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Democratization and Growth

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Author Info
Papaioannou, Elias
Siourounis, Gregorios

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Abstract

This paper challenges cross-sectional findings that democratic institutions have a negligible direct effect on economic growth. We employ a newly constructed data-set of permanent democratic transitions during the so-called Third Wave of Democratization and examine the within effect of democratization in countries that abandoned autocracy and consolidated representative institutions. We study democratization in a before-after event study approach that enables us to control for time-invariant country-specific effects and general time trends. The panel estimates imply that on average democratizations are associated with a one half to one percent increase in annual per capita growth. The dynamic analysis also reveals a J-shaped growth pattern: during the transition growth is slow and on average negative; in the medium and especially long run, however, growth stabilizes at a higher level. The evidence supports "development" theories of democracy and growth that highlight the positive impact of representative institutions on economic activity. They also favour Friedrich Hayek (1960)’s idea that the merits of democracy appear in the long run.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6987.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:6987

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Related research
Keywords: annual growth; democracy; event study; institutions; political economy;

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Find related papers by JEL classification:
C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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