Two dimensions of democracy and the economy

Abstract

Does democracy influence economic policymaking and outcomes? Our study investigates the implications of Dahl's two dimensions of democracy (‘polyarchy’): contestation/competition and inclusion/participation. We hypothesize that increases in democratic competition inspire policy incrementalism, thus lowering growth volatility and generating fewer deep crises. Meanwhile, increases in substantive democratic inclusion – genuine political voice, or democratic participation in the presence of a minimum of contestation – should increase the political weight of relatively poor voters, who have a differentially strong aversion to deep growth crises. A statistical analysis of 149 countries for 1961–98 finds greater democracy associated with fewer years of sharply negative growth (‘crisis’), with both democratic contestation and substantive inclusion contributing to this outcome. Our conclusions question the wisdom of designing economic policy institutions that are intentionally insulated from the democratic process.