Democracy and Growth: Evidence for Portugal (1960–2001)

Abstract

This paper examines the causal relationship between democracy and economic growth in Portugal over the period 1960–2001 within a VAR model with four variables: output, physical and human capital, and an index of democracy. We apply Granger causality tests and impulse-response functions to analyze causality and check how unexpected changes influence growth. Our main findings point to a bi-directional causality between democracy and growth. The impulse-response analysis suggests that in the short run democracy has a negative effect on growth in Portugal, but in the long run this effect is positive. Furthermore, we find that democracy also causes economic growth by increasing educational attainment.