Working Paper: CEPR ID: DP4579
Authors: Francesco Giavazzi; Guido Tabellini
Abstract: This Paper studies empirically the effects of and the interactions amongst economic and political liberalizations. Economic liberalizations are measured by a widely used indicator that captures the scope of the market in the economy, and in particular of policies towards freer international trade (cf. Sachs and Werner, 1995; Wacziarg and Welch, 2003). Political liberalizations correspond to the event of becoming a democracy. Using a difference-in-difference estimation, we ask what are the effects of liberalizations on economic performance, on macroeconomic policy and on structural policies. The main results concern the quantitative relevance of the feedback and interaction effects between the two kinds of reforms. First, we find positive feedback effects between economic and political reforms. The timing of events indicates that causality is more likely to run from political to economic liberalizations, rather than vice versa, but we cannot rule out feedback effects in both directions. Second, the sequence of reforms matters. Countries that first liberalize and then become democracies do much better than countries that pursue the opposite sequence, in almost all dimensions.
Keywords: democracy; development; economic reform; growth
JEL Codes: O10; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic liberalizations (P19) | growth (O40) |
| economic liberalizations (P19) | investment (G31) |
| political liberalizations (P39) | quality of institutions (D02) |
| political liberalizations (P39) | economic growth (O49) |
| political liberalizations (P39) | economic liberalizations (P19) |
| economic liberalizations precede political liberalizations (P39) | economic performance (P17) |