Political institutions and economic development over more than a century

Abstract

Economists and political scientists have long investigated the effect of political institutions on economic development, mainly focusing on cross-sectional analyses for the years after World War II. This paper takes a historical perspective and studies whether this effect can be traced back to 1870 and how it changed over time. Using both cross-sectional and panel fixed effects regressions, I show that democracy positively affects income per capita in the post-1950 period. The effect increases as time passes and becomes especially larger after 1990, i.e. with the great democratization wave induced by the Fall of the Iron Curtain. Yet, I find no effect for the period before 1950, when the variation in income per capita is mostly explained by prior income levels, and in particular, by education. These findings are robust to accounting for income dynamics as well as to using different data sources to measure political institutions.