Campaign posters of opposition presidential candidate Mauricio Macri, above, and Buenos Aires’s governor and ruling party presidential candidate Daniel Scioli are seen in Buenos Aires, Friday, Oct. 23, 2015. In a suprise result, Macri won. But even before the result was known, investment increased. (AP Photo/Natacha Pisarenko)

If developing countries want to be prosperous and attract international investment, they should hold free and fair elections. That’s the takeaway from my analysis of data on elections and net investment flows in 157 countries between 1990 and 2013, which I presented in a recent paper in International Interactions.

Over the past years, illiberal democracy has been spreading across the developing world. By “illiberal democracy” I mean countries like Venezuela, Argentina, and Hungary, which hold elections but curtail civil liberties, where constitutions limit power in theory but where in practice the rule of law is flexible at best, and no one holds leaders to account.

For them, it may be useful to know that simply holding free and fair elections makes a big difference in attracting investment, whether a right- or left-leaning party wins the election or whether the country has a broader commitment to political rights.

Let’s look at why.

That’s what happened in Argentina and Venezuela

I’ll start with two recent examples of countries that had been run illiberally, but which held relatively free and fair elections that resulted in opposition victories: Argentina, which held elections in the fall, and Venezuela, which elected a new government in December. In both cases, voters replaced left-leaning and illiberal incumbents with center-right parties, precisely to improve the economy.

Even before the new governments could take any actions, investors responded. The Merval, Argentina’s stock index, increased 40 percent from the beginning of October, before the Oct. 25 election, to just after it at the end of the month — even before the completion of the second round of voting in early November. The bond markets improved even more, and  yields on the country’s 10-year bonds fell to just 2.25 percent. Meanwhile, in Venezuela, the Caracas Stock Exchange gained more than 35 percent in value between November and the week after the Dec. 6 election.

There are several theories about why

Political science has examined various theories to explain why international investors move money to countries with competitive  elections. David S. Brown et al. and Witold J. Henisz hold that governments reduce corruption, improve governance, and attract capital when a strong opposition can hold powerful presidents accountable. Presidents on the left need lawmakers on the right, and vice versa. Parties from the left and right tend to oppose one another and are less likely to collude to seize property than when the same party holds the presidency and the legislature.

Meanwhile, Brandon Julio argues that electing right-leaning governments tends to attract investment because investors look forward to their pro-business policies.

All true, but here’s another one: Fair elections invite confidence that the government will treat investors fairly, too

While the research supporting these explanations is strong, there’s yet another reason, I found.

Fair elections are critical not only because they hold a government accountable for its actions, but also because they signal to investors that this nation’s government respects democracy and the rule of law. Investors want reassurance that governments will respect their property and not seize or tax it at high rates, as was done by illiberal rulers like Venezuelan leaders Hugo Chávez and Nicolás Maduro, or Argentina’s Cristina Kirchner, or Zimbabwe’s Robert Mugabe.

But accurate information about how a government might treat an individual firm in a dispute is difficult to come by. Investors therefore watch elections carefully, use them to assess political risk, and let them inform investment strategies.

Many conclude that governments that violate electoral laws to stay in office would also be willing to violate investors’ property rights. Worse, they will probably get away with it — as Venezuela’s Chávez administration did from 1999 to 2013, and the Maduro administration has since then. If the election was rigged, and the leader is overriding laws and constitutional provisions, no one in the country can stand up to the government if and when it reneges on its promises. And so investment falls — because there’s a lot of economic risk in doing business in countries with unconstrained governments.

The technical stuff 

Here’s the technical background to how I reached these conclusions. I used regression analysis to estimate the relationship between fair elections and foreign investment in 157 countries over more than 20 years, enabling me to examine patterns in the data relating to a series of independent variables that could be considered potential causes of investment, such as fair elections and right-leaning government, as well as the potential effects — i.e., investment. For example, evidence of a positive connection between fair elections and investment is present only if investment increases after fair elections, on average, and mere chance cannot account for this pattern in the data.

I was therefore also able to evaluate each of the alternative explanations while holding the others constant. The results showed that investors do prefer right-leaning governments to left-leaning governments. But investors also overwhelmingly prefer fair elections to unfair elections, because they also send their money to countries with fair elections over those with unfair elections, on average.

One way to think about this result is that a country that switches from a left-wing government to a right-wing government will attract more investment than one that goes in the other direction, from right to left.  However, if two countries go from right to left, then the country with fairer elections will still attract more investment than the other. The same can be said for two countries moving from left to right.

Authoritarian governments should consider holding fair elections. It just might invite more prosperity

Haiti, the Central African Republic, Niger, Cape Verde, Uganda, Benin and many developing countries have scheduled elections for early 2016. It would be generous to categorize these countries as illiberal democracies. Observers might not therefore expect upcoming elections to be meaningful. But if they are, these countries would get an economic boost, no matter which party gets into power.

Unfortunately, politicians in many developing countries reject liberal democracy because free and fair elections may mean losing power. Perhaps they might consider that free elections send clear signals to those whose investments can stabilize economies and improve standards of living.

Free and fair elections bring a country increased revenue from both portfolio investment (such as stocks, bonds, and mutual funds) in the short term and Foreign Direct Investment (FDI, which includes building factories, training workers, through subsidiaries or joint ventures) in the long term.

This revenue could then be devoted to improving popular public services, such as health care and education, pleasing voters. Governments that hold free and fair elections may thus lose some short-term power, but gain prosperity, and potentially ongoing popularity.

Mike Touchton is an assistant professor of political science at Boise State University.