Does Democracy Promote the Rule of Law

Recent studies find that democracy increases economic growth but often do not address through what channels such an effect could travel. This study considers whether or not democracy strengthens the rule of law, an institutional measure purported to increase economic growth. Utilizing a panel dataset from 1984 to 2007 for 127 countries and both fixed effect and dynamic GMM methodologies, we examine whether democracy promotes the rule of law. We generally find a short run positive influence upon the rule of law although effects are greatest for low income countries.Keywords: Democratization, Institutions, Rule of Law, Economic GrowthJEL classification: O40, O50, O55(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONMany studies point to the importance of institutions for economic growth, including Acemoglu et al. (2001), Hall and Jones (1999), Engermann and Sokoloff (1997), and Dollar and Kraay (2003).1 Acemoglu et al. (2005) and Acemoglu (2010) provide surveys of this literature. North (1990) defines institutions as "the humanly devised constraints that shape human interaction." He asserts that institutions that secure property rights promote economic development. One specific component of institutions that has received attention is adherence to the rule of law. By "rule of law" we mean a judicial regime in which no one is above the law and everyone is equal before the law (Dicey, 1889). People abide by judicial decisions and people's day-to-day actions are generally lawful in that they do not conflict with legal codes. One reason to focus on the rule of law is its importance in protecting property and promoting productive activities. Rodrik et al. (2004) state that in principle the rule of law captures more elements describing institutional quality than do other measures.Given this presumed importance, a question then arises as to why the rule of law is more prevalent in some countries than in others. Some have examined the effects of long-run historical factors such as the degree of European influence or geographic factors. These factors determine the type of institutions which then affect long-run income levels. Hall and Jones (1999) and Acemoglu et al. (2001) provide examples. We examine a more contemporaneous factor. Specifically, we consider whether democracy promotes the rule of law and so whether democratization could then improve the rule of law.2 Using panel data estimation methodologies, recent studies show that democracy raises economic growth.3 Our study explores whether promoting the rule of law could be a channel that explains these findings.Barro (1996) considered a similar issue. He found that although greater maintenance of the rule of law is favorable to economic growth, he found little evidence that democracy promotes the rule of law. Our study differs from Barro's in several dimensions. First, Barro utilizes cross-sectional variation to identify long-run patterns. A possible problem of this specification could arise from omitted variable bias and reverse causality (Giavazzi and Tabellini, 2005). Second, a cross-country sample does not utilize the within country variation in the degree of democracy or adherence to the rule of law. A panel can exploit such variation. This could be especially important given Barro's application. His democracy variable comes from 1975 whereas his rule of law variable is from 1980. Therefore, he does not incorporate the post-1980 events into his analysis, including the large number of countries that democratized when the Soviet Union fell. Our study considers a panel dataset, spanning 1984 to 2010, and so considers these changes. Use of a panel also allows us to examine timing issues which were not feasible given Barro's approach. We consider short and long-run effects of democracy upon the rule of law. Perhaps democracy initially supports the rule of law but then the effects of democracy turn negative as rent-seeking becomes more frequent. …