Sunday, November 2, 2008

Democracy and growth

Elias Papaioannou and Gregorios Siourounis use within-country comparisons over time to show that democratising countries realise higher long-run growth after the volatile transition period. This study side-steps the usual cross-country comparisons between democratic and oligarchic third world countries, and studies the growth in transition countries that switched from autocratic to representative rule. The result is that once democracy stabilized, the economic growth rates were found to be higher than during the pre-democratic years.

This within-country estimates show that on average democratisations are associated with a 0.5% to 1% increase in annual per capita growth. Further, exits from democracy are followed by significant drops in growth on the order of 2%. The fact that most transitions were induced by economic and political crises, means that economic growth rates in such times are likely to be lower. The study finds that growth in transition countries is around 0.9% higher after the consolidation of democracy compared to evolution of growth in non-reforming countries. Countries that implemented partial reforms were experiencing below global mean annual growth rates before the transition. However, after switching to democracy, these countries experienced, on average, higher growth rates than the rest of the world.

The authors write that their dynamic analysis "suggests that growth is usually volatile and negative during the transition period. Yet after the consolidation of democracy, growth stabilises at a higher rate. This J-shaped pattern accords with F.A. Hayek’s idea that the 'as is true of liberty, the benefits of democracy will show themselves only in the long-run, while its more immediate achievements may well be inferior to those of other forms of government'."

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