Growth volatility and the interaction between economic and political development

Abstract

Research on the effect of democracy on economic growth has not reached a definitive conclusion. Yet, research on the effect of democracy on economic growth volatility has consistently found that higher levels of democracy reduce volatility. Similarly, research has found that higher levels of economic development retard volatility. Using a novel empirical approach, this article presents evidence of an interactive effect between higher levels of democratization and economic development on growth volatility. Specifically, the marginal effect of political development on volatility is negative until countries reach per capita income levels of about $2,700, depending on the conditioning set. The marginal effect is insignificant for countries with higher levels of income. This implies that at a minimum, nearly 50% of the countries in our sample could enjoy less volatile economies with greater political development.