Income and Democracy: Lipset's Law Inverted

Abstract

In this article, we revisit Lipset’s law (Lipset 1959), which posits a positive and significant relationship between income and democracy. Using dynamic panel data estimation techniques that account for short-run cross-country heterogeneity in the relationship between income and democracy and that correct for potential cross-section error dependence, we overturn the literature's recent set of findings of the absence of any significant relationship between income and democracy and in a surprising manner: We find a significant and negative relationship between income and democracy: higher/lower incomes per capita hinder/trigger democratization. We attribute this result to the nature of the tax base. Decomposing overall income per capita into its resource and non-resource components, we find that the coefficient on the latter is positive and significant while that on the former is significant but negative. In the Sub-Saharan Africa (SSA) portion of the sample where the relationship runs from political institutions – i.e. democracy – to economic performance – i.e. income, democracy is found to positively and significantly affect income per capita, which slowly converge to its long-run value as predicted by current democracy levels: SSA countries may thus be currently too democratic to what their income levels suggest.