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How does democracy cause growth?

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  • Vanessa Boese-Schlosser
  • Markus Eberhardt

Abstract

Recent empirical work has established that ‘democracy causes growth’. In this paper, we determine the underlying institutions which drive this relationship using data from the Varieties of Democracy project. We sketch how incentives and opportunities as well as the distribution of political power shaped by underlying institutions, in combination with the extent of the market, endogenously form an ‘economic blueprint for growth’, which likely differs across countries. We take our model to the data by adopting novel heterogeneous treatment effects estimators, which allow for non-parallel trends and selection into institutional change, and run horse races between underlying institutions. We find that freedom of expression, clean elections, and legislative executive constraints are the foremost drivers of long-run development. Erosion of these institutions, as witnessed recently in many countries, may jeopardise the perpetual growth effect of becoming a liberal democracy we establish for the post-WWII period.

Suggested Citation

  • Vanessa Boese-Schlosser & Markus Eberhardt, 2023. "How does democracy cause growth?," Discussion Papers 2023-13, Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP).
    • Handle: RePEc:not:notnic:2023-13
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    More about this item

    Keywords

    Democracy; Growth; Institutions; Interactive Fixed Effects; Difference-in-Difference;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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