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The Relationship between Economic Growth and Democracy: Alternative Representations of Technological Change

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  • Heshmati, Almas

    (Jönköping University)

  • Kim, Nam-Seok

    (Sogang University)

Abstract

This study investigates the relationship between economic growth and democracy by estimating a nation's production function specified as static and dynamic models using panel data. In estimating the production function, it applies a single time trend, multiple time trends and the general index formulations to the translog production function to capture time effects representing technological changes of unknown forms. In addition to the unknown forms, implementing the technology shifters model enabled this study to find possible known channels between economic growth and democracy. Empirical results based on a panel data of 144 countries observed for 1980–2014 show that democracy had a robust positive impact on economic growth. Credit guarantee is one of the most significant positive links between economic growth and democracy. The marginal effects of credit guarantee and foreign direct investment inflows are stronger in democratic countries than they are in non-democratic ones. In order to check the robustness of these results, a dynamic model constructed with a flexible adjustment speed and a target level of GDP is also tested. The results of this dynamic model also support the positive impacts of democracy on economic growth.

Suggested Citation

  • Heshmati, Almas & Kim, Nam-Seok, 2017. "The Relationship between Economic Growth and Democracy: Alternative Representations of Technological Change," IZA Discussion Papers 10880, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp10880
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Democracy depends on financial markets too
      by Bruno Duarte in EUnomics on 2018-09-03 18:02:28

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    2. Kaya MUHAMMED VEYSEL & Yılmaz SUAT SERHAT, 2019. "Does Economic Growth Need Democracy? An Application on Islamic Countries with System-GMM Approach," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 1, pages 156-161.

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    More about this item

    Keywords

    economic growth; democracy; production function; single time trend; multiple time trends; general index; technology shifters; flexible adjustment speed; target level of GDP;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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