COVER STORY • 4

D

oes Democracy Need Renewal?
Socio-Economic Consequencesof Democratic Politics

By Masaaki Higashijima

Introduction
Growing mistrust of indirect democracy, the emergence ofpopulism, and widening political polarization – as this “crisis ofdemocracy” occurs, autocracies such as China emphasize that they
are superior to democracies in governance. Swift actions against thenovel coronavirus and the propagation of fast economic growth aresuch examples. Indeed, are democracies inferior to autocracies insocio-economic performances?
Modern democracy is a form of political governance which
stipulates checks and balances of powers in the constitution, andconducts free and fair elections while guaranteeing citizens’ politicalrights and freedom. This definition of democracy has twodimensions. One is the aspect of “liberalism” where representativesof the people with various ideas and interests compete with one
another and restrain the use of excessive power. This dimension
includes “horizontal accountability” which denotes the balance ofpower amongst the executive, legislative, and judicial branches aswell as with other monitoring institutions. The other is the aspect of
democracy where representatives respond to the will of the citizens(public opinion) through free and fair elections. This is also called“vertical accountability”.
In contrast, authoritarian regimes point to a political system wherethese two types of accountability do not fully function, i.e. one
political leader (dictator) monopolizes power and elections areneither free nor fair.
These two factors of liberal democracy have been considered tohold both advantages and disadvantages. The aspect of liberalism
constrains the use of arbitrary power, and is expected to prevent theso-called “tyranny of the majority”. Yet such political constraints may
make it difficult to implement policies in a timely manner and may
result in policy stalemate. The other aspect of democracy urges
politicians to implement what the general public desires. That being
said, the electoral ambition of politicians may also lead to shortsighted policy decisions which provide “bread and circuses” to thegeneral public without viewing issues over the long run. Whenemphasizing the negative aspects of democratic systems, it leads tothe argument of the so-called “developmental dictatorship” wheredecisions can be made from a long-term policy perspective by adictator without being exposed to competitive elections.
Based upon these features of democracy and authoritarianism, as
well as their advantages and disadvantages in the policy making
https://www.jef.or.jp/journal/Author
Masaaki Higashijima

process, social scientists have accumulated a bulk of research
regarding the relationship between political regimes and various
socio-economic performances. This article reviews the conditions
under which democracy functions well in producing good socioeconomic performances. In so doing, I introduce important researchthat political scientists and economists have published, including myown with my coauthors.

Significance of Horizontal Accountability
in Democratic Regimes
Economic policies direct the prospect of a country’s economy.
Governments formulate fiscal policies; central banks decide on
monetary policies. During a recession, they implement expansionary
fiscal and monetary policies to improve the circulation of money andstimulate the economy. The monetary policy of Abenomics was a
typical example of this. On the other hand, when the economy isbooming, these policies are tightened to deter inflation and a bubble
economy. Appropriate economic policies reacting to the economic
situation lead to deterring inflation, fiscal soundness, economic
growth and poverty reduction in the long term.
In contrast to this rationality in policy making, economic policy
may be also used as a method for political survival of politicians.
Especially under a democratic system where politicians and parties
compete, there have been constant concerns that economic policies
may be easily used by political leaders to gain popularity fromvoters. If economic policies are decided with the purpose of staying
in power, rather than based on policy rationality, expansionary fiscal
and monetary policies may be constantly taken under democracy
rather than under authoritarianism. Consequently, those policies maylead to serious fiscal deficits and inflation.
But this perspective on the relationship between democracy andeconomic policy overly stresses the aspect of vertical accountability
in democracy, and underestimates the aspect of horizontal
accountability. Professor Cristina Bodea of Michigan State University
and I explored the conditions under which de jure central bankindependence becomes effective in controling government fiscalpolicies (“Central Bank Independence and Fiscal Policy: Can theCentral Bank Restrain Deficit Spending?” by Cristina Bodea andMasaaki Higashijima, British Journal of Political Science 47, 2017).
Central banks can restrain government fiscal policies by tightening
monetary policies by raising interest rates and limiting lending to theJapan SPOTLIGHT • January / February 2022

15government. The central bank’s discretion over monetary policy andits policy autonomy are stipulated in the central bank law. The issue
is whether governments abide by the agreement over the legal
independence of the central bank. In the case of authoritarianregimes, the dictator monopolizes power and thus legal
arrangements can be easily reneged on. Therefore, a high level oflegal central bank independence may not be regarded as a crediblemeans of preventing any policy intervention by politicians in the eyesof companies, investors, and consumers whose policy expectations
significantly influence policy outcomes.
Conversely, in democratic systems, executive leadership ismonitored and controlled by the legislative and judicial branches aswell as the media, which urges the government to abide by the law
stipulating the authority and autonomy of the central bank.
Therefore, the high level of legal central bank independence renders
high credibility. Consequently, the bank’s monetary policy is more
likely to impact government fiscal policy, as well as the people’sexpectations for macroeconomic policy.
We conducted an empirical analysis on the conditions under which
the fiscal deficit expands by using data on fiscal balances and central
bank independence from 78 countries around the world. Our analysis
found that the more democratic a country is (i.e., the higher levels ofexecutive constraints, media transparency, and judicial independenceare), the more likely legal central bank independence is to improvefiscal deficits in statistically significant ways. Our results indicate thatthe very existence of horizontal accountability, which is one of thetwo elements of modern democracy, allows central banks to act
independently and thus could affect government fiscal policy,maintaining policy rationalities.
The power of horizontal accountability is also important when
thinking about the manipulation of economic policies for the purposeof elections, or political business cycles. A large amount of research
indicates that squandering fiscal policies for election victories is lesslikely to be observed in advanced democracies, but becomes moresalient in new democracies. Using data covering 131 nations of both
democratic and authoritarian countries, my statistical analysis
investigates under what conditions fiscal deficits worsen during
election years. In less advanced democracies and electoral
authoritarian regimes where governments hold multi-party elections
but those elections suffer from various forms of electoral
manipulation, election years tend to experience increases in fiscal
deficit (“Political Business Cycles in Dictatorships” by Masaaki
Higashijima, WIAS Discussion Paper Series No. 2016-002). In
emerging democracies, horizontal accountability has not yet been
fully institutionalized. In electoral autocracies, governments often
exercise large-scale fiscal stimulus around elections to buy off
citizens’ votes to win elections overwhelmingly, thereby
demonstrating regime strength and popularity (The Dictator’sDilemma at the Ballot Box, by Masaaki Higashijima, Ann Arbor:
University of Michigan Press, 2022). In other words, governments
decide economic policies with long-term rationalities when
democracy is matured enough to hold robust horizontal
accountability.
16 Japan SPOTLIGHT • January / February 2022

The Role Expected in Vertical Accountability
Under Democracy
Economic policies that a government implements impact acountry’s economic development and social welfare in the long term.
Do democracies outperform autocracies in terms of promoting
economic growth and public health? Political scientists andeconomists have conducted a large amount of research on theimpact of democracy on economic growth and public health. In
democracy, the rule of law prevails and thus citizens’ property rights
are secured by effective horizontal accountability. Citizens whoseproperty rights are secured are able to concentrate on investment
without the fear of their assets being confiscated by government
authorities, leading to economic growth.
On the other hand, democracy also has a path of verticalaccountability. To win elections, governments may prioritize politicalsupport from the consumption-oriented masses over investmentoriented business elites. If this is the case, the introduction ofdemocracy may discourage investments, which are the driving forceof economic growth. From this perspective, authoritarian regimes
which prioritize investment-oriented business elites over the generalpublic may be more suitable for economic growth.
Which of these two theoretical expectations does data analysis
support? A vast amount of research on political regimes andeconomic growth has shown varying empirical findings, dependingon samples and statistical models. Most recently, however, Professor
Domenico Rossignoli of Università Cattolica del Sacro Cuore and hiscolleagues have conducted the largest ever meta analysis based on
188 research papers which appeared in the past 35 years, including
a total of 2,047 statistical models (“Does Democracy Cause Growth?
A Meta Analysis of 2000 Regressions,” by Marco Colagrossi,
Domenico Rossignoli, and Mario A. Maggioni, European Journal ofPolitical Economy 61, 2020). Their meta analysis indicates that
democracy has a positive direct impact on economic growth, andthat this trend is more notable in recent studies which conductcredible statistical analysis through casual inference methods andpolished data. Multiple studies have pointed out that economic
performance indicators such as economic growth rates tend to be
manipulated in favor of governments under authoritarian regimes.
Despite likely pro-government data biases in dictatorships, the meta
analysis suggests that democracy is more strongly and positively
correlated with economic growth compared to its counterpart, firmly
supporting the view that democracy does not hinder economic
growth, but rather promotes it.
The discussion thus far has indicated the possibility that thevertical accountability in democracies may not help nations scorebetter economic performance than horizontal accountability. In otherwords, some may wonder if politicians in a democracy could be too
preoccupied with the outcome of elections and therefore democracy
might not function well to offer anything beneficial to voters.
Protecting public health by social policies is an important role thegovernment plays. While the wealthy are able to enjoy ample medicalcare and social welfare, the poor cannot receive the necessary socialwelfare on their own. Introducing fair and free elections may allow
politicians aspiring to win elections to listen to the poor majority
rather than the wealthy minority. As a result, politicians may promotesocial policies that improve welfare for the poor. In other words,
vertical accountability may be likely to heighten earnest responses
from politicians regarding the policy needs of the general public.
To test this empirically, Dr. Susumu Annaka of Waseda Universityand I analyzed whether and how the introduction of free and fairelections contributes to improving public health by using panel dataon infant mortality rates from 172 countries between 1800 and 2015(“Political Liberalization and Human Development: Dynamic Effectsof Political Regime Change on Infant Mortality across Three
Centuries (1800-2015)” by Susumu Annaka and Masaaki
Higashijima, World Development 147, 2021). Our findings indicatethat immediately after democratization, governments quickly shift
their social and public policies to pro-poor directions, and suchpolicy changes tend to have positive impacts on the long-term
improvements in public health. In other words, governments start
adopting public policy packages to target a wider array of people
immediately after democratization, and such policy changes later
contribute to gradual improvement in infant mortality. Conversely,
when free and fair elections are undermined, such autocratization
leads to negative effects on infant mortality incrementally over time.
In line with our finding, Professor John Gerring of the University ofTexas at Austin and his colleagues also demonstrate that whencountries continue to hold free and fair elections – and therefore thelonger democracy lasts – such democratic consolidation isconducive to combatting infant mortality (“Democracy and HumanDevelopment: Issues of Conceptualization and Measurement”, byJohn Gerring et al, Democratization 28-2, 2021). What these data
analyses indicate is that the introduction and consolidation of verticalaccountability incentivize politicians to respond to the policy needs ofthe socially vulnerable, resulting in the significant improvement ofpublic health for citizens.

Is Democratic Governance Almighty?
The data analyses that I have introduced so far have indicated thepositive impacts of modern democracy. Can democratic governance,
then, claim to be almighty? Unfortunately, this is not necessarily thecase. For several socio-economic consequences, research makes it
clear that the mechanisms of democracies are not sufficient. The
most pertinent issue is wealth inequality. If democratic governments
are more likely to adopt policies that deal with poverty, democracy
can also be expected to promote wealth equality via taxation of thewealthy and redistribution of wealth to the low-income citizens.
However, data analysis on democracy and economic inequality has
not found such an empirical pattern to be very strong. Professor
David Stasavage of New York University and Professor Kenneth
Scheve of Stanford University point to the fact that, although taxing
the rich is a reasonable measure to aim for wealth equality, the lowincome class have varying opinions on whether such taxation is fair,
and thus such a policy might not obtain enough popular support. In

addition, in countries like the United States where economic
inequality is rising, the wealthy lobby political parties and politicians.
As a result, tax systems that benefit the rich are likely to bemaintained (Taxing the Rich: A History of Fiscal Fairness by Kenneth
Scheve and David Stasavage, Princeton: Princeton University Press,2016). If varying popular opinions on the fairness of taxation andlobbying by the rich are the likely causes of wealth inequality,advancing democratic institutions along the two dimensions ofaccountability may not be enough to combat growing economic
disparity in democracies.
Furthermore, there might be “unintended consequences” that weshould beware of as democracy progresses. One such issue is thegovernment response to economic crises. Professor Phillip Lipscy of
the University of Toronto studied the impact of political regimes on
financial crises by using panel data of 69 countries covering theperiod 1800 to 2009. His analysis indicates that when democracy ina country is more developed, the more likely it is for severe credit
crunches to occur, leading to a financial crisis including closures,
mergers, and nationalization of banks. He also claims that strong
horizontal accountability may be one of the important mechanismsthat create a banking crisis (“Democracy and Financial Crisis”, byPhillip Y. Lipscy, International Organization 72-4, 2018). Resonatingwith this, Dr. Daniel Hansen of Carnegie Mellon University argues
that when independent central banks have a policy preference for low
inflation, economic performances tend to be low after a bankingcrisis. Unemployment rates tend to remain high; domestic bankcredit stays low; stock market valuation experiences drop (“TheEconomic Consequences of Banking Crises: The Role of Central
Banks and Optimal Independence,” by Daniel Hansen, American
Political Science Review, Online First, 2021). These findings indicatethat the negative aspects of democrartic checks and balances mayappear, especially when swift responses are required to address acrisis.
As confrontation between democracy and autocracy intensifies,
authoritarian states may flaunt the superiority of their governance,and people living in democratic states may be faced with the various
grave issues that democracy carries. However, much research onpolitical regimes and their socio-economic consequences indicate
the fact that democracy has led us to a more desireable society andeconomy. But this does not mean that we can be content with thecurrent state of democracy. As long as democracy is an “unfinishedrevolution”, properly understanding the issues that democracy
cannot solve in its current form, and determining a path for therenewal of democracy, remain an urgent challenge.

Masaaki Higashijima is an associate professor of Political Science at Tohoku
University. His research interests include comparative political economy,democratization, and autocratic politics. His first book, The Dictator’s Dilemma
at the Ballot Box, is forthcoming from the University of Michigan Press (WeiserCenter for Emerging Democracies Series). He holds a Ph.D. in Political Sciencefrom Michigan State University.

Japan SPOTLIGHT • January / February 2022

17