Democracy in Transitional Economies and Sustainable Development

Democratic institutional framework is crucial for long term sustainable development especially in transitional economies (North, 1990). Well-defined and enforced institutional framework increases the economic growth through reducing transaction costs, by efficient allocation of resources, and by restricting rent seeking activities. Various studies empirically investigate the growth effects of democracy but remain inconclusive – few predict positive association while others find negative association between democracy and economic growth. In this study, we analyze the impact of democratic institutions on economic growth in transitional/developing economies. We focus in particular upon “middle income” countries, which are typically launched upon a process of economic development but are still in a transitional phase. In these countries we find considerable heterogeneity in quality of democratic institutions. When we look across these countries we find that some countries grow even with low level of democracy but other fail to achieve sustainable economic growth with strong democracy. In some countries quality of democracy remains persistence over the longer period of time but in some countries it is highly volatile like in Pakistan. Hence, it is important to analyze whether quality of democracy is important for growth or persistency is crucial for sustainable development. This study empirically explores this question using a panel data set for transitional i.e. middle income, countries over the period 1985-2015. We also examine the particular aspects of transition economies in term of level and persistence of democracy. This study will provide policy-relevant conclusions. Methodology: Our modeling framework is the “MRW” model – the “conditional convergence” model of Mankiw, Romer and Weil (1992) augmented with indicators of the democracy. To analyze the growth effects, we employ a panel data set of 50 developing/transitional economies drawn from the World Bank’s “middle income” group. The dynamic nature of this modelling framework leads us to use a GMM approach to estimation and the extent of cross-sectional variation leads us to prefer the “System GMM” estimator of Blundell and Bond (1998). Data on the extent of democracy is available from POLITY IV. This index emphasizes the institutional characteristics of democracy, as measured by competitiveness of political participation, competitiveness of executive recruitment, openness of executive recruitment and constraints on the chief executive. Will be shared