DP5499 Democracy and Development: The Devil in the Details

Author(s): Torsten Persson , Guido Tabellini

Publication Date: February 2006

Keyword(s): democracy , reform , growth , institutions , difference-in-difference estimations

JEL(s): E0 , O1 , P0

Programme Areas: International Macroeconomics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP5499.asp

Does democracy promote economic development? We review recent attempts to addresses this question, which exploit the within-country variation associated with historical transitions in and out of democracy. The answer is positive, but depends - in a subtle way - on the details of democratic reforms. First, democratizations and economic liberalizations in isolation each induce growth accelerations, but countries liberalizing their economy before extending political rights do better than those carrying out the opposite sequence. Second, different forms of democratic government and different electoral systems lead to different fiscal and trade policies: this might explain why new presidential democracies grow faster than new parliamentary democracies. Third, it is important to distinguish between expected and actual political reforms: expectations of regime change have an independent effect on growth, and taking expectations into account helps identify a stronger growth effect of democracy.