Democratization and Growth
London Business School Economics Working Paper
88 Pages Posted: 20 Jul 2004
Date Written: November 2004
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: Suggested Citation