Political Polarization, State Capacity, and Economic Growth

Abstract

Political polarization is becoming an increasingly prominent feature of contemporary politics, but its implications for economic growth is less understood. The related literature remains largely theoretical, and few studies investigate the channels through which polarization influences growth. This study addresses this gap by examining if and how political polarization affects economic growth across a panel of 75 countries from 1990 to 2019. We find that political polarization, measured by the dispersion of self-reported political ideologies, negatively impacts economic growth. Moreover, we find that this effect occurs primarily through reduced private investment, human capital investment, and total factor productivity. However, we also find that strong state capacity, defined as the government’s ability to effectively implement policies, can mitigate the adverse effects of polarization on growth. 

Keywords: economic growth, political polarization, investment, total factor productivity, state capacity

JEL Classification: D72, O47