Political Competition between Countries and Economic Growth

Political competition between European countries has often been viewed as being a stimulus to the innovation process and part of the reason why Europe was the first region of the world to experience sustained growth. Countries that fell behind their rivals technologically and economically became more vulnerable to exploitation by their neighbors. In this way the presence of rival states provided added incentive to innovate. This paper uses a simple model of conflict between countries to study the role of political competition in economic growth. The governments of each country are threatened politically by innovation and hence face a trade-off between the stability of their regime and keeping up with their rivals. The model shows that "institutional spillovers", such as a decrease in the level of rent-seeking in one country, can affect growth in a competing country. Thus political fragmentation can be growth enhancing as it can result in more political competition