ABSTRACT

For decades, socio-economists have pondered on the “lead and led” relationship between economic freedom and political democracy. On the one hand, the Lipset hypothesis argues that economic prosperity, measured as increases in the standard of living, is the prerequisite for democracy (Lipset 1959; 1994; Lipset et al. 1993). However, after examining panel data from over 100 countries from 1960-90, Barro (1996) argued that economic freedom encourages economic growth, but that democracy can retard growth, and he concluded, “the overall effect of democracy on growth is weakly negative.” At most, democracy helps economic growth only at a low level of political freedom. Once a moderate level of freedom is achieved, democracy, in the form of severe income redistribution and political positioning that can lead to the dominance of interested groups, actually retards growth. On the other hand, the advocates of democracy (for example, Friedman 1962; Pourgerami 1994) believe that the two are mutually reinforcing and that democracy serves to foster economic growth.