Abstract
This paper examines the indirect effect of democracy on economic growth using a dataset of 17 MENA countries from 1990 to 2015. Democracy is assumed to affect growth through a series of channels: education, health, physical capital accumulation per labor, government consumption, and trade openness. A system of six simultaneous equations using 3SLS, is used to estimate the effect of democracy on growth through these channels. For further analysis, the countries are classified into groups according to the democratic status on the one side, and the level of income on the other. The results indicate that democracy enhances growth through its positive effect on health in all classifications of countries within the MENA region. However, the effect of democracy on growth through education and physical capital/labor is non-monotonic. Democracy hinders growth through government size and trade openness. Once all of these indirect effects are accounted for, the overall effect of democracy on growth is negative in less democratic countries and poor countries, but positive in more democratic countries and rich countries.
Highlights
The direct relationship between democracy and economic growth has been widely investigated in the literature in the last 50 years, and several theories have been developed regarding the relationship between the two variables
The main purpose of this study is to estimate the indirect effect of democracy on economic growth through different channels in the Middle East and North Africa (MENA) region for the period
We estimate the effect of these channels on economic growth in the MENA region
Summary
The direct relationship between democracy and economic growth has been widely investigated in the literature in the last 50 years, and several theories have been developed regarding the relationship between the two variables. The main purpose of this study is to estimate the indirect effect of democracy on economic growth through different channels in the Middle East and North Africa (MENA) region for the period. We estimated a full system of equations determining economic growth and the channel variables using panel simultaneous equations model, three-stage least squares (3SLS). We identify the most important channels through which democracy can affect economic growth and estimate the effect of democracy on these identified channels. We estimate the effect of these channels on economic growth in the MENA region. We estimate the indirect effect for different democratic groupings within the region separately to investigate whether the relationship relates to the stage of democratic transition of countries or not. We estimate the indirect effect of democracy on growth in rich and poor countries within the region separately
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