Democratization and Growth

London Business School Economics Working Paper

88 Pages Posted: 20 Jul 2004

See all articles by Elias Papaioannou

Elias Papaioannou

London Business School; Centre for Economic Policy Research (CEPR)

Gregorios Siourounis

London Business School

Date Written: November 2004

Abstract

This paper challenges recent empirical findings that democratic institutions have a negligible direct effect on economic growth. We delve into numerous historical sources and democracy indicators to identify the countries and timing of recent democratization episodes. We then employ a before-after event study approach and analyze the impact of democratization on growth in countries that have managed to abandon autocratic rule and consolidate democratic institutions. In contrast to previous studies, we primarily explore the within country effect of a permanent democratization, controlling for time-invariant country-specific effects. The dynamic panel estimates imply that democratizations, on average, are associated with an almost one percent increase in real per capita growth. The analysis also reveals a noteworthy J-shaped growth pattern: during the transition growth is slow and even negative; after, however, the third post-democratization year growth peaks and stabilizes at higher level. The effect is robust to various model specifications, panel methodologies, alternative democratization dates, and to the potential endogeneity of democratization. From a theoretical standpoint the evidence offers direct support for development theories of democracy and growth that highlight the positive impact of representative institutions on economic activity. They also favor the old Aristotelean notion, recently rephrased and updated by Friedrich Hayek (1960), that the merits of democracy will come in the long run.

Keywords: event study, democratic changes, growth, institutions, political economy

JEL Classification: O40, C30, E60

Suggested Citation

Papaioannou, Elias and Siourounis, Gregorios, Democratization and Growth (November 2004). London Business School Economics Working Paper. Available at SSRN: https://ssrn.com/abstract=564981 or http://dx.doi.org/10.2139/ssrn.564981

Elias Papaioannou (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gregorios Siourounis

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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