Does Consensus Democracy Improve Economic Outcomes? Anna Colley Worcester College, Oxford University March 2018 Introduction Of unparalleled importance to the framers of democratic constitutions is the relationship obtaining between the nature of the institutions adopted and performance. In Patterns of Democracy (2012), Lijphart recommends the consensus model of democracy over the majoritarian model in virtue of delivering superior economic outcomes. Yet, in this essay, I will reject Lijphart’s conclusion that consensus democracy improves economic outcomes by arguing that the causal relationship he identifies is spurious. Firstly, I will address Lijphart’s ad hoc identification of outliers and confounding variables. Once all outliers are excluded and economic openness controlled for, the statistical significance he finds is undermined. Subsequently, I will question the appropriateness of his inclusion of interest group corporatism as a component of consensus democracy. And, lastly, I will suggest that Lijphart’s case selection is to his advantage, for no robust relationship between consensus democracy and economic outcomes is established amongst a sample of ten younger democracies. Definitions Lijphart’s typology of democracies is simple: majoritarian democracies are governed by majority rule, whereas consensus democracies seek to maximise agreement. Following Lijphart, I will focus exclusively on the executives-parties dimension of his majoritarian- consensus dichotomy 1 . To operationalise ‘economic outcomes’, I will ignore the growth rate of Gross Domestic Product on the basis that Lijphart’s empirical analysis found no statistical significance between this and the executives-parties dimension and will look solely at inflation, as measured by the Consumer Price Index, and unemployment. Theoretical Argument The theoretical basis for Lijphart’s claim is far from implausible. Consensus democracies tend to contain a greater number of veto players than majoritarian democracies; hence, their economic policies are likely to find greater stability and broader support (Lijphart, 2012; Tsebelis, 2002). Both of these attributes go some way to justify ascribing superior economic outcomes to consensus democracies. 1 Lijphart’s executives-parties dimension is comprised of five variables. A consensus democracy has a dominant legislative, a multiparty system, a proportional electoral system, corporatist interest groups, and unconcentrated executive.
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Does Consensus Democracy Improve Economic Outcomes?
Anna Colley
Worcester College, Oxford University
March 2018
Introduction
Of unparalleled importance to the framers of democratic constitutions is the relationship
obtaining between the nature of the institutions adopted and performance. In Patterns of
Democracy (2012), Lijphart recommends the consensus model of democracy over the
majoritarian model in virtue of delivering superior economic outcomes. Yet, in this essay, I
will reject Lijphart’s conclusion that consensus democracy improves economic outcomes by
arguing that the causal relationship he identifies is spurious. Firstly, I will address Lijphart’s
ad hoc identification of outliers and confounding variables. Once all outliers are excluded and
economic openness controlled for, the statistical significance he finds is undermined.
Subsequently, I will question the appropriateness of his inclusion of interest group
corporatism as a component of consensus democracy. And, lastly, I will suggest that
Lijphart’s case selection is to his advantage, for no robust relationship between consensus
democracy and economic outcomes is established amongst a sample of ten younger
democracies.
Definitions
Lijphart’s typology of democracies is simple: majoritarian democracies are governed by
majority rule, whereas consensus democracies seek to maximise agreement. Following
Lijphart, I will focus exclusively on the executives-parties dimension of his majoritarian-
consensus dichotomy1. To operationalise ‘economic outcomes’, I will ignore the growth rate
of Gross Domestic Product on the basis that Lijphart’s empirical analysis found no statistical
significance between this and the executives-parties dimension and will look solely at
inflation, as measured by the Consumer Price Index, and unemployment.
Theoretical Argument
The theoretical basis for Lijphart’s claim is far from implausible. Consensus democracies
tend to contain a greater number of veto players than majoritarian democracies; hence, their
economic policies are likely to find greater stability and broader support (Lijphart, 2012;
Tsebelis, 2002). Both of these attributes go some way to justify ascribing superior economic
outcomes to consensus democracies.
1 Lijphart’s executives-parties dimension is comprised of five variables. A consensus democracy has a dominant
legislative, a multiparty system, a proportional electoral system, corporatist interest groups, and unconcentrated
executive.
In the first place, it is not unreasonable to suppose that consensus democracies will
outperform majoritarian democracies in key indicators of economic performance in virtue of
having more stable economic policies. Sharp reversals of economic policy undeniably have
damaging repercussions on the rates of inflation and unemployment; and such reversals are
not uncommon amongst majoritarian democracies, where the two dominant parties take turns
as government and opposition. These reversals, or rather potential reversals, translate into
uncertainty as legislative elections draw near, too. And as Canes-Wrone and Ponce de Leon
note, uncertainty surrounding economic policy delays investment, particularly in capital and
other sunk costs (Canes-Wrone & Ponce de Leon, 2014). This is then associated both with a
reduction in the creation of new employment opportunities and with a reduction in the growth
of output that generally tempers price increases. Yet this is not the only way in which the
detrimental effect had on economic outcomes by the volatility of economic policy within
majoritarian democracies is exacerbated. Policymakers face a greater temptation to use the
fiscal tools at their disposal to stimulate a short term economic boom such that they stand a
higher chance of re-election, too. Myopically, suboptimal short term economic policies are
thus favoured (Aisen & Veiga, 2011).
In the second place, there is certainly some force behind Lijphart’s argument that the
decisions concerning economic policy reached by the governments of consensus democracies
are likely to be more successful than those of their majoritarian counterparts in virtue of
representing a greater section of society (Lijphart, 2012).
But there are strong counterarguments to consider.
The many veto players within consensus democracies indeed generate a demand for broad
agreement; but they do not ensure that this is supplied (Anderson, 2001). It is therefore quite
possible for consensus democracy to be altogether rather undeserving of its name. It is, after
all, obvious that the more veto players there are, the more difficult it becomes to reach an
agreement satisfactory to all. Less obvious, but no less important for economic outcomes, is
the decrease in the relative size of each political grouping. This increases their motive to
pursue particularist interests. Hence, consensus democracy need not necessary entail more
effective representation, nor more durable and acceptable economic policies.
Beer’s maxim ‘representative government must not only represent, it must also govern’
captures the traditional hypothesis that majoritarian democracies deliver more effective
policies than consensus democracies (Beer, 1998). Much can be said in favour of this
hypothesis; indeed, much literature has, with Lowell going so far as to state his ‘axiom’ that
one-party cabinets are required for effective policy (Lowell, 1896). One supportive point
meriting mention here is that majoritarian democracies can respond more quickly to
exogenous aggregate demand and supply shocks.
There are, then, strong theoretical arguments both for and against Lijphart’s claim. Whether
or not consensus democracies really do outperform majoritarian democracies in their control
of inflation and unemployment consequently becomes a purely empirical matter. Prima facie,
the statistically significant relationship Lijphart finds between these variables appears to
settle the dispute. But this can be doubted. I propose to do just this by probing his treatment
of outliers, control variables, components, and cases in turn.
Empirical Analysis
A: Lijphart’s Findings
Lijphart’s empirical analysis finds a statistically significant relationship between both
inflation and unemployment and consensus democracy. For every one percentage point
increase in the extent to which a country fits the consensus model of democracy, his
multivariate regression indicates a fall in inflation by almost one-and-a-half percent and a fall
in unemployment by nearly two percent.
B: Identifying and Excluding Outliers
However, Lijphart gives no procedural justification for identifying Israel and Uruguay as
outliers with respect to inflation and seemingly omits to consider whether any democracy’s
unemployment ought to be treated as an outlier.
As figure 1 demonstrates, in fact a third country, namely, Jamaica, has an average annual
inflation rate that should be excluded from Lijphart’s analysis; and, regarding unemployment,
Jamaica and Spain are outliers and as such should be excluded.
Figure 1: Boxplots depicting inflation and unemployment for Lijphart’s thirty-six
Lijphart’s prescription that constitutional engineers should favour the consensus model of
democracy to yield the best economic outcomes may be queried for another reason. Setting
aside any concerns about outliers, controls, and conceptualisation, the conclusion Lijphart
draws from his sample of democracies may not be generalisable across the wider population.
Lijphart’s case selection may be to the advantage of his hypothesis. His thirty-six
democracies represent the rather uniform experience of Latin America and southern Europe;
of his cases, just ten are outside these geographical regions and only six are presidential.
There is then a real concern that the choice of political institutions by the countries within his
sample and their economic performance depends upon a cultural factor. This makes sense of
Fortin’s (2008) inability to replicate Lijphart’s findings for nineteen Eastern European
countries, and the fact that Croissant and Schächter (2009) again fail to replicate Lijphart’s
findings, this time across nine Asian countries between the 1980s and 2005.
Neither of these studies adopt Lijphart’s definition of democracy or operationalisation of the
components of the executives-parties dimension exactly. So, to test whether the positive
relationship he finds between consensus democracy and economic outcomes within his
sample is merely a result of his selection of cases according to constructive consensual
culture, a new sample of democracies meeting his definition and operationalisation must be
taken.
Following Liphart in using Freedom House’s rating of a country as free to determine whether
it qualifies as a democracy, provided that its population exceeds a quarter of a million, a
sample of ten countries newly democratic between the years 1998 and 2015 can be drawn.
These are: Belize, Benin, Bulgaria, Cape Verde, El Salvador, Estonia, Guyana, Hungary,
Latvia, and Lithuania2.
In calculating the executives-parties index for these countries, I refrained from including a
measure of interest group corporatism, partly due to a lack of data and partly due to the lack
of a justification for doing so. I followed Lijphart in measuring the effective number of
parties according to Laakso and Taagepera’s index (Laakso and Taagepera, 1979)3. I
operationalised the concentration of power within cabinets as the percentage of minimal
winning one-party cabinets. To measure executive dominance, I stuck to Lijphart’s choice of
average cabinet duration. For electoral system disproportionality I calculated Gallagher’s
index for each legislative election within the time period and took the mean. To then collate
these four variables into a single index, I adjusted each to make the mean zero and standard
deviation one after making taking the negative of the effective number of parties4.
The components of the executive-parties index for the ten new democracies show similar
interrelations to that of Lijphart’s thirty-six. Hence, there is good reason to expect that, if
Lijphart’s sample is duly representative, then his finding will be reproduced.
2 Chile also was democratic throughout the period 1998 to 2015 and was not included in Lijphart’s analysis.
However, I was unable to follow Lijphart’s method of personally adjusting his measure of executive dominance-
average cabinet duration-for presidential systems and as such deemed it better to omit Chile from my sample. 3 This I did for each legislative election held within the years 1998 to 2015 inclusive and then found the average. 4 So that a higher value for each component indicates a more consensus system.
Figure 3: Correlation matrix for the four components of the executive-parties dimension for
the new sample of democracies
Scaled
effective
number of
parties
Scaled
percentage of
minimal winning
one-party
cabinets
Scaled index
of executive
dominance
Scaled index of
electoral
disproportionality
Scaled effective
number of parties 1 0.734 0.714 0.381
Scaled percentage of
minimal winning one-
party cabinets
0.734 1 0.906 0.322
Scaled index of
executive dominance 0.714 0.906 1 0.421
Scaled index of
electoral
disproportionality
0.381 0.322 0.421 1
Figure 4: Correlation matrix for the first four components of the executives-parties
dimension for Lijphart’s 36 democracies
Effective
number of
parties
Percentage of
minimal winning
one-party
cabinets
Index of
executive
dominance
Index of electoral
disproportionality
Effective number of
parties 1 -0.801 -0.652 -0.603
Percentage of minimal
winning one-party
cabinets
-0.801 1 0.733 0.549
Index of executive
dominance -0.652 0.733 1 0.561
Index of electoral
disproportionality -0.603 0.549 0.561 1
However, there is no significant relationship between consensus democracy and economic
outcomes: both when following his original controls and when also controlling for economic
openness.
Figure 5: Regression results for ten new democracies