Does democratization lower consumer prices? Regime type, prices, and the consumer–producer tradeoff
| Date | 01 March 2019 |
| Published date | 01 March 2019 |
| DOI | 10.1177/0192512117731264 |
| Subject Matter | Articles |
https://doi.org/10.1177/0192512117731264
International Political Science Review
2019, Vol. 40(2) 145 –160
© The Author(s) 2017
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DOI: 10.1177/0192512117731264
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Does democratization lower
consumer prices? Regime
type, prices, and the
consumer–producer tradeoff
Andy Baker
University of Colorado Boulder, USA
Stefan Wojcik
Data Scientist, USA
Abstract
The booming literature on the consequences of democratization for material welfare has produced no
findings on the relationship between regime type and relative consumer prices. The literature largely shows
that democracies favor masses over elites, generating the expectation that democratization should lower
consumer prices. Yet it also finds that democratization boosts economic growth, an outcome that is partially
contingent on making consumer goods expensive relative to capital goods. We argue that democratization
lowers relative consumer prices since politicians under democracy can more effectively chase votes by
satisfying consumers’ demands for the immediate payoff of lower prices. Our statistical analysis of 160-plus
countries over 60 years shows that democratization raises consumer advantage, which is the consumer
price level relative to the price level of capital goods. We also provide evidence of the policy levers that
democratizing countries have used to achieve this effect.
Keywords
Democratization, regime type, prices, consumer–producer tradeoff
Any market society features a subtle struggle between consumers and producers over pricing, but
states are also involved in tilting the playing field in one direction or the other. Some states favor
consumers by allowing for unfettered market activity in most sectors, while others advantage
incumbent producers by stifling competition with monopolistic and oligopolistic firms. Since
Corresponding author:
Andy Baker, Department of Political Science, University of Colorado Boulder, Ketchum 115, UCB 333,
Boulder, CO 80309, USA.
Email: Andy.Baker@Colorado.edu
731264IPS0010.1177/0192512117731264International Political Science ReviewBaker and Wojcik
research-article2017
Article
146 International Political Science Review 40(2)
states are so crucial in shaping where societies lie in this consumer–producer tradeoff, it is surely
the case that political institutions, and especially the fundamental nature of a political regime,
influence price levels.
To date, however, the now-booming literature on the consequences of democracy for mate-
rial welfare has produced no findings on the relationship between regime type and relative
consumer prices. In general, the literature finds that, relative to continued autocracy, democra-
tization favors the masses over elites on several grounds, such as welfare state size (Brown and
Hunter, 1999) and exchange rate policy (Leblang, 1999; Steinberg, 2015). One might thus
expect democracies to have lower consumer prices, yet democratization also boosts the rate of
economic growth (Acemoglu et al., forthcoming), an outcome that is partially contingent on
having sufficiently high consumer prices. After all, economists have shown that low prices on
consumer goods relative to those on capital goods are a major drag on productivity gains
because low consumer prices encourage immediate consumption at the expense of investment
(De Long and Summers, 1991).
We argue and find empirical support for the hypothesis that democratization lowers relative con-
sumer prices since politicians under democracy can more effectively chase votes by satisfying con-
sumers’ demands for the immediate payoff of lower prices. In making our argument, we introduce a
new statistical measure to the literature on political institutions and economic outcomes. ‘Consumer
advantage,’ the ratio of capital goods prices to consumer goods prices, improves on previous attempts
to gauge where societies sit in the consumer–producer tradeoff. We demonstrate our argument about
the consumer-friendliness of democracy to be true, using time-series evidence from more than 160
countries over a 60-year period. We also provide evidence of the policy levers that democracies have
used – lower barriers to entry on foreign consumer goods, foreign capital, and domestic business – to
lower relative consumer prices. Through the channel of relative consumer prices, democratization
thus produces a mild headwind against productivity improvements by tilting prices against producer
interests, a finding that provides an important counterpoint to the mounting body of evidence that
shows democracy to be beneficial for economic growth. In essence, our argument and findings resur-
rect Huntington’s (1968) half-century-old argument that autocracies should grow more quickly than
democracies because dictators could more easily suppress or ignore citizens’ demands for immediate
consumption, in turn forcing savings and shifting economic resources toward investment. At the
same time, while Huntington’s claim was fundamentally correct in its direction, it was probably exag-
gerated in its magnitude. Privileging consumption is clearly not fatal to economic growth since dem-
ocrats can (and, according to evidence amassed elsewhere, do) pursue it via other channels.
Regime type and the consumer–producer pricing tradeoff
In every society, a quiet battle exists between consumers and producers. Consumers want low
prices on goods and services, and producers of these items wish to charge high prices while paying
low ones for their own inputs. Much of this implied tug-of-war takes place in the myriad day-to-
day decisions that are made in the marketplace. States, however, can weigh in on one side or the
other, and to do so they have a wide variety of policy levers at their disposal, such as market-entry
regulations, trade policy, exchange rate regimes and levels, price controls and subsidies, and taxa-
tion (Stigler, 1971). To be sure, the struggle between consumers and producers is not entirely zero-
sum. For example, consumers benefit from a healthy investment environment, since it leads to
productivity gains that eventually increase supply and lower prices. Similarly, taxation and other
means of raising prices on capital goods and production are passed on, at least partially, to consum-
ers. Despite this, a substantial divergence in short-term interests with respect to pricing remains
between the two groups, and each economy, under the influence of the state and its policy levers,
takes a different stance in this tradeoff.
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