Academic journal article NBER Reporter

Political Institutions and Comparative Development

Academic journal article NBER Reporter

Political Institutions and Comparative Development

Article excerpt

A great deal of evidence suggests that different patterns of economic development are causally related to differences in economic institutions. Countries that create inclusive and secure property rights and the rule of law grow, while those that do not stagnate or decline. (1)

But why do economic institutions vary so much across, and even within, countries? Though there are different approaches to this question, a central one emphasizes that economic institutions (conceived broadly to include economic policies) are outcomes of processes of collective choice. Such choices are shaped by the political institutions that distribute power, aggregate preferences and interests, place constraints, and determine the payoffs to different strategies in the political process.

This perspective suggests that there ought to be evidence of systemic relationships between political institutions, economic institutions and policies, and economic outcomes.

Perhaps the largest research effort has gone into investigating the impact of democracy on economic growth. There is obviously a strong correlation between levels of GDP per capita and the extent of democracy, yet at the same time theoretical work suggests that not all the mechanisms unleashed by moving political institutions from autocratic to democratic are positive for economic growth.

Democratization tends to shift power away from narrow elites towards the mass of people. That can favor redistribution, the provision of public goods in society, (2) and expansion of the role of the state in society. These very processes may or may not be good for economic growth. Redistribution can lead to distortions and disincentives, (3) or it can stimulate growth. (4) The same is true of the expansion of the size or role of the state. Finally, democratic political competition can be very clientelistic, mitigating against the provision of public goods. There is also obviously a considerable amount of heterogeneity in this process. Dictatorships and democracies alike vary greatly in their institutional architecture--such as in the extent of checks and balances (5)--and societies that have ostensibly democratic politics may have political power concentrated in the hands of a small group of economic elites or bureaucrats.

Despite this evident heterogeneity, it is interesting to ask what the average effect of moving from autocratic to democratic political institutions is on economic policies and institutions and on economic growth. We do that in our paper with Suresh Naidu and Pascual Restrepo. (6) Ours is hardly the first study of this relationship but, interestingly, the conventional wisdom has been that democratization has at best small positive effects on economic growth. Our paper shows that this "non result" is driven by the complicated dynamics of GDP around democratization.

It is a robust fact that democratizations are often precipitated by recessions and negative economic shocks. Clearly, unless one controls for this properly, one can easily make a spurious inference about the impact of democracy. We control for this using two different strategies. The first is to control for lags of GDP in linear regressions. The second is to adapt to our panel context the semi-parametric time-series estimators proposed by Joshua Angrist and Guido Kuersteiner, (7) and Angrist, Oscar Jorda, and Kuersteiner, (8) which use propensity score-based matching methods to correct for the effects of GDP dynamics. Beyond this problem lies the question of identification. In addition to controlling for a full set of country and year fixed effects, we address this issue with an instrumental-variables (IV) strategy. We develop an instrument for democracy based on regional waves of democratizations and reversals.

Our identification assumption is that democratization in a country spreads to other nondemocratic countries in the same region, but does not have a direct differential impact on economic growth in these countries, at least conditional on lagged levels of country and regional GDP and various covariates that could be correlated with country-level GDP at the year, region, and initial regime level. …

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