2008-11-08

Democracy may be beneficial economically after all

Elias Papaioannou and Gregorios Siourounis:
Cross-country comparisons have produced little evidence that democracy improves economic growth. This column summarises research using within-country comparisons over time to show that democratising countries realise higher long-run growth after the volatile transition period. Democracy’s value may lie in its dynamic aspects.

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While there is significant heterogeneity across countries (Persson and Tabellini, 2007), our results suggest that, if anything, the average effect of successful democratic transitions on growth is positive. Our “within” evidence shows that the experience of the past four decades suggests that even moderate political reforms can also bring sizable economic gains. Most importantly, our 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 (1960) 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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