Role of Political Institutions on Economic Growth: Empirical Evidence

Alali, Walid Y. (2010): Role of Political Institutions on Economic Growth: Empirical Evidence.

Abstract

This paper explores the effect of political institutions on economic development via its causation of economic reforms. Focusing on the causality between political institutions – democracy, specifically – and economic reforms. After all, one way of improving society's well-being is through promoting economic growth, thereby narrowing the cross-country income differences. We investigate whether economic reforms are more likely to take place in democracies since greater accountability may lead the government to adopt measures that gain majority support. Economic reforms are referred to as comprehensive measures that broaden the market's scope including the international. Using the same methodology as in the previous paper1, the dynamic panel GMM estimator, we study whether democracy causes economic reforms in different sectors, namely fiscal measures, trade liberalisation, credit market liberalisation, capital account openness and labour market deregulation. Reciprocally, test if economic reforms cause the democratisation process, and how political institutions and economic reforms interact.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic Development, Institutions, Institutions Performance, Policy, Economic Growth, Political Institution
• Subjects: D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and Impact; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Abiad, A. and A. Mody. 2005. "Financial Reform: What Shakes it? What Shapes it?" American Economic Review, 95:1, pp. 66-88.

Acemoglu, D. 2006. "A Simple Model of Inefficient Institutions." Scandinavian Journal of Economics, 108:4, pp. 515-46.

Acemoglu, D. 2009. Introduction to Modern Economic Growth. Cambridge, M.A.: Princeton University Press.

Acemoglu, D., P. Aghion, and F. Zilibotti. 2006. "Distance to Frontier, Selection, and Economic Growth." Journal of the European Economic Association, 4:1, pp. 37-74.

Acemoglu, D. and S. Johnson. 2005. "Unbundling Institutions." Journal of Political Economy, 113:5, pp. 949-95.

Acemoglu, D. and J. Robinson. 2006. "De Facto Political Power and Institutional Persistence." American Economic Review, 96:2, pp. 325-30.

Alali, W. Y. 2009. “Impact of Institutions and Policy on Economic Growth: Empirical Evidence” Oxford University: https://doi.org/10.5287/bodleian:D5EDPnKPb

Alesina, A., S. Ardagna, and F. Trebbi. 2006. "Who Adjusts and When? The Political Economy of Reforms." IMF Staff Papers:53.

Amin, M. and S. Djankov. 2009. "Natural Resources and Reforms." Policy Research Working Paper, No. 4882.

Coviello, D. and R. Islam. 2006. "Does Aid Help Improve Economic Institutions?" World Bank Policy Research Working Paper, No. 3990.

Dailami, M. 2000. "Financial Openness, Democracy and Redistributive Policy." World Bank Policy Research Paper, No. 2372.

De Haan, J. and J.-E. Sturm. 2003. "Does more Democracy lead to Greater Economic Freedom? New Evidence for Developing Countries." European Journal of Political Economy, 19:3, pp. 547-63.

Dethier, J.-J., H. Ghanem, and E. Zoli. 1999. "Does democracy facilitate the economic transition : an empirical study of Central and Eastern Europe and the Former Soviet Union." World Bank Policy Research Working Paper, No. 2194.

Eichengreen, B. and D. Leblang. 2006. "Democracy and Globalisation." BIS Working Papers, No. 219.

Fidrmue, J. 2003. "Economic Reform, Democracy and Growth During Post-Communist Transition." European Journal of Political Economy, 19:3, pp. 583-604.

Giavazzi, F. and G. Tabellini. 2005. "Economic and Political Liberalizations." Journal of Monetary Economics, 52:7, pp. 1297-330.

Giuliano, P., P. Mishra, and A. Spilimbergo. 2009. "Democracy and Reforms." IZA Discussion Papers, No. 4032.

Gwartney, J. D., R. Lawson, and S. Norton. 2008. "Economic Freedom of the World: 2008 Annual Report." Economic Freedom Network.

Hayek, F. A. 1960. The Constitution of Liberty. London: Routledge and Kegan. Heritage Foundation. 2009. 2009 Index of Economic Freedom. Washington, D.C.: Heritage Foundation.

Heston, A., R. Summers, and B. Aten. 2006. "Penn World Table Version 6.2." Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania.

IMF. 2005. "Chapter 3: Building Institutions," in World Economic Outlook. Washington D.C.: IMF.

IMF. 2008. "Structural Reforms and Economic Performance in Advanced and Developing Countries." IMF Occasional Paper, forthcoming.

Li, Q. and R. Reuveny. 2003. "Economic Globalization and Democracy: An Empirical Analysis." Penn State and Indiana University, mimeo.

Lipset, S. M. 1959. "Some Social Requisites of Democracy: Economic Development and Political Legitimacy." The American Political Science Review, 53:1, pp. 69-105.

Loko, B. and M. A. Diouf. 2009. "Revisiting the Determinants of Productivity Growth: What's New?" IMF Working Paper, WP/09/225.

Lopez-Cordova, E. and C. Meissner. 2005. "The Globalization of Trade and Democracy, 1870-2000." NBER Working Paper, No. 11117.

Lundstrom, S. 2003. "On institutions, economic growth and the environment." Goteborg University, Department of Economics, Economic Studies:No. 123.

Milner, H. V. and K. Kubota. 2005. "Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries." International Organization, 59:01, pp. 107-43.

Nickell, S. J. 1981. "Biases in Dynamic Models with Fixed Effects." Econometrica, 49:6, pp. 1417-26.

Papaioannou, E. and G. Siourounis. 2008. "Economic and Social Factors Driving the Third Wave of Democratization." Journal of Comparative Economics, 36:3, pp. 365-87.

Quinn, D. P. 2000. "Democracy and International Financial Liberalization." Georgetown University, mimeo.

Rajan, R. G. and L. Zingales. 2003. "The Great Reversals: the Politics of Financial Development in the 20th Century." Journal of Financial Economics, 69:1, pp. 5-50.

Rigobon, R. and D. Rodrik. 2004. "Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships." CEPR Discussion Papers, No. 4653.

Rodrik, D. 2005. "Growth Strategies," in Handbook of Economic Growth. Philippe Aghion and Steven Durlauf eds. Amsterdam: Elsevier, pp. 967-1014.

Rodrik, D., A. Subramanian, and F. Trebbi. 2004. "Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development." Journal of Economic Growth, 9:2, pp. 131-65.

Rudra, N. 2005. "Globalization and the Strengthening of Democracy in the Developing World." American Journal of Political Science, 49:4, pp. 704-30.

Sachs, J. D. 2000. "Tropical Underdevelopment." Centre for International Development at Harvard University, CID Working Paper.

Sachs, J. D. 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income." NBER Working Paper, No. 9490.

Sachs, J. D. and A. Warner. 1995. "Economic-Reform and the Process of Global Integration." Brookings Papers on Economic Activity, 26:1995-1, pp. 1-118.

Schumpter, J. 1950. Capitalism, Socialism and Democracy. New York: Harper & Row.

Sullivan, M. J. 1991. Measuring Global Values. New York: Greenwood.

Sunde, U., M. Cervellati, and P. Fortunato. 2006. "Growth and Endogenous Political Institutions," in Institutions, Development, and Economic Growth.

Theo S. Eicher and Cecilia Garcia-Penalosa eds. Cambridge, MA: The MIT Press, pp. 215-48.

UNDP. 2007. Governance Indicators: A Users' Guide. New York: UNDP. Vandenbussche, J., P. Aghion, and C. Meghir. 2006. "Growth, Distance to Frontier and Composition of Human Capital." Journal of Economic Growth, 11:2, pp. 97-127.

Wacziarg, R. and K. H. Welch. 2003. "Trade Liberalization and Growth: New Evidence." NBER Working Paper, No. 10152.