Does democratization spur growth?

Many studies have considered how democratization affects economic growth. We expand this work by allowing short‐ and long‐run effects of democracy upon growth to differ since effects during political transitions need not coincide with those under established democracies. We also allow these short‐ and long‐run effects to differ across world regions since history, demography and geography vary across regions. Using annual, cross‐county data from 1960 to 2010, we find that democratizations increased growth rates in sub‐Saharan Africa both in the short run and in the long run but lowered them in Europe. Effects in other regions appear less strong. Our results suggest that democracy could be most beneficial for growth in poorer, less stable regions. We also do not find any evidence of a transitional cost. Stronger evidence arises that these effects come from rising productivity rather than through greater investment. Finally, some support though mixed suggests that democracy's ability to mitigate the effects of ethnic heterogeneity provides a partial explanation for the cross‐regional heterogeneity.     

Does Democracy Increase Growth More in New Countries?

Countries face governing challenges at their inception, albeit not of the same degree or type. Challenges such as creating governing structures and forming one nation from disparate groups can create uncertainty and so lower economic growth. Does democracy exacerbate or lessen such problems? This paper considers an empirical specification where the effect of democracy upon economic growth is allowed to vary over time. I find that democracy is more greatly associated with economic growth in newer countries. This suggests that democracy helps to mitigate governing challenges that can lower economic growth.     

Democracy and growth

Growth and democracy (subjective indexes of political freedom) are analyzed for a panel of about 100 countries from 1960 to 1990. The favorable effects on growth include maintenance of the rule of law, free markets, small government consumption, and high human capital. Once these kinds of variables and the initial level of real per capita GDP are held constant, the overall effect of democracy on growth is weakly negative. There is a suggestion of a nonlinear relationship in which more democracy enhances growth at low levels of political freedom but depresses growth when a moderate level of freedom has already been attained. Improvements in the standard of living—measured by GDP, health status, and education—substantially raise the probability that political freedoms will grow. These results allow for predictions about which countries will become more or less democratic over time.     

Immigration,Ethnic Diversity,and Political Outcomes: Evidence from Denmark

I study the impact of immigration and increasing ethnic diversity on political outcomes in immigrant‐receiving countries, focusing on immigration and election outcomes in Danish municipalities between 1981 and 2001. A novel instrumental variable strategy based on historical housing stock data addresses issues of endogenous location choices of immigrants and a rich set of control variables is employed to isolate ethnic diversity effects from those of other immigrant characteristics. Increases in local ethnic diversity lead to rightward shifts in election outcomes by shifting electoral support away from traditional “big government” left‐wing parties and towards anti‐immigrant nationalist parties. This holds for both local and national elections.     

Fiscal decentralization and government size: The role of democracy

This paper examines how the level of democracy in a country affects the relationship between fiscal decentralization and government size. We argue that political regimes, proxied by their democracy levels, are important for different decentralization theories to predict the impact of fiscal decentralization on government size. We test this argument using panel data from 76 developed and developing countries during 1972–2013. We find strong and robust evidence that fiscal decentralization is negatively associated with government size and that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. Therefore, our study contributes to the literature by offering a novel insight on mixed results regarding the relationship between fiscal decentralization and government size in the literature.     

Democracy and prosperity in two decades of transition1

This article revisits the relationship between democracy, liberalization and prosperity in transition countries, using a panel of 25 countries over 20 years. Earlier investigations found political and economic liberalization to be positively correlated although the relationship between political liberalization and prosperity remained unclear. In this article, the results are ambiguous regarding the relationship between democracy indicators by Freedom House and the Polity Project on one hand and growth on the other. This contribution therefore investigates the component variables of these indicators to determine their degree of influence. The findings suggest that basic constitutional rights and constraints on the government rather than political competition as such may be conducive to both economic liberalization and prosperity in the transition countries.     

Political institutions and economic volatility

We examine the effect of political ‘institutions’ on economic growth volatility, using data from more than 100 countries over the period 1960 to 2005, taking into account various control variables as suggested in previous studies. Our indicator of volatility is the relative standard deviation of the growth rate of GDP per capita. The results of a dynamic panel model indicate that democracy reduces economic volatility. We also find that some dimensions of political instability and policy uncertainty increase economic volatility.     

Economic growth in a politically fragmented world

I explore the effects of economic and political integration on economic growth in a model of vintage human capital and sequential intergenerational bargains. Adoption of a new technology raises not only the productivity but also the bargaining position of the future generations, creating a bias for the current generations to preserve the current technology. Economic integration (i.e., the sharing of frontier technology among countries) promotes growth if there is a diversity in human capital distribution or a coordination failure across countries. On the other hand, political integration (i.e., the merging of countries into a single bargain) promotes stagnation as it eliminates the diversity and coordination failures.     

Forms of democracy and economic growth volatility

Using a panel of 140 countries over the 1975–2007 period, we disaggregate democracies across five institutional dimensions (government forms, electoral rules, state forms, number of veto players, and age of democracies), to study the precise forms of democracy that may explain the lower economic growth volatility (EGV) in democracies compared to dictatorships, usually emphasized by the literature. We find that, while all government forms decrease EGV to the same extent, proportional electoral rules outperform majoritarian and mixed electoral rules, suggesting a role for a more inclusive political decision-making process. In addition, EGV is significantly lower in unitary states, suggesting a role for a limited separation of power between the central government and the local authorities, while the effect of the number of veto players and the age of democracies is significant only in developed countries. Consequently, the choice between various forms of democracy may not be neutral for EGV, and, possibly, for countries' development path.     

Growth volatility and the interaction between economic and political development

Research on the effect of democracy on economic growth has not reached a definitive conclusion. Yet, research on the effect of democracy on economic growth volatility has consistently found that higher levels of democracy reduce volatility. Similarly, research has found that higher levels of economic development retard volatility. Using a novel empirical approach, this article presents evidence of an interactive effect between higher levels of democratization and economic development on growth volatility. Specifically, the marginal effect of political development on volatility is negative until countries reach per capita income levels of about $2,700, depending on the conditioning set. The marginal effect is insignificant for countries with higher levels of income. This implies that at a minimum, nearly 50% of the countries in our sample could enjoy less volatile economies with greater political development.     

Nationalism and government effectiveness

Nation-building is believed to have a positive influence on economic and political outcomes, especially in countries with ethnically fragmented populations. Yet nationalism, an indicator of successful nation-building, has been empirically linked to protectionism and intolerance, which suggests that dismal performance is a more likely outcome. This paper empirically identifies an inverted U-shaped relationship between nationalism and government effectiveness. The results suggest that the level of nationalism in the population is higher than optimal in most countries. It is further shown that nationalism may mitigate the negative effects of ethnic heterogeneity in former colonies. We find no clear linkages between nationalism and trade openness.     

Political democratization, economic liberalization, and growth volatility

This study empirically investigates the effects of political and economic liberalization on growth volatility using a difference-in-difference method for a sample of 158 countries over the 1970-2005 period. The results show that, when examined separately, economic liberalization leads to a significant reduction in volatility while democratization is not followed by a decrease in growth volatility. For countries that undertake only one liberalization, opening up the economy to international trade reduces volatility in growth; becoming a democracy, on the other hand, seems to increase macroeconomic instability. For countries that implement both political and economic liberalizations, no statistically significant effect on volatility is detected. These results serve to provide additional support for the policy recommendation that developing countries should liberalize their economy first and then consider political liberalization.     

Culture and Economic Performance: Policy as an Intervening Variable

The role of cultural factors in determining relative rates of economic growth is shown to involve the interrelationship between cultural factors and governmental ability to institute growth-oriented policies in addition to the direct effects of cultural values on recognized economic forces. The role of culture can exert, therefore, a substantial indirect component and that component depends directly upon the form of government and political conditions in the different countries.     

Rent‐Seeking,Market Structure,and Growth

We study the role of productive and unproductive entrepreneurship in economic growth, in a setting where firms compete in both economic and political markets. Specifically, firms compete for market share through cost‐reducing technological innovation, and they vie for influence over government transfer policy through rent‐seeking activities. We find that rent‐seeking affects growth in two ways: it allows firms to ignore economic competition, leading to less innovation, and it alters the number of firms that are supported in equilibrium. The former effect is negative, while the latter is ambiguous. We show how these effects depend on various characteristics of economic and political markets.     

Income,inequality, and the stability of democracy — Another look at the Lipset hypothesis

This paper studies the endogenous emergence of political regimes, in particular democracy, oligarchy and mass dictatorship, in societies in which productive resources are distributed unequally and institutions do not ensure political commitments. The political regime is shown to depend not only on income levels, but also, in particular, on resource inequality. The main results imply that under any economic environment a distribution of resources exists such that democracy is the political outcome. This distribution is independent of the particular income level if the income share generated by the poor is sufficiently large. On the other hand, there are distributions of resources for which democracy is infeasible in equilibrium regardless of the level of economic development. The model also delivers results on the stability of democracy. Variations in inequality across several dimensions due to unbalanced technological change, immigration or changes in the demographic structure affect the scope for democracy or may even lead to its breakdown. Among other historical examples, the results are consistent with the different political regimes that emerged in Germany after its unification in 1871.     

Are government transfers harmful to economic growth? A meta-analysis

A common perception is that government transfers are harmful to economic growth. However, existing empirical evidence on this point is mixed. Potential reasons for these conflicting results include differences in the level of economic development of the countries studied, different estimation methods and different measures of government transfers. By conducting a meta-analysis of 149 estimates reported in 23 studies, we sought to understand if – and if so, to what extent – government transfers are harmful to economic growth, as well as how important the abovementioned reasons are in explaining different findings in the literature. We found that government transfers are more detrimental to economic growth in developed countries compared to less-developed countries because such transfers can have a non-monotonic effect on growth. When government transfers are substantial, as they are in developed countries, they tend to reduce growth. We also found that the growth effects of government transfers are sensitive to the measurement of the transfers, i.e., studies that use unemployment benefits instead of social security tend to report a stronger negative growth effect.     

Does economic openness affect liberal and electoral democracy in a different way? Empirical evidence from developing countries

The focus of this paper was to empirically analyze the impacts of economic liberalization on the liberal and electoral democracy in a sample of 106 less developed and developing countries over the period 1970–2016. The economic relationship between these countries and the global trade and the financial system generates a crucial question of to what extent political conditions are affected by this changing relation. To test these relationships, this paper uses V‐Dem's liberal democracy and electoral democracy indices and nine economic liberalization variables. Utilizing two‐step system dynamic panel GMM estimation indicates that trade openness and economic globalization, de facto strongly affects electoral democracy.     

Did support for economic and political reforms increase during the post‐communist transition,and if so,why?

We study the dynamics of individual support for changes in the economic and political system, using a unique dataset for 12 transition economies over the period 1991–2004. We document that support for transition was initially lower in the CIS countries and that there has been a converging trend in the support for reforms between the CIS and the Baltic and Central and Eastern European countries. We suggest several explanations for the initial divergence and the post‐98 convergence in support for transition between these three groups of countries, and show that economic growth, declining income inequality and improving quality of governance have contributed to increase the support for transition. In addition, we find that increased support for the market economy and democracy in the CIS is accompanied by a larger increase in trust towards the political institutions. Our results also confirm the implications of Aghion et al. ( 2010 )'s model of a negative correlation between trust and the demand for government regulation.     

Natural resources and the tradeoff between authoritarianism and development

Why do African and Middle Eastern countries seem cursed by an abundance of natural resources yet USA, Australia and Norway seem blessed? A growing literature has argued that the benevolence or malignance of natural resources depends upon the quality of institutions. This paper offers a new explanation based on associational freedom and its interaction with the political system. The model predicts that natural resources have an adverse impact on economic performance and transition to democracy in authoritarian regimes but not in democracies. It also predicts that repression of associational freedom will be increasing in natural resources in authoritarian regimes. I test the model's predictions using fixed-effects regressions on an international panel from 1975 to 2000 and find support.     

Political instability and economic growth

This paper investigates the relationship between political instability and per capita GDP growth in a sample of 113 countries for the period 1950 through 1982. We define political instability as the propensity of a government collapse, and we estimate a model in which such a measure of political instability and economic growth are jointly determined. The main result of this paper is that in countries and time periods with a high propensity of government collapse, growth is significantly lower than otherwise. We also discuss the effects of different types of government changes on growth.