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Income, growth, and democracy looking for the main causal directions in the nexus

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  • Paldam, Martin

Abstract

The development of the political system of countries is noisy, but in the longer run a strong relation to the economy emerges in the cross-country data for income, growth, and the main democracy indices. Two main theories explain these relations: (α) starts from the strong correlation between income and democracy, seeing income as the causal variable. It is the democratic transition, which is the political part of the theory of the grand transition. (β) starts from the much weaker correlation between democracy and economic growth, seeing democracy as the causal variable. This is a part of the primacy-of-institutions theory, where the political system is a key institution. The discussion needs (λ) a link-relation between growth and income. It connects the (α) and (β) theories, so that one may explain the other. The analysis looks at all six possible univariate relations between the three variables using kernel regressions on a large, unified data set. This method gives a clear picture. The strong α-relation can indeed explain the weak β-relation as spurious, but the weak β-relation predicts that the α-relation is very weak. Thus, (α) encompasses (β), but not vice versa.

Suggested Citation

  • Paldam, Martin, 2024. "Income, growth, and democracy looking for the main causal directions in the nexus," European Journal of Political Economy, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:poleco:v:83:y:2024:i:c:s017626802400034x
    DOI: 10.1016/j.ejpoleco.2024.102532
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    References listed on IDEAS

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    1. Paldam,Martin, 2021. "The Grand Pattern of Development and the Transition of Institutions," Cambridge Books, Cambridge University Press, number 9781316515501.
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    6. Colagrossi, Marco & Rossignoli, Domenico & Maggioni, Mario A., 2020. "Does democracy cause growth? A meta-analysis (of 2000 regressions)," European Journal of Political Economy, Elsevier, vol. 61(C).
    7. Paldam, Martin, 2018. "A model of the representative economist, as researcher and policy advisor," European Journal of Political Economy, Elsevier, vol. 54(C), pages 5-15.
    8. Daron Acemoglu & Simon Johnson & James A. Robinson & Pierre Yared, 2008. "Income and Democracy," American Economic Review, American Economic Association, vol. 98(3), pages 808-842, June.
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    3. Paldam, Martin, 2025. "The OPEC/MENA/Arab nexus and the missing democratic transition," European Journal of Political Economy, Elsevier, vol. 90(PB).

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    Keywords

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    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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