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Democracy, Diversification, and Growth Reversals

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  • Cuberes, David

Abstract

There exists convincing evidence that democratic countries are less volatile. This conclusion is usually reached with respect to volatility as measured by the standard deviation of annual growth rates of per capita GDP which includes both low and high frequency fluctuations. However, recently several studies have documented that significant changes in trend-growth, such as growth accelerations that last a decade or similar periods of negative growth, are quite common. In this paper we ask whether democracy also has a stabilizing effect on trend-volatility, i.e. whether more democratic countries experience fewer and milder swings of trend-growth. We find a common phenomenon medium term reversals of growth, that is periods of exceptionally high growth are, on average, followed by periods of exceptionally low growth, and vice versa. The propensity to experience large swings of trend growth is not uniform across countries-less democratic countries are more susceptible to it. When compared with factors commonly associated with volatility such as measures of quality of institutions, macroeconomic policies and financial development, we find that democracy is the most robust predictor of a country's propensity for growth reversals. We construct a model in which non-democracies have high barriers of entry for new firms. This leads to less sectoral diversification: fewer sectors are operated but more resources are channeled to each. In an uncertain environment this leads to infrequent but large growth accelerations when one of the few sectors operated is successful. However, these accelerations are followed by large declines when fortunes change in favor of the missing sectors. We present empirical evidence that confirms the positive relationship between democracy and industrial diversification.

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  • Cuberes, David, 2008. "Democracy, Diversification, and Growth Reversals," MPRA Paper 8430, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:8430
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    2. Rougier, Eric, 2016. "“Fire in Cairo”: Authoritarian–Redistributive Social Contracts, Structural Change, and the Arab Spring," World Development, Elsevier, vol. 78(C), pages 148-171.
    3. Felipe Starosta de Waldemar, 2010. "How costly is rent-seeking to diversification : an empirical approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00461486, HAL.
    4. Lectard, Pauline & Rougier, Eric, 2018. "Can Developing Countries Gain from Defying Comparative Advantage? Distance to Comparative Advantage, Export Diversification and Sophistication, and the Dynamics of Specialization," World Development, Elsevier, vol. 102(C), pages 90-110.
    5. Madeeha Gohar Qureshi & Eatzaz Ahmed, 2012. "The Inter-linkages between Democracy and Per Capita GDP Growth: A Cross Country Analysis," PIDE-Working Papers 2012:85, Pakistan Institute of Development Economics.
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    8. Fabbri, Giorgio, 2017. "International borrowing without commitment and informational lags: Choice under uncertainty," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 103-114.
    9. Maria Petrova & Robert H. Bates, 2012. "Evolution of Risk and Political Regimes," Economics and Politics, Wiley Blackwell, vol. 24(2), pages 200-225, July.
    10. Lorenzo Burlon, 2017. "Public expenditure distribution, voting, and growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(4), pages 789-810, August.
    11. Adam, Antonis & Delis, Manthos D. & Kammas, Pantelis, 2011. "Are democratic governments more efficient?," European Journal of Political Economy, Elsevier, vol. 27(1), pages 75-86, March.
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    18. Ivar Kolstad & Arne Wiig, 2014. "Diversification and democracy," CMI Working Papers 9, CMI (Chr. Michelsen Institute), Bergen, Norway.
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    22. Francesco Lamperti & Clara Elisabetta Mattei, 2016. "Going Up and Down: Rethinking the Empirics of Growth in the Developing and Newly Industrialized World," LEM Papers Series 2016/01, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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    24. Seim, Anna Larsson & Parente, Stephen L., 2013. "Democracy as a middle ground: A unified theory of development and political regimes," European Economic Review, Elsevier, vol. 64(C), pages 35-56.

    More about this item

    Keywords

    Democracy; growth reversals; diversification; structural breaks;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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