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Democracy, institutions and growth

11 th International Academic Conference on economic and social development. EACES workshop "Comparative empirical studies: what can we learn for transition and developing countries?". Democracy, institutions and growth. An application to Former Communist Countries (1990-2008).

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Democracy, institutions and growth

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  1. 11th International Academic Conference on economic and social development EACES workshop "Comparative empirical studies: what can we learn for transition and developing countries?" Democracy, institutions and growth An application to Former Communist Countries (1990-2008) Domenico Rossignoli Università Cattolica del Sacro Cuore - Milano

  2. Democracy, institutions and growth Brief Index • Review of the literature: uncertainty on direct democracy/growth relationship; consensus on institutions/growth relationship • Offering a new indirect approach: democracy, institutions and growth • An empirical application on Former Communist Countries 11th International Academic Conference on Economic and Social Development

  3. Democracy, institutions and growth Exploring existing literature (1) • No significant direct relationship between democracy and growth (Barro, 1996; Helliwell, 1994; Przeworski et al. 2000) • Indirect positive effect through human capital (Wacziarg, 2001) No clear evidence of a direct correlation between democracy and growth 11th International Academic Conference on Economic and Social Development

  4. Democracy, institutions and growth Exploring existing literature (2) • Institutions and growth relationship explored • Theorically (North, 1990; Olson, 1993) • Empirically (Acemoglu, 2005; Rodrik, 2003) Wide academic consensus about positive institutions effect on long-run growth 11th International Academic Conference on Economic and Social Development

  5. Democracy, institutions and growth Connecting democracy and growth through institutions • Political and economic systems are linked through institutions. • What are institutions? “the rules of the game in a society and more formally [as] the humanly devised constraints that shape human interaction” (North, 1990) Economic Institutions Political Institutions Economic Growth Democracy Environmental Conditions 11th International Academic Conference on Economic and Social Development

  6. Democracy, institutions and growth A simple classification A simple classification offered: • Environmental Conditions • Rule of Law • Political Stability • Economic Institutions • Property Rights • Economic Freedom 11th International Academic Conference on Economic and Social Development

  7. Democracy, institutions and growth An empirical application: former communist countries • Selected Sample • 28 former communist countries, • 1995-2008, economic data from World Bank • First step: OLS regression • Real GDP growth as dependent variable • Standard control variables • Institutional variables (direct relationship) • Second Step: OLS regression • Institutional variables as dependent variables • Political Rights Index as determinant • Hypothesis:democracy is positively correlated with growth-enhancing institutions. Thus, itindirectly affects economic growth 11th International Academic Conference on Economic and Social Development

  8. Democracy, institutions and growth Summary of institutional proxies 11th International Academic Conference on Economic and Social Development

  9. Democracy, institutions and growth Institutions and growth: results OLS, robust standard errors in parenthesis. Significance level:**= 5 per cent ***= 1 per cent. 11th International Academic Conference on Economic and Social Development

  10. Democracy, institutions and growth Findings • Political stability and rule of law proxies show significant and positive coefficients. • Chosen economic institutions proxies show not significant coefficients. • Environmental conditions are positively correlated with economic growth in this transition countries’ sample. 11th International Academic Conference on Economic and Social Development

  11. Democracy and institutions correlation Democracy, institutions and growth OLS, robust standard errors in parenthesis. Significance level:**= 5 per cent ***= 1 per cent. 11th International Academic Conference on Economic and Social Development

  12. Democracy, institutions and growth Democracy and institutions: some findings • Democracy/Political Stability and Democracy/Rule of Law relationship are shown positive and significant in a quadratic form. Democracy and environmental conditions are positively correlated 11th International Academic Conference on Economic and Social Development

  13. Democracy, institutions and growth Democracy and institutions: some findings • Democracy/Property Rights Protection and Democracy/Economic Institutions relationship are shown negative but not significant. Democracy and economic institutions relationship is not significant 11th International Academic Conference on Economic and Social Development

  14. Democracy and EnvironmentalConditions: EU influence (1) 11th International Academic Conference on Economic and Social Development

  15. Democracy and EnvironmentalConditions: EU influence (2) 11th International Academic Conference on Economic and Social Development

  16. Further investigations • The paper presents positive and significant correlation between democracy and economic freedom using a different proxy (Fraser Institute) but only half of the sample is covered. • The paper also shows direct positive and significant correlation between democracy and human capital (proxied by previously used variables). 11th International Academic Conference on Economic and Social Development

  17. Democracy and Human Capital OLS, robust standard errors in parenthesis. Significance level:**= 5 per cent ***= 1 per cent. 11th International Academic Conference on Economic and Social Development

  18. Democracy, institutions and growth Conclusions • Institutions are positively related to economic growth. • In particular, environmental conditions, namely rule of law and political stability have significant and positive effect on economic growth. • Democracy may indirectly affect economic growth through institutions: political rights are positively and significantly correlated with growth-enhancing institutions. • Human capital is also positively affected by democracy. • European Integration may have fostered the democracy/institutions relationship in selected countries. 11th International Academic Conference on Economic and Social Development

  19. Democracy, institutions and growth Final considerations • Further research needed: • To improve measurement of institutions • To improve the empirical application of the model • To get an aggregate model linking democracy to growth through institutions • To include a panel dataset in order to catch dynamic aspects not considered so far. 11th International Academic Conference on Economic and Social Development

  20. Democracy, institutions and growth References • Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Institutions as a fundamental cause of long-run growth. In P. Aghion, & S. Durlauf (A curadi), Handbook of economic growth (p. 385-472). Amsterdam: Elsevier. • Aghion, P. (2006). On institutions and growth. In T. S. Eicher, & C. Garcìa-Penalosa (A curadi), Institutions, development and economic growth. Cambridge & London: MIT Press. • Barro, R. J. (1996). Democracy and economic growth. Journal of Economic Growth, 1 (1), 1-27. • Feng, Y. (2003). Democracy, governance and economic performance. Cambridge MA and London: MIT Press. • Gastil, R. D. (1986). Freedom in the world. Westport: Greenwood Press. • Gwartney, J., & Lawson, R. (2003). The concept and measurement of economic freedom. European Journal of Political Economy, 19, 405-430. • Helliwell, J. F. (1994). Empirical linkages between democracy and economic growth. British Journal of Political Science, 24, 225-248. • North, D. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press. • Olson, M. (1991). Autocracy, democracy and prosperity. In J. R. Zeckhauser, Strategy and chioce (p. 131-157). Cambridge, MA: MIT Press. • Persson, T., & Tabellini, G. (2003). The economic effect of constitutions.London & Cambridge, MA: MIT Press. • Przeworski, A., Alvarez, M. E., Cheibub, J. A., & Limongi, F. (2000). Democracy and development. Cambridge, MA: Cambridge University Press. • Rodrik, D. (2003). In search of prosperity. Princeton: Princeton University Press. 11th International Academic Conference on Economic and Social Development

  21. Thankyouforyourattention! 11th International Academic Conference on Economic and Social Development

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