Working Paper: CEPR ID: DP9282
Authors: Caroline Freund; Melise Jaud
Abstract: Theory and empirics are ambiguous on the effect of democracy on growth. Cross-country studies find that democracy has no significant impact on growth. In contrast, within-country studies find a strong positive effect of transition to democracy. We reconcile this inconsistency by showing that the positive effect of political transition is a result of swift regime change and not democratization. We identify and examine 90 successful, failed, and gradual transitions that have occurred over the last half century. This new classification permits us to compare successful episodes of democratization with unsuccessful ones -- as opposed to with the counterfactual of no transition. We find that both successful and failed transitions boost long-run growth by about one percentage point, but gradual change is quite costly in economic terms. The results imply that the growth dividend from political transition is a result of regime change and not democratization, and also offer new evidence on the importance of the speed of transition for economic growth. The results are robust to a number of alternative specifications, to stricter and more lenient definitions of democratic transition, and to including reverse transitions.
Keywords: Democratization; Event Study; Political Transition
JEL Codes: N40; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political transition (P39) | Economic growth (O00) |
| Successful transitions (J62) | Economic growth (O00) |
| Failed transitions (J62) | Economic growth (O00) |
| Gradual transitions (J62) | Economic growth (O00) |
| Reverting to autocracy after a democratic transition (D72) | Economic growth (O00) |
| Securing democracy (K16) | Economic growth (O00) |
| Regime change (P39) | Replacement of incompetent governments (O17) |
| Replacement of incompetent governments (O17) | Economic growth (O00) |