers of dictatorship. 8
However, there are also some examples of dictatorial regimes presiding over countries with high, or even spectacular, economic growth rates. Some of the most famous
examples are Taiwan, South Korea and Singapore in the 1960s and 70s, and presentday China. Multiple theoretical arguments exist that may contribute to explaining
these, and other, dictatorial growth successes, and some of the arguments indicate
that the authoritarian nature of these regimes indeed may have contributed vitally
to the high growth rates (see e.g. the three arguments presented in Knutsen 2010b).
The economic effects of democracy and dictatorship are thus not straightforward to
determine theoretically.
In their seminal study, Przeworski and Limongi (1993) evaluated four theoretical
arguments on the relationship between political regime type and economic growth.
These four arguments are only a subset of the existing arguments in the literature
on democracy, dictatorship and effects on growth (see Knutsen 2006, 58142), but
they are among the most important. The arguments highlight how regime type
might matter for
property rights
investment
autonomy of the state
checks on predatory rulers

which all again are expected to impact strongly on

economic growth. Below I will take a fresh look at these arguments, and include
some new theoretical insights, as well as relevant empirical findings from recent
years research. I also add, and briefly present, a fifth argument on democracy
and technological change.

3.7. Democracy and protection of property rights in

favor of democracy
There exist multiple arguments on how democracy may affect the protection of property rights, and these arguments point in different directions (for a more thorough
account, see the review in Knutsen 2011b). As I will discuss below, most (large-n)
empirical studies find a positive net effect of democracy on property rights protection.
Consider a hypothetical country
where the median citizens property entitlement is below the average property entitlement, and where property (only) can be redistributed progressively. There are
aggregate economic costs related to redistributing property, for example economic
loss due to tax distortions or disincentives for investment due to increased uncertainty about security of property in the future. Under democracy, if one assumes
one-dimensional politics, the median voters preferred outcome would be a policy
that redistributes property until the marginal personal gain of redistribution is equal
to the median voters share of the marginal national economic loss from redistribution.
The argument above provides a limited account of the politics of property rights
protection, as is explained in depth in Knutsen (2011b). If we for example relax the
questionable assumption that property can only be redistributed progressively, there
are strong counterarguments to the claim that democracy weakens property rights
protection. As will be discussed in Chapter 2, democracy is associated with power
distribution, both horizontal and vertical. These features provide checks against
violations of property rights. In principle, any form of government implies concentration of coercive power and therefore the possibility of state-led confiscation
of property, since a political position within a state apparatus provides the opportunity for individuals with superior coercive power to enforce the rules to their
advantage, regardless of their effects on efficiency (North 2000, 50).
However, democracies will have certain specific advantages over dictatorships in
terms of constraining regime-associated property expropriation. First, in democracies the politically advantaged will constitute a larger segment of the population. In
Mancur Olsons model (Olson 1993, 2003; McGuire and Olson 1996), a larger group
will internalize more of the indirect negative incentive effects of property rights violation on the overall economy, even if they gain directly from redistributive activity:
The majoritys interest in its market earnings induces it to redistribute less to
itself than an autocrat redistributes to himself (Olson 2003, 122). Second, there
is more power dispersion in democracies, also between different state institutions,
which reduces the possibility for single actors to enforce their will at the cost of others. Because of lack of protection of individual rights, poor political accountability
and concentration of power, property rights will be less protected in dictatorships,
since these features will allow dictatorial elites to confiscate property with fewer
costs. Confiscation of property with subsequent redistribution of property as private goods to political backers is also much cheaper in dictatorships, where the
winning coalitions supporting the political ruler are smaller (Bueno de Mesquita

et al. 2003). Under democracy, where winning coalitions are generally larger, rulers
motivated by political survival will have greater incentives to provide the public
good of universal property rights protection.
Przeworksi and Limongi recognize the multiplicity of arguments on the relationship between democracy and property rights. Their overall assessment is therefore
that while everyone seems to agree that secure property rights foster growth,
19
it is controversial whether democracies or dictatorships better secure these rights
(Przeworski and Limongi 1993, 51), and they further conclude that [t]he idea that
democracy protects property rights is a recent invention, and we think a far-fetched
one (Przeworski and Limongi 1993, 52). I disagree with this conclusion, among
others because the median-voter based model on redistribution of property captures
only one aspect of the politics of redistribution (see Timmons 2010). Democracies
have historically followed a range of redistributive policies, but these have often
taken other, and more productivity-enhancing, forms than expropriation and redistribution of property from rich to poor (see e.g. North, Wallis and Weingast 2009).
Actually, the most compelling argument for refuting Przeworski and Limongis conclusion is the conclusion reached by several empirical studies conducted after Przeworski and Limongis article was published in 1993. These studies find a positive
net effect of democracy on property rights protection (e.g. Leblang 1996; Boix 2003;
Adzera, Boix and Payne 2003; Clague et al. 2003). In Knutsen (2011b), I find
that democracy enhances the protection of property rights, even when taking into
account that regime type is endogenous to property rights protection.

3.8. Dictatorship and investment either way

Singapore had the highest average investment GDP ratio of all countries (with data)
between1970 and 2000. On average, 45 percent of the Singaporean GDP was invested
(Knutsen 2006, 411). The investment ratio for the Soviet Union in the 1930s was equally
high, and today China is racking up annual investment ratios over 0.40. 11 Could these high
investment rates have been viable under democratic regimes? Probably not! Dictatorships
have several policy means that allow them to drive up investment rates, thereby increasing medium to long run growth rates (Solow 1956; Romer
1990).
First, dictatorships often suppress freedom of association, thus crippling the independent organization of unions. In the absence of strong, independent unions,
wages are lower, and relatively rich capital owners take a larger share of total production (e.g. Rodrik 1999a). When combined with the assumption that savings
rates increase with income (The Kaldor Hypothesis), this yields the prediction that
aggregate savings and thereby probably investment rates will be higher in dictatorships. Political accountability is also lower under dictatorship, among others due
to the lack of free and fair elections. This reduces the pressure on political rulers
11 For a fascinating treatment of the early Soviet Unions economic policy and economy, see
Davies, Harrison and Wheatcroft (1994).
A similar political logic underlies the argument that
dictatorial governments need not provide as much social security to its populations.
The response of rational citizens living under dictatorial rule is to save privately in
order to self-insure for the future (see also Knutsen 2010b).
The argument that dictatorships are better able to generate higher savings and
investment rates is therefore founded on solid theoretical reasoning. However, political mechanisms that allow dictatorships to generate a higher investment rate,

should the regime want so, does not imply that most dictatorial governments have
incentives to generate high investment rates. As discussed in Knutsen (2010b), the
case-based empirical evidence often cited in favor of the argument above (e.g. Wade
1990; Leftwich 2000) seems prone to selection bias. There are relatively few historical dictatorships with extremely high savings rates; these are quite frequently
recycled as examples in the literature, and general inferences on high savings rates
under dictatorship are thereafter drawn. This likely gives rise to a systematic bias
(regarding the effect of regime type) stemming from selecting cases on specific values (high savings and investment rates) on their dependent variable (see for example
Geddes 2003b).
Nevertheless, I find some evidence indicating that dictatorship in general enhances savings rates, but not investment rates, in Chapter 5, although the evidence
is far from robust. Moreover, the growth accounting exercise presented in Chapter
5, based on data going back to the 19th century, shows a positive, although not completely robust, effect of dictatorship on physical capital-induced growth. Also, for
example, the thorough study conducted by Tavares and Wacziarg (2001) finds that
democracy reduces economic growth via the savings and investment channel, and
Tavares and Wacziarg (2001) moreover find that this is the most sizeable negative
indirect effect of democracy on growth.
Despite this, the empirically estimated negative effect of democracy on growth
via the savings and investment channel reported in Chapter 5 is perhaps not as
large as many theorists would have expected. Although there are notable exceptions, most dictatorships do, as noted above, not generate very high savings- and
investment rates, and there are several reasons for this. First, self-interested dictators might not see it in their interest (monetary or related to political survival) to
pursue policies that generate investment-induced growth, as will become clear from
the argument below on predatory dictators. A second related point is that investment, and particularly foreign direct investment, is sensitive to the protection of
property rights; as seen above, democracy likely strengthens property rights protection in general. Third, a high degree of corruption deters investment, and democracy
probably reduces corruption, at least in relatively rich countries (Fjelde and Hegre
2007) and when democracy is consolidated (Rock 2009a). Therefore, even if certain
dictatorships generate extremely high investment rates because of the large scope
of possible policies under limited political accountability, most dictatorships do not
produce high investment rates.
Mankiw, Romer and Weil (1992) expanded the traditional Solow model of economic growth
by including human capital. The traditional Solow model postulated
that income is a function of technology, labor and physical capital. If one stretches
the capital concept to include human capital, democracies have an extra advantage
over dictatorships, since democracies invest more in schooling and health.
to human capital may impact on the likelihood of having a democracy (e.g. Lipset 1959;
Inglehart and Welzel 2006), 12democracy likely enhances human capital. Education and
basic health care are highly valued by most people. One would thus expect more widely
distributed high-quality education and health care in democracies, as democratic politicians
are assumed to be more responsive to citizens preferences than dictatorial (see
e.g. Lake and Baum 2001; Lindert 2005). According to Acemoglu and Robinson
(2006b, 64), Lindert (2000) finds a strong and positive effect of democratization on
educational expansion in Western Europe. Engerman, Mariscal and Sokoloff (1998)
find the same effect in Latin America. Stasavage (2005) finds that democracy has

a positive effect on primary education spending in Africa. More generally, Baum

and Lake (2003), Tavares and Wacziarg (2001) and Doucouliagos and Ulubasoglu
(2008) find a positive indirect effect of democracy on growth via human capital, and
these studies even indicate that this is the most important positive indirect effect of
democracy on economic growth. As with the relationship between democracy and
12 But, see the thorough study and skeptical results in Acemoglu et al. (2005)
In conclusion, dictatorship on average likely increases investment in physical
capital, although there is large variation among different dictatorial regimes in this
area. However, it also seems likely that democracy increases the accumulation of
human capital. If we apply a broad definition of capital, including both physical
capital and human capital, it is quite unclear whether democracy on average increases investment. Chapter 5 tests the effect of democracy on both physical and
human capital-induced growth, and the results are not robust enough to conclude
with certainty on this matter.

3.9. Dictatorship and autonomy of the state against

democracy
Scholars studying East Asia have, as Przeworski and Limongi (1993) noted, often
linked the fantastic economic performances of some Asian dictatorships to the autonomy of the dictatorial state (see the more extensive treatment of this literature
and argument in Knutsen 2010b). In this view, the key to the superior economic
performance of the Asian tigers is state autonomy, defined as a combination
of the capacity of the state to pursue developmentalist policies with its insulation from particularistic pressures, particularly those originating from large firms
or unions. This argument takes two steps: state autonomy favors growth, and
state autonomy is possible only under authoritarianism (Przeworski and Limongi
1993, 56).
Olson (1982) argues that democracies are prone to capture from special interest
groups. This may conceivably lead to policies that are incoherent with the interests
of the broader populace; economic growth may be sacrificed for the protection of
specific business sectors or pivotal voting blocs whose interest is not aligned with
economic growth. In any case, such lobby processes will be associated with wasteful
rent-seeking, which will detract financial resources and focus from more productive
ventures (see e.g. Grossman and Helpman 2001).
One argument is that politicians and bureaucrats are insulated from such pressures under authoritarianism and are therefore better able to conduct proper
policies (see e.g. the discussions in Wade 1990). One important special case is that
of economic reforms. Certain microeconomic reforms for example improve the efficiency of
resource allocation in the medium to long run, but an adjustment process
towards an efficient equilibrium may be painful and certain previously privileged 23 groups
may lose out. Under democracy, the potential losers may be important political actors, socalled veto players (Tsebelis 2002), who will block reform. Trade liberalization is often
considered a particularly fitting example, where protected industries might block
liberalization, even if the expected result from liberalization is an increase in national GDP.
Under dictatorship, the dictator is assumed to have the means, and in some instances also the
incentives, to carry out painful reform (but, see Rodrik 1999b). Reform is also assumed to
be conducted more speedily under a dictatorial regime, since many of the procedural steps
needed in democracy as well as complex and time-consuming negotiation can be skipped (see
also Knutsen 2010b).@@
There are counterarguments that modify the picture painted above. First, more

than state autonomy alone is required for successful political decision making. Political and bureaucratic processes need to be embedded in a concrete set of social
ties that binds the state to society and provides institutionalized channels for the
negotiation and renegotiation of goals and policies (Evans 1995, 12). Such embeddedness may suffer under dictatorship because of the regimes insulation from the
general populace, and the lack of an organized civil society with extensive knowledge of local conditions. Local knowledge is important in order to achieve efficient
implementation of political decisions, and dictators are likely to be at an information disadvantage (in addition to the discussions in Chapter 5, see e.g. Sen 1999;
Mueller 2003). When it comes to the speed of reforms, Lijphart (1999, 259) notes
that speedy reform processes and speedy implementation may have negative consequences, especially if there is large uncertainty about a reforms effects. A certain
degree of political inertia, with thorough debates on the consequences of reform
and subsequent adjustments of the reform proposal, may be beneficial for the final
economic outcomes. Most importantly, the assumption that dictators are indeed as
autonomous asdescribed above is questionable. Even if there is lack of free and fair elections
linking the regime to the broader electorate, no dictator could survive without backing from
specific groups, be it the party, the landlord elite or the military. Bueno de Mesquita
et al. (2003) recognize this, and claim that every leader answers to some group that
retains her in power: her winning coalition (Bueno de Mesquita et al. 2003, 7). The
In reality, the relationship between democracy and trade policies is far more complex,
depending for example on the factor intensities of the countrys economy, more specifically
the relative intensities of capital to labor and particularly land to labor (see e.g. the brilliant
analyses in Rogowski 1989; ORourke and Taylor 2007). The relationship also depends on
more specific institutional structures, like the electoral system (Rogowski 1987; Persson and
Tabellini 2003;Persson 2005).
winning coalition is again drawn from a selectorate, the group of actors that can
potentially influence the selection of leaders. The difference between democracies
and dictatorships within this framework is therefore not the degree of autonomy
of the regime, but the sizes and natures of the underlying winning coalitions and
selectorates. Kim Jong Il might be heavily dependent on his backers for political
survival, but his backers are few, the high-ranking military officers and possibly also
some high-ranking party members (see various chapters in Kihl and Kim 2006). The
question of whether a small underlying winning coalition is conducive to growth is
different from the question of whether more state autonomy is conducive to growth.
This may lead us to rethink the economic effects of dictatorial insulation from the
general populace.

3.10. Democracy and constraints on predatory rulers

in favor of democracy
According to Evans (1995, 45), if autonomy is defined as not having goals shaped by
social forces, Mobutus regime in Zaire was a very autonomous regime. Mobutus
Zaire is an infamous prime example of a predatory regime, where the dictator
and his inner clique mainly used their powers to enrich themselves and secure their
continuation in office. One may ask: Why would self-interested dictators not use
their vast powers to promote policies to their own benefit, even in instances where
the population in general would suffer economically? Historical examples of dictators that have used their power for following personal goals with disastrous macroconsequences are numerous, ranging from the Roman Emperors Caligula and Neros
extravagant and extremely expensive cultural and architectural projects to Khmer

Rouge and Pol Pots decision to kill Cambodians with education or glasses. The
most clear-cut examples come from rulers that steal or confiscate socially productive resources for their own material benefit, predatory rulers in the true sense of
the word. However, the point is more general; rulers might use strategies that are
well-designed for achieving personal goals, but which reduce economic growth.
This qualification may also impact on the validity of the other theoretical arguments
presentedhere, for example Argument II). I will come back to these types of questions, related
to the incentives of rulers and the importance of context for preferred policies (see also
Robinson 1998, 2001; Acemoglu and Robinson 2006a). Another rational
strategy could be to spend excessive amounts on a repressive apparatus instead of
using resources for productive investments (see e.g. Wintrobe 1990, 1998; Acemoglu
and Robinson 2006b). In democracies, leaders who try to engage in predatory activities are
more likely to be detected because of freedom of media, more likely to
be stopped by other institutions like the legislature and courts, and more likely to
be thrown out of office in the next election. Democratic institutional features thus
provide checks on predatory behavior.
Not all dictatorships are predatory. One reason is that dictatorships vary in terms
of institutionalized checks and balances (e.g. Przeworski et al. 2000; Gandhi 2008).
Some dictatorships have legislatures and parties that play at least some political role,
also when it comes to constraining predatory behavior. Moreover, in some contexts,
rational dictators may not see it in their long term interest to act predatorily. Olson
(1993, 2003) argues that dynastic regimes may refrain from predatory activities
because of their rulers relatively long time horizon. These rulers do not want to
diminish the overall size of the future tax base (see also McGuire and Olson 1996),
as they assume there is a good chance that either they or their close relatives will be
around to reap the long-term benefits of a productive economy. Robinsons model
(Robinson 2001) indicates that willingness to engage in predatory behavior depends
on how the dictators survival probability is affected by predation, and this again
is a function of several contextual variables. Bueno de Mesquita et al.s (2003)
analysis indicates that if dictators have relatively large winning coalitions, they will
have incentives to provide public goods instead of engaging in predatory behavior.
Besley and Kudamatsu (2007) argue that winning coalitions that are to likely retain
their positions as crucial political players if a particular dictator falls from power
are better able to discipline the dictator into refraining from predatory behavior.
Nevertheless, an extension of most of the arguments in the above paragraph to
include democracies, from institutional checks to size and autonomy of the winning
coalition, indicate that democratic leaders will have even less incentive to engage in
predatory behavior than dictators who rule under the conditions described above.

3.11. Democracy and technological change in favor of democracy

The question of what drives economic growth has been intensively scrutinized by
economists. Technological change is commonly accepted as the most crucial aspect
underlying long-term growth (see e.g. Romer 1990; Helpman 2004). 16 Thus, if there
is a link between democracy and technological innovation and diffusion, there is
a link between democracy and growth. Sah and Stiglitz (1986) point to one such
potential link. They show that polyarchical organizations, where decision power is
distributed horizontally, have higher probabilities of accepting good, novel projects
under uncertainty than hierarchical organizations. As democracies exhibit greater
dispersion of authority, the above logic may indicate a democratic technology advantage.

Halperin et al. claim that democracies realize superior developmental performance because they tend to be more adaptable (Halperin, Siegle and Weinstein
2005, 14). They view democracies as learning organizations, where individuals
are engaged in the gathering of new information, debate, adjusting positions and
revising pre-existing knowledge. Evaluating and changing old ways of doing things
and achieving progress by trial and error are important for political and economic
dynamism.
Free and open debate is instrumental for eliminating unfounded knowledge
and for opening up to new ideas. John Stuart Mill, referring to political suppression
of ideas, noted that the opinion which it is attempted to suppress by authority may
possibly be true. Those who desire to suppress it, of course, deny its truth; but they
are not infallible (Mill 1974, 77).
Economics and politics are not empirically separate domains, and freedom of
expression and debate, as well as norms related to competition between alternative
views and to acceptance of change, may spill over from the political to the economic
sphere. In the economic sphere the aforementioned norms will likely contribute
to creative destruction (Schumpeter 1976), thereby speeding up the process of
technological change, which again increases economic growth. Openness to new and
alternative domestic and international ideas and willingness to try out alternative
ways of doing things generate a dynamic economy. Freedom of speech crucially
contributes to better opportunities for actors to evaluate and disseminate ideas from
abroad, and may spur intense and inclusive debates on what the most efficient and
proper solutions to a specific problem are (Halperin, Siegle and Weinstein 2005).
Of course, information and learning in the marketplace is not identical to openness of political debate and the freedom to voice political opinion. Imitation of technologies can of course
also be conducted in a society where political debate is limited. The Asian Tigers and
Communist China may be decent empirical examples. But, even Chinese-style control and
censorship of certain selected websites, conducted for political reasons, might hinder
information flow and use of communication technologies that could have given economic
benefits.
Neo-Schumpeterian economists have stressed the importance of diversity of ideas
and introduction of novel ideas into the economy. According to Verspagen, the evolution that characterizes a dynamic economy is the outcome of a constant interaction between variety and selection (Verspagen 2005, 495). Selection reduces variety
since more efficient techniques are adopted through learning or through victory in
the marketplace, thus competing out more inefficient methods of production (e.g.
Alchian 1950; Nelson and Winter 1982; Fagerberg 2003). In order to keep up variety,
one needs a steady introduction of novel ideas. Freedom of speech and open idea exchange under democracy enhance both variety and selection; both the introduction
of new ideas, either from abroad or from local entrepreneurs, and learning processes
rely on the possibility of collecting and processing information in a relatively unrestricted manner. Harsh restrictions on civil liberties are incompatible with the
latter conditions. Given the importance of technological and organizational change
for long-term growth, the mechanisms sketched up above are presumably very important channels through which democracy enhances economic growth.
On a general note, dictatorial regimes may out of political survival motivations
restrict civil liberties and general diffusion of information both from abroad and
within the country. This may, however, result in reduced absorption and spread of
new productive ideas and technologies. This can be the case even if the regime wants

economic growth, as it is difficult for the regime to fine-tune policy so that only politically dangerous information is stopped, and economically productive information
allowed.
3.12. Evaluation of the arguments; a quick summary
The overall evaluation of the above theoretical arguments indicate that democracys negative economic effects are not as severe as some authors (like, e.g. Huntington 1968;
Haggard 1990) have suggested.
Democracy and property rights Either way Democracy increases growth
Dictatorship and investment Democracy decreases growth Either way
Dictatorship and autonomy Democracy decreases growth Democracy decreases
growth
Autonomous rulers are predatory Democracy increases growth Democracy increases
growth
Democracy and technology Democracy increases growth
First, I score the property rights argument in favor of democracy. This contrasts with
Przeworski and Limongis evaluation; they scored the argument as Either way. My
evaluation is
partly based on the strong arguments proposed by among others North (1990), Olson
(1993) and Bueno de Mesquita et al. (2003) on the incentives for dictators to grab property to their own or their supporters advantage, and the statistical evidence pointing to a
positive effect of democracy on property rights protection. Some of the theoretical studies on the political economy of property rights in dictatorships, and the statistical studies,
have been published after Przeworski and Limongi wrote their article. Second, on the
argument that dictatorship enhances investment, I agree with Przeworski and Limongis
evaluation that one may expect a dictatorial advantage if one considers only physical capital. However, when including also human capital, I conclude that Either way is a more
proper score, as democracies are found to have a substantial human capital advantage in
the literature. As Przeworski and Limongi, I score the Autonomy argument in disfavor
of democracy (although there were several strong counterarguments), and the Predation
argument in favor of democracy. Finally, the novel argument on the proposed effect of
19
democracy on technological innovation and diffusion point to an extra economic advantage for democracy. Nevertheless, there are other arguments on how and why political
regime type may impact on economic growth that are not discussed here (see, e.g. Knutsen 2011c), and the weighting of different theoretical arguments will unlikely produce
any clear consensus on what the relationship between democracy and growth looks like.
Hence, one has to examine what empirical studies on the subject find.

CHAPTER 4:
RESEARCH METHODOLGY:
4.1. TARGET POPULATION:
The undergraduate students of Comsats, Lahore & University of Sargodha (Lahore Campus).
4.2. SAMPLING TECHNIQUE:
In order to select sampled population, simple random sampling technique will be applied.
4.3. SAMPLED POPULATION:
The sampled population for this research is the undergraduate students of the department of
Computer Sciences & Management Sciences, Architecture Comsats Lahore & University of
Sargodha (Lahore Campus).
4.4. SAMPLE SIZE:
For the collection of primary data, the questionnaire will be distributed among 70-80
students.
4.5. DATA COLLECTION TOOL:
Primary data will be collected through the prepared questionnaire.
4.6. DATA ANALYSIS TOOL:
The data will be analyzed quantatively.
4.7. RESEARCH SETTING:
The research setting is natural.
4.8. INCLUSION CRITERIA:
The students of Management Sciences & Computer Sciences, Comsats Lahore & University
of Sargodha (Lahore Campus) are included in this research.
4.9. EXCLUSION CRITERIA:
All other students of Comsats Lahore & University of Sargodha (Lahore Campus) are not
included in this research.

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