Working Paper: NBER ID: w13180
Authors: Philippe Aghion; Alberto Alesina; Francesco Trebbi
Abstract: We explore the question of how political institutions and particularly democracy affect economic growth. Although empirical evidence of a positive effect of democracy on economic performance in the aggregate is weak, we provide evidence that democracy influences productivity growth in different sectors differently and that this differential effect may be one of the reasons of the ambiguity of the aggregate results. We provide evidence that political rights are conducive to growth in more advanced sectors of an economy, while they do not matter or have a negative effect on growth in sectors far away from the technological frontier. One channel of explanation goes through the beneficial effects of democracy and political rights on the freedom of entry in markets. Overall, democracies tend to have much lower entry barriers than autocracies, because political accountability reduces the protection of vested interests, and entry in turn is known to be generally more growth-enhancing in sectors that are closer to the technological frontier. We present empirical evidence that supports this entry explanation.
Keywords: Democracy; Economic Growth; Political Institutions; Productivity Growth
JEL Codes: H7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| democratic institutions and political rights (P16) | economic growth (O49) |
| political rights (P26) | market entry (L17) |
| market entry (L17) | economic growth (O49) |
| democratic institutions and political rights (P16) | lower entry barriers (D43) |
| lower entry barriers (D43) | market entry (L17) |
| economic development (O29) | demand for democracy (D72) |
| democracy (D72) | economic growth in advanced sectors (O49) |
| democracy (D72) | negative effects in less advanced sectors (F69) |