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.     

Democracy,rent seeking,public spending and growth

Does democratization imply faster growth, less corruption and less inefficiency? Past studies yield ambiguous results on the effects of democracy on economic performance and growth. We develop a simple two-sector endogenous growth model that shows both very young and mature democracies grow faster than countries in mid stages of democratization, producing a ‘U’ effect. This effect results from the pattern of rent seeking as it diverts from the provision of public goods. Rent-seekers act as monopolistic competitors. Initially, more democracy increases their number, raising aggregate rents. However, rents per rent-seeker fall with the number of rent seekers. Due to this crowding effect and the increased competition among rent seekers, aggregate rents fall in mature democracies. Thus, rents show an ‘inverted-U’ effect in relation to democracy. We find fairly robust supportive evidence for the latter.     

Is democracy good for growth? — Development at political transition time matters

Is democracy a better political regime for economic prosperity than autocracy? This paper shows that the answer depends on the initial economic development level during the democratic transition when the foundation of institutions was laid. Democracy facilitates growth only in countries that already have adequate development at transition time. These countries are more likely to create and sustain growth-enhancing institutions than others. Without appropriate development, democracy does not improve growth; this applies to about 40% of the third-wave democratized countries. These results are based on a sample of 153 countries in 1960–2010 and robust to various specifications and endogeneity issues.     

A comparison of clustering dynamics in the US and UK computer industries

This paper compares the dynamics of the process by which geographical clusters emerge in the US and UK computer industries, by modelling the evolution of firm growth and entry. In both countries, new companies are attracted by industry strength in particular sub-sectors in a particular region. Moreover, incumbent firms located in a cluster that is strong in their own sub-sector of the industry tend to grow faster than average. While there are some second order differences between the models estimated for the US and the UK, it appears that the dynamics of clustering are similar. In particular, there is no evidence that clustering effects are weaker in the UK than in the US.     

The growth effect of democracy and technology: An industry disaggregated approach

The theoretical and empirical sides of democracy-growth literature fail to offer a consensus on the impact of democracy on growth. This paper provides a disaggregated manufacturing approach that reveals different effects of democracy across industries within countries. I surmise that the interplay between democracy and technological development is crucial to the economic performance of industries. A panel dataset of 61 manufacturing industries from 72 countries between 1990 and 2010 is employed, along with a wide variety of democracy measures. The results point to a technologically-conditioned effect of democracy. Political regime changes towards democracy are growth-enhancing for industries close to the World Technology Frontier but have a negative effect on backward industries. This evidence is robust to specification changes and alternative estimation techniques, and prevails once the possible dynamics of manufacturing growth are tackled.     

Political Institutions, Capital Flows, and Developing Country Growth: An Empirical Investigation

The paper examines the real per-capita growth effects of the quality of democracy, the rule of law, and capital flows in developing countries. The direct growth effects of democracy are positive and often statistically significant. Moreover, the estimates from a three-stage least-squares regression offer evidence that democracy has indirect growth effects that work by encouraging schooling and that the rule of law influences growth indirectly by encouraging foreign direct investment. A higher FDI to GDP ratio is associated with a faster growth rate. The estimated growth effect of the FDI to GDP ratio is several times higher than the estimated growth effect of the domestic investment to GDP ratio. By contrast, this study does not find a clear asso-ciation between other types of capital flows and growth.     

Democracy, Governance, and Economic Growth: Theory and Evidence

The paper examines how democracy affects long-run growth by influencing the quality of governance. Empirical evidence is first presented showing that measures of the quality of governance are substantially higher in more democratic countries. A general-equilibrium, endogenous growth model is then built to show how a governance-improving democracy raises growth. In this model, stronger democratic institutions influence governance by constraining the actions of corrupt officials. Reducing corruption, in turn, stimulates technological change and spurs economic growth. Empirical evidence is presented showing that democracy is in fact a significant determinant of total factor productivity (TFP) growth between 1960 and 1990 in a cross-section of countries. But this contribution occurs only insofar as stronger democratic institutions are associated with greater quality of governance.     

Endogenous lifetime and economic growth

Endogenous mortality is introduced in a two-period overlapping generations model: probability of surviving from the first period to the next depends upon health capital that is augmented through public investment. High mortality societies do not grow fast since shorter lifespans discourage savings; development traps are possible. Productivity differences across nations result in persistent differences in capital-output ratios and relatively larger gaps in income and mortality. High mortality also reduces returns on education, where risks are undiversifiable. When human capital drives economic growth, countries differing in health capital do not converge to similar living standards, ‘threshold effects’ may also result.     

The heterogeneous effect of oil discoveries on democracy

This paper evaluates the existence of a resource curse on political regimes using the Synthetic Control Method. Focusing on 12 countries, we compare their democracy level with the weighted democracy level of countries that have not experienced oil shocks and have similar pre‐event characteristics. We find that the exogenous variation in oil endowment does not have the same effect on all countries. In most cases, the event has a negative effect in the long run, but countries with a pre‐existing high level of democracy are not negatively affected.     

Democracy and Economic Growth: Optimal Level and Transmission Channels

After evening out all the benefits and costs, the overall optimal level of democracy is about 3.2, on a scale of 1 to 7. On average, fully dictatorial countries have a conditioned growth rate of –1.113 percent, fully democratic countries have a conditioned growth rate of 1.146 while countries with the optimal level of democracy/autocracy have a conditioned growth rate of 2.665. In the case of a fully dictatorial country, moving one unit towards democracy can raise the GDP growth rate by about 1.725 points; while for a fully democratic country, moving towards autocracy by one unit can raise the growth rate by about 0.885 points. This study provides useful information for many developing countries which are experiencing substantial pressures to restructure their political system.     

Democracy-growth nexus and its interaction effect on human development: A cross-national analysis

This paper examines the democracy-growth nexus and its interactive effect on human development by using cross-national panel data spanning over 20 years incorporating the effect of democratization process. We find evidence that the effect from democracy to human development is nonlinear and varies depending on the levels of growth and democracy. The results confirm that the interaction effect of democracy-growth nexus has a positive impact on human development but the effect is sensitive to democratization process and the level of a country's economic development. It is established that democracy is more crucial in developed countries, whereas economic growth is vital in developing countries. The findings imply that the role of democracy in enhancing human development should not be overemphasized as economic growth is vital in the developing countries.     

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.     

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.     

Ethnicity, Politics and Economic Performance

The paper investigates the effects of ethnic diversity on economic performance. Previous studies have found that diversity has various detrimental microeconomic effects, tending to reduce public sector performance, and has large detrimental effects on the overall growth rate. I develop a simple model of the effect of ethnic diversity on a government decision problem in which there is a tradeoff between growth and distribution, in the contexts of democracy and dictatorship. I find that in democracy ethnic diversity has no effect upon the decision, whereas in dictatorship ethnic diversity leads to a government choice which reduces the growth rate. I then test these propositions on two data sets. The first is for 94 countries over the period 1960–1990. I find that whether diversity adversely affects overall economic growth depends upon the political environment. Diversity is highly damaging to growth in the context of limited political rights, but is not damaging in democracies. The second is for World Bank projects in 89 countries. I find that the same relationship between diversity and democracy affects the proportion of projects which are successful.     

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.     

Does tourism influence economic growth? A dynamic panel data approach

On average, tourism-specialized countries grow more than others. This is not consistent with the core of modern economic growth theory that suggests that economic growth is linked to sectors with high-tech intensity and large scale. In this article, we use appropriate panel data methods to study the relationship between tourism and economic growth. In general, we show that tourism is a positive determinant of economic growth both in a broad sample of countries and in a sample of poor countries. However, contrary to previous contributions, tourism is not more relevant in small countries than in a general sample.     

Democracy vs. dictatorship

A democratic society is often regarded as a prerequisite for economic growth and development. Yet, most empirical studies are not capable of identifying a positive link between GDP growth and democracy indexes. In addition, it is a stylized empirical fact that: (i) most developing countries are dictatorships; and (ii) many poor dictatorships have experienced high growth performances and emerged from poverty such as South Korea, China and Egypt. Against this background, it is of interest to analyse in which ways the growth performance between autocratic and democratic economies may differ, in particular among low-income countries. To answer this question, we compare the endogenous growth paths of two economies that differ only in their political regimes in the context of an overlapping generations model. The key features of the model are: (i) a positive bequest motive in the form of investments in education or productive public capital (infrastructure); (ii) a higher marginal (inter-temporal) utility of consumption today versus consumption tomorrow in low-income countries (for example, subsistence level of consumption); and (iii) a dictator that cares about her income or the income of her dynasty tomorrow. In this framework, we demonstrate that poor but large and stable dictatorships exhibit a higher equilibrium growth rate than comparable (equally poor) democracies. Moreover, there exists a particular threshold value in income such that the growth-reducing impact of dictatorial consumption (corruption) outweighs the higher (initial) public investments. Above this, the growth rate under democracy dominates the one in dictatorship.     

Economic Growth and Political Regimes

The absence of continuous regime type measures that focus on institutions rather than outcomes besets studies on whether democratic or authoritarian regimes grow faster. Additional shortcomings include the failure to consider development stages and the erroneous endogenous specification of regimes. Given panel data on 105 countries from 1960 to 1989, the effective party/constitutional framework measure does not correlate with growth or investment in the total sample. But considering development levels, some evidence indicates that discretion decreases growth in advanced areas, and, contrary to theory, inhibits investment in poorer countries. Also, single-party dictatorships have higher investment ratios but do not grow faster than party-less regimes.     

Global dynamics,capabilities and the crisis

The financial crisis started in 2007–8, initially in the US, but its consequences have been felt throughout the global economy. However, its effects were far from uniform. While parts of Asia and Africa continued to grow fast, Europe experienced a large set back. This paper emphasizes three important factors: differences across countries in technological development; differences in capacities to exploit the opportunities offered by technology; and differences in the ability to compete in international market. A formal model, based on this approach, is developed and applied to data for 100 countries in the period 1997–2012. Empirical indicators reflecting the various factors are developed, a dataset constructed and econometric estimates of the model performed. The results are used to explore the factors behind the slowdown in economic growth, with a particular emphasis on the continuing stagnation in Europe. A major factor turns out to be the increased financialization of the economy. The negative effect of the growth of finance prior to the crisis is especially pronounced for the countries that suffered most during the crisis.     

Democratization is the driving force for technological and economic change

The purpose of this paper is to analyze the relationship between democratization and technological innovation. In primis, the paper shows, through economic history, that democratization is an antecedent process (cause) to technological and economic change (effect). In particular, the primary finding is that democratization is a driving force for technological change: most free countries, measured with liberal, participatory, and constitutional democracy indices, have a higher level of technology than less free and more autocratic countries. In fact, “democracy richness” generates a higher rate of technological innovation with fruitful effects for the wellbeing and wealth of nations. These findings and predictions lead to the conclusion that policy makers need to be cognizant of positive associations between democratization and technological innovation paths in order to support the modern economic growth and future technological progress of countries.