Not everyone will be surprised to learn that political regimes have no effect on average rates
of growth of total income. One generally held view, made influential by Huntington (1968),
is that what matters for economic development is political stability, rather than the
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particular political institutions. Any system of political institutions promotes development
as long as it maintains political order. The danger is “political instability.”
Political instability, as measured by past or expected changes of chief executives, the
frequency of strikes, demonstrations, or riots, is much greater in democracies. Yet political
instability affects economic performance only under dictatorships. Changes of chief
executives, while much less frequent in dictatorships, are economically costly only in these
regimes. Whether because of institutional constraints or of motivations of those who govern
democracies, neither past nor expected changes of heads of governments affect growth
under democracies. But under dictatorships economic growth slows down significantly
when the tenure of rulers is threatened. The same is true of various forms of “socio-political
unrest”: strikes, anti-government demonstrations, and riots occur more often in democracies
but they retard growth only in dictatorships. Finally, the effect of threats to the stability of
regimes on investment shows that investors fear democracy and hope to find a safe haven in
many dictatorships: prospective demise of a dictatorship causes investors to flee while its
prospective advent makes them flock.
Thus, political instability retards growth exclusively under dictatorships. Huntington and
other “realists” got it all wrong. Studies of political instability are guided by the hypothesis
that, to state it in the words of Alesina and Perotti (1997: 21), “what influences growth is
not so much the type of regime (dictatorship or democracy) but regime instability, that is,
the propensity to coups and major changes of government.” This hypothesis is logically
incoherent, since “political instability” cannot be even defined independently of political
institutions. Alternation in office or other manifestations of popular opposition, whether
strikes or anti-government demonstrations, do not constitute “instability” under democracy.
Such phenomena are frequent in democracies because democracy is a system in which
people are free to express their dissatisfaction with governments. And they are rare in
dictatorships because it is precisely to prevent such forms of expression that dictatorships
are established and maintained. Democracies are inherently “unstable”: what constitutes
anomalies, breakdowns of rule, under dictatorship is just an essential, definitional, feature of
democracy. A change of chief executives in democracies occurs as a consequence of
elections or other regularized procedures, while under most dictatorships the only way
rulers can change is by a coup. To discover, as Alesina at al. (1996) do, that coups reduce
growth but regular alternations in office do not, is not to find that some forms of “political
instability” affect development, but only that some political events that constitute instability
under dictatorship do not under democracy.
Once it is understood that the same political phenomena have different meanings under
different regimes, it is not surprising that economic actors react to them differently. Under
dictatorships, whenever the regime is threatened, whenever rulers in fact change or are
expected to change, whenever workers muster the courage to strike or masses of people to
demonstrate their opposition to the government, the economy suffers. Under democracy,
everyone knows that the government will change from time to time, that workers may
strike, and people may express their dissatisfaction with the government in a variety of
ways. Hence, when such phenomena do transpire, they evoke at most an economic yawn.