conflicts and democratic political institutions can be a useful means of manag-
ing conflict. In the face of an adverse shock (such as higher world oil prices)
democracies tend to be better at allocating the costs of that shock across differ-
ent groups: for example, whether higher import prices should be reflected in
lower wages, lower government spending or lower company profits. Collier
(2010) finds that the positive effects of democracy only occur when GDP per
capita reaches about $3,000; below this level democracy exacerbates political
conflict and violence.
There is good evidence that democracies do better on wider measures of
development. Rodrik (1998b) finds that democracies pay higher wages after
taking account of labour productivity, income levels and other determinants of
wages. In countries undergoing transitions from dictatorship to democracy,
such as Chile, Turkey, Argentina, Brazil, Hungary, Spain, Greece and Portugal
there is a significant increase in the level of wages relative to labour productiv-
ity. This case-study approach shows that the relationship runs from democracy
to higher wages, not the reverse. Przeworski et al. (2000) find that in poor
countries (below $3,000 per capita) democracies and dictatorships have simi-
lar rates of investment and productivity growth, but that patterns of growth
diverge in wealthier countries. Like Rodrik they find that wealthier democra-
cies pay higher wages; they also find democratic governments spend more on
social security, health,housing, recreation and culture (2000:237). It seems
that democracy increases the bargaining power of labour and pushes politi-
cians to court workers through offering higher wages. These processes do not
reduce the rate of economic growth over the longer run. Przworski et al.(2000)
find that higher wages in democracies are offset by higher productivity of
labour.
Property rights as institutions
Well-protected property rights can make economic exchange cheaper and so
increase the level of income in a country. Transaction costs are the sum total of
the costs of undertaking an exchange, such as selling/buying an orange.
Transaction costs include comparing prices between the various sellers of
oranges, measuring the attributes of the orange (taste, freshness, weight) and
protecting agreements (ensuring the orange is handed over by the seller and the
buyer has freedom to use it as he/she wishes). Without the protection of a legal
system the seller of the orange may feel it necessary to employ bodyguards to
prevent the buyer taking and refusing to pay for the orange. Good institutions
reduce the transaction costs associated with economic exchange. A legally
protected right to return a defective orange will enable the buyer to reduce the
time and effort expended in testing the orange for freshness/quality before
purchasing it.
There is no reason to suppose institutions (or even organizations) will
ev olve to maximize economic efficiency. North argues:
212 Patterns and Determinants of Economic Growth