Local Democracy and Economic Growth

51 Pages Posted: 1 Dec 2016

See all articles by Carl Henrik Knutsen

Carl Henrik Knutsen

University of Oslo - Department of Political Science

John Gerring

University of Texas at Austin

Svend-Erik Skaaning

Aarhus University

Date Written: November 1, 2016


Theoretical work on the institutional sources of economic growth regards decentralization and democracy in a positive light. Despite this, empirical work shows that neither fiscal decentralization nor national democracy is a robust predictor of per capita GDP growth. We argue that these theories have failed to bear fruit because they ignore the linchpin of decentralization and democracy, namely local democracy. Democracy at a local level enhances economic growth by enabling decentralized policy selection and incentivizing local politicians to select policies that benefit economic development, including the provision of local public goods. We test for the relationship using a novel measure of local democracy with global coverage and time series extending from 1900 to the present. We find robust evidence that local democracy nurtures growth. This relationship holds up when accounting for country- and year-fixed effects, when controlling for democracy at the national level, and when we treat our measure of local democracy as an endogenous regressor. Additional tests reveal that the relationship is clearer in contexts where our argument suggests that it should operate more strongly, namely (national- level) democracies and in periods and regions where local-level institutions have a more pronounced role in policy-making.

Suggested Citation

Knutsen, Carl Henrik and Gerring, John and Skaaning, Svend-Erik, Local Democracy and Economic Growth (November 1, 2016). V-Dem Working Paper 2016:39, Available at SSRN: https://ssrn.com/abstract=2877755 or http://dx.doi.org/10.2139/ssrn.2877755

Carl Henrik Knutsen (Contact Author)

University of Oslo - Department of Political Science ( email )

Moltke Moesvei 31
Olso, 0851

John Gerring

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Svend-Erik Skaaning

Aarhus University ( email )

Bartholins Allé 7
Aarhus, 8000

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