However, the large difference in GDP in the subsequent years shows that the increase in GDP in Figure 1 is not merely an artifact of the dynamics of GDP in the years preceding a political transition.įinally, in addition to controlling for country and year fixed effects, we use an instrumental variables (IV) strategy to overcome omitted variable bias. This means we are effectively comparing the path of GDP following a democratization, with the path of GDP following an ‘almost democratization’ (those countries that look likely to have a transition based on the trajectory of prior GDP).Īs Figure 2 shows, there is no difference in the years prior to the democratization (even those years not used to predict the propensity score). We predict the probability of democratizing based on four years of GDP, and then reweight country-years. The propensity score reweighted data can be seen in Figure 2. (2013), to correct for the effects of GDP dynamics. Our second strategy is to adapt to our panel context propensity-score-based matching estimators, proposed in Angrist and Kuersteiner (2012) and Angrist et al. To overcome any possible Nickell bias, owing to lagged dependent variables, we show our results hold with generalized method of moments (GMM) estimators, as proposed by Arellano and Bond (1991), and Hahn et al. Given the pattern in Figure 1, our first strategy is to control for lags of GDP in linear regressions, including a full set of country and year fixed effects. Importantly, we allow for and estimate explicit dynamics of (log) GDP using a number of different strategies. This leads to a 0-1 measure of democracy for 184 countries annually from 1960 (or post-1960 year of independence) to 2010. We use information from both the Freedom House and Polity data sets, as well as other codings of democracies, to resolve ambiguous cases. We build on the important work by Papaioannou and Siourounis (2008) to develop a dichotomous index of democracy, purged of spurious changes in democracy scores available in the standard datasets, and rely on this measure for most of our analysis. We deal with all these challenges in our study. Even with year and country fixed effects, changes in democracy may be correlated with other changes or respond to current or future economic conditions, raising obvious omitted variable bias concerns (Acemoglu et al.A reliable estimate of the impact of democracy on future GDP therefore needs to model and estimate the dynamics of the GDP process. As shown in Figure 1, democratizations are preceded by a temporary fall in GDP.Existing democracy indices are typically subject to considerable measurement error, leading to spurious changes in the democracy score of a country even if its democratic institutions do not truly change.There are several challenges in estimating the impact of democracy on growth: These are large but not implausible effects, and suggest that the global rise in democracy over the past 50 years (of over 30 percentage points) has yielded roughly 6 percent higher world GDP. Our central estimates suggest that a country that switches from non-democracy to democracy achieves about 20 percent higher GDP per capita in the long run (over roughly the next 30 years). Our results show a robust and sizable effect of democracy on economic growth. (2014), we present evidence from a panel of countries between 19 challenging this view. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century ” The study But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. “One-party non-democracy certainly has its drawbacks. Meanwhile, reacting to the rise of China, New York Times columnist Tom Friedman argues: Robert Barro’s seminal research in this area concluded that “ore political rights do not have an effect on growth…The first lesson is that democracy is not the key to economic growth” (Barro 1997: 1 and 11). The central estimates suggest that a country that switches from non-democracy to democracy achieves about 20 percent higher GDP per capita over the subsequent three decades.Ī belief that democracy is bad for economic growth is common in both academic political economy as well as the popular press. In this column, we discuss new evidence showing that democracy has a robust and sizable pro-growth effect. Many analysts view democracy as a neutral or negative factor for growth. ( Note: this post originally appeared in ) Democracy sees higher GDP due to greater civil liberties, economic reform, increased investment and government capacity, and reduced social conflict.
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