clubs, athletic associations), and educational bodies (e.g., schools, universi-
ties, vocational training centres). (1994:361)A bank is an organization that has an important influence on economic growth
through the resources it allocates to competing investment projects. Whether
banks promote growth depends in part on underlying institutions. A weak legal
system may lead to bank directors stealing money rather than investing it or to
politicians pushing banks to lend to politically favoured constituents rather
than productive businesses.
Democracy and dictatorship as institutions
There is a big debate among scholars of development about whether dictator-
ship or democracy is better at promoting economic growth and human devel-
opment,and the relation proves to be far more complex than the simplistic
sentiment that more democracy is good for everything.
Political systems are institutions; whether a country has democratic or dicta-
torial politics defines the rules by which individuals can acquire office, how
power changes hands and the relation of the political leadership with the judici-
ary and citizenry. The first problem is to measure democracy. We may reasonably
conclude that having frequent elections, a diverse media, free speech and rights
of assembly and a viable opposition party all make for a functioning democracy,
but how do we add all these variables into a single index so we can measure its
relationship with income levels and economic growth? If a country has more
regular elections but greater state control of the media has it become more or less
democratic? One effort is by the Economist Intelligence Unit (EIU) which has
been publishing a democracy index regularly since the 2000s. Countries’ scores
are based on the answers given by experts (though what sort of ‘experts’ is not
made clear) to questions relating to five categories: electoral process and plural-
ism,civil liberties, functioning of government, political participation, and polit-
ical culture. The answers are valued at one or zero and the five categories are then
av eraged to produce a measure of ‘democracy’. Depending on its score, a coun-
try is then classified as a full democracy, a flawed democracy, a hybrid regime or
an authoritarian regime. Researchers often also use an index produced by
Freedom House that seeks to measure civil liberties and political rights.
These various measures of democracy do show a clear link with income per
capita – richer countries are more likely to be democratic. The second problem,
however, is that this positive relation says nothing about causation. Is democ-
racy is a good political institution for promoting growth, so that democratiza-
tion leads to subsequent rapid economic growth? Or is democracy something
that emerges only in high-income countries? Some scholars have even
suggested that the two variables are not related, that a third factor can drive
both democracy and incomes. Chapter 9 examined the Acemoglu thesis which
stated that a country’s colonial history is an important determinant of its
Institutions 207