Political competition, party structure and economic growth: Theory and evidence from Indian states

This paper uses a two period overlapping generations model with balanced growth to investigate the links arising among political competition, the effective number of political parties (ENP), the composition of government spending and the growth rate of the economy. The model highlights three hypotheses with respect to political competition and ENP. First, while a small rise in ENP is required to breakdown oligopolistic political power, a further rise will fragment the credibility of opposition to the incumbent governing party, lessening effective competition and leading to operational inefficiency and excessive government size. The second hypothesis argues that an increase in party competitiveness produces a compositional output response leading to a more consumption intensive package of government services. Third, effective party competition is complementary with economic growth. All three imply a non-monotonic relationship with ENP. A panel of annual data on 14 major Indian states spread over six decades is used to test these predictions and the results suggest that the data from Indian states fit well with the predictions of the model.