Heo Tan 2001 notes

Following Seymour Martin Lipset's seminal work on the socioeconomic prerequisites of democracy, numerous social scientists have theorized and tested the relationship between democracy and economic development.
The "third wave" of democratization has increased interest in understanding this relationship.
Despite extensive studies, there remains no clear consensus on the causal relationship between democracy and economic performance.

Economic Growth Drives Democracy:
- Some scholars believe that economic growth leads to social mobilization, which eventually drives political mobilization and democratization.
- Economic growth generates new social classes that demand social transformation.
Democratization Leads to Economic Growth:
- Other scholars argue that as nations democratize, their economies develop faster, as individuals gain confidence that their property will be protected—a condition primarily fulfilled in democratic societies.
No Systematic Relationship:
  - A third group suggests there is no consistent relationship, citing reasons such as:
    - Economic development is influenced by various factors beyond democracy.
    - Democratization can be influenced by multiple social, political, and economic stimuli.

Justification for Granger Approach:
- Previous studies often used cross-sectional approaches, assuming high similarity among countries which may not be valid.
- A longitudinal approach is necessary to examine the dynamics between economic development and democratization.
Focus on Endogeneity:
- The study doesn't assume a predetermined direction of causation (either economic growth leading to democracy or the reverse).
Consideration of Delayed Relationships:
- Acknowledges the possibility of delayed responses between the two variables and investigates these dynamics.

Seymour Martin Lipset:
   - Proposed a positive relationship: the more economically advanced a nation, the greater the likelihood of sustaining democracy.
   - He identified factors like industrialization, wealth, urbanization, and education as supportive of democracy.
   - Concluded that a prominent generalization is that democracy correlates with economic development.
Bilson:
- Argued economic development allows dynamic societal elements to gain status and wealth, promoting political freedom.
Pennar et al.:
- Suggested economic growth leads to democracy through rising education levels and relative deprivation.
Mancur Olson:
- Emphasized the institutional framework's impact on economic performance, claiming that democracies, due to stronger protection of property rights, foster greater economic growth compared to autocracies.
Sirowy and Inkeles:
- Linked democratic governance and civil liberties with favorable conditions for economic growth.
Leblang:
- Found that stronger property rights in democracies correlate with faster economic growth.

Various datasets measure democracy; notable ones include Gastil's Freedom House, Gurr's Polity II, Bollen's data, and Arat's scores.
Selected Arat’s longitudinal dataset covering 1950-1982 for 32 developing countries due to better sensitivity to democratic fluctuations.
Economic growth was operationalized using GDP measured in local currencies, as suggested by Sen to avoid inflation/deflation impacts of currency exchange variations.

The Granger causality method tests whether one variable predicts changes in another by including lagged terms.
Operational formulas:
  - To test if X Granger causes Y:
    - $Y_t = a + \beta_1 Y_{t-1} + \beta_2 X_{t-1} + ext{error}$
  - To check if Y Granger causes X:
    - $X_t = a + \beta_1 X_{t-1} + \beta_2 Y_{t-1} + ext{error}$
The appropriate lag length is determined using the Schwartz information criterion.

Results from Granger Causality Tests:
  - Economic growth causes democracy in 11 (34%) of the countries studied.
  - Democracy causes economic growth in 10 (31%) countries.
  - 3 countries exhibit a feedback relationship.
  - 8 countries show no significant relationship.
Contrasts found:
- Findings indicate economic growth does not universally sustain democratic systems, aligning with Arat’s conclusions but differing from Burkhart and Lewis-Beck's results which indicate a one-way causation from economic growth to democracy only.

The study reveals no definitive causal direction between democracy and economic growth; outcomes suggest that causation could flow in either direction.
Recommendations for future research include:
- Utilizing a more complex operationalization of democracy.
- Considering various influencing factors, such as development timing, geophysical characteristics, economic strategies, and international relations.
It highlights the necessity to integrate these factors into causal assessments of democracy and economic growth.