First. If you develop the characters first, the plot first or do them iteratively... or just start to write and then edit to make the characters work in the final version is completely a question of taste and writing style.

You do not have to create the characters first.

You should, however, as I will get into below, have well-developed characters, plot, and theme to make the story work.

As has been mentioned in other answers, you use characters to create an emotional response in the reader and a connection with the story. However, there's more to it than that.

If you don't utilize characters fully in your story you're losing half your set of tools to create conflict. You're also making it much harder to make the theme of your story work. In the worst case scenario, you risk making the whole thing limp.

Inner conflict vs Outer conflict

A story usually has two versions of conflict. The inner conflict, taking place in the head of the character, and the outer conflict taking place in the world outside the character.

An important aspect of the inner conflict is about character development (a.k.a. change arcs). This development is usually about how the (main) character stops believing in the lie of the story and starts believing in the truth (positive change arc). Other versions exist; truth to lie (corruption change arc), lie to worse lie (fall arc), lie to depressing truth (disillusion arc).

The outer conflict is, in short how the characters (protagonist, antagonist, and various sidekicks) try to make their lies and truths manifest in the physical world.

The Flat Arc / Testing Arc

Apart from the above versions of character development, there's also a version where the character defends their truth against a lie-ridden world. This is called a flat or testing arc.

This type of character development is what you'll see in superhero stories, and may also be common in plot-driven stories. It may seem as if there is no character development, and there isn't... in the main character... but instead, it happens in other supporting characters around the main character.

Character development is all about the character changing their relationship to the truth and the lie in the story, however, even a flat arc character can evolve, learn new skills, become more confident in their truth, or more skillful in using it, they just never exchange their truth for the lie. Not even when they are sure their truth is about as effective against the lie as a straw of grass against a tornado.

Of course, just because the character doesn't change, doesn't mean they don't get a thorough beating in the story. They usually get to pay dearly for daring to believe in the truth. Sometimes even with their lives.

Character, Plot, Theme

The three elements character, plot, and theme are among the more important in a story.

The theme can be described as the conflict between a truth and an opposing lie (or the conflict between a group of related truths and an opposing group of related lies—it can get more or less complex).

The trick with the theme is to weave it into the story so skillfully the reader almost isn't consciously aware it's even there.

There are many ways this can be done but in short, it's about showing, not telling the lies and truths. If your characters never utter them in dialog, great! Or at least not have a long monolog about them... Instead, make the reader understand what the characters believe by their actions.

The theme connects to the characters by having the truths and lies cause character development.

The inner conflict consists of the protagonistic and antagonistic characters being proponents of the truth and lie respectively.

The outer conflict, the plot, is about these characters doing things to try to manifest their lies and truths in the outer world (i.e. shaping the world according to their beliefs). In doing so, they make the outer conflict a manifestation of the inner.

Without this triangle of theme, character, and plot, the story is at risk of seeming limp, illogical and/or superficial. Not to mention that with less developed characters it will only contain half the amount of conflict you could otherwise pack into it.

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