Democratisation and Growth

Abstract

This article challenges cross-sectional findings that democracy has a negligible effect on growth. We employ a new dataset of political transitions during the Third Wave of Democratisation and examine the within effect of democratisation in countries that abandoned autocracy and consolidated representative institutions. The panel estimates imply that on average democratisations are associated with a 1% increase in annual per capita growth. The dynamic analysis reveals that: while during the transition growth is slow, in the medium and long run it stabilises at a higher level. This evidence favours development theories of democratic rule and Friedrich Hayek (1960)s idea that the merits of democracy appear in the long run. Leading politicians and commentators have argued that democratisation will bring prosperity and growth into pariah and economically poorly performing countries. 1 Others, however, remain sceptical, pointing to the mixed and inconclusive empirical evidence. The old debate dating back to Plato and Aristotle, on which political regime is socially and economically optimal arises again. This debate is not purely academic and philosophical as it has important policy implications. In the last thirty years, the world has experienced an unprecedented move towards democratic institutions. Influential policy makers and scholars urge Western authorities to foster democratic movements in totalitarian countries; see The Economist article Philosophers and Kings (June 19th 2003). Yet the question remains: Will democratisation bring economic growth? To assess the average growth effect of a successful democratic transition we analyse the evolution of annual real per capita GDP growth before and after incidents of permanent democratic reform in the 1960‐2003 period. In our analysis we exploit a newly constructed dataset of permanent democratisations during the so-called Third Wave of Democratisation and the 1990s when many former socialist countries moved towards representative rule. The panel results reveal new evidence that contrast with the previous, mainly cross-sectional, work. First, conditioning on time-invariant country characteristics and global shocks, a permanent democratisation is associated with approximately a one half to one per cent increment in annual real per capita GDP growth. Second, a dynamic J-shaped effect emerges with considerable (though not * This article is a major revision of an earlier paper titled Aristotle Was Right: Stable Democracy Fosters