DP6987 Democratization and Growth
This paper challenges cross-sectional findings that democratic institutions have a negligible direct effect on economic growth. We employ a newly constructed data-set of permanent democratic transitions during the so-called Third Wave of Democratization and examine the within effect of democratization in countries that abandoned autocracy and consolidated representative institutions. We study democratization in a before-after event study approach that enables us to control for time-invariant country-specific effects and
general time trends. The panel estimates imply that on average democratizations are associated with a one half to one percent increase in annual per capita growth. The dynamic analysis also reveals a J-shaped growth pattern: during the transition growth is slow and on average negative; in the medium and especially long run, however, growth stabilizes at a higher level. The evidence supports "development" theories of democracy and growth that highlight the positive impact of representative institutions on economic activity. They also favour Friedrich Hayek (1960)?s idea that the merits of democracy appear in the long run.