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Economic and Political Liberalizations

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  • Giavazzi, Francesco
  • Tabellini, Guido

Abstract

This Paper studies empirically the effects of and the interactions amongst economic and political liberalizations. Economic liberalizations are measured by a widely used indicator that captures the scope of the market in the economy, and in particular of policies towards freer international trade (cf. Sachs and Werner, 1995; Wacziarg and Welch, 2003). Political liberalizations correspond to the event of becoming a democracy. Using a difference-in-difference estimation, we ask what are the effects of liberalizations on economic performance, on macroeconomic policy and on structural policies. The main results concern the quantitative relevance of the feedback and interaction effects between the two kinds of reforms. First, we find positive feedback effects between economic and political reforms. The timing of events indicates that causality is more likely to run from political to economic liberalizations, rather than vice versa, but we cannot rule out feedback effects in both directions. Second, the sequence of reforms matters. Countries that first liberalize and then become democracies do much better than countries that pursue the opposite sequence, in almost all dimensions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4579.

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Date of creation: Aug 2004
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Handle: RePEc:cpr:ceprdp:4579

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Keywords: democracy; development; economic reform; growth;

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