Democracy and Development : The Devil in the Details

Does democracy promote economic development? Despite many attempts to address this question, the answer remains elusive. Richer countries are generally democratic. But this cross-country correlation could reflect reverse causation or omitted variables. Evidence that political regime changes produce subsequent economic growth is considerably weaker. Does this mean that political regimes do not influence economic development? Not necessarily, but such causal effects are difficult to identify from the within-country variation. A plausible reason for this difficulty is that democracy is too blunt a concept. Political regimes come in various forms and are reformed in different circumstances. Such heterogeneity is interesting in its own right. Moreover, if heterogeneity is not random, correlation between specific reform features and their occurrence makes it hazardous to estimate an average causal effect on economic growth. This paper illustrates three specific instances where the details of democratic reform influence their economic effects. Section I clarifies our empirical strategy. Section II zooms in on political and economic reforms, drawing on Francesco Giavazzi and Guido Tabellini (2005). Democratizations as well as liberalizations induce accelerations of growth. But the sequence of reforms is crucial: countries liberalizing their economy before extending political rights do better. Section III considers different forms of democracy, drawing on Torsten Persson (2005). Specific democratic institutions influence the fiscal and trade policies implemented after democratization, which may explain why presidential democracy leads to faster growth than parliamentary democracy. Section IV distinguishes expected and actual political reforms, drawing on Persson and Tabellini (2005). Taking expectations of regime change into account helps identify a stronger growth effect of democracy