Economic resilience in developing countries: The role of democracy in the face of external shocks

Ahmed, Salah and Trabelsi, Mohamed Ali (2022): Economic resilience in developing countries: The role of democracy in the face of external shocks. Published in: Entrepreneurial Business and Economics Review , Vol. 10, No. 1 (March 2022): pp. 23-34.

Abstract

Objective: The objective of this article is to examine the role of democracy in strengthening the resilience of developing economies in the face of exogenous negative external shocks.

Research Design & Methods: To achieve our research objectives, we used the duration model to estimate how democracy can determine the probable duration of an economic growth spell.

Findings: By examining a panel of 96 developing countries observed in 1965-2015, we found that democracy is a resilience factor, insofar as it helps to support growth spells in the event of negative external shocks. The results show that an improvement in democracy score is associated with an increase in the expected duration of a growth spell. The second finding is that some dimensions of democratic institutions like political participation and egalitarian inclusion can lead to a sustainable economic growth.

Implications & Recommendations: The benefits of democracy for improving living standards in developing coutries. The study should be subject to further research as more variables that account for major shocks could be considered, such as political and civil unrest, internal conflicts, or natural disasters. These shocks may occur during a growth period and cause very serious disruptive effects.

Contribution & Value Added: The originality of this work lies in studying the role of democracy in the face of exogenous negative external shocks through the duration model which represents an original empirical study.

• Item Type: MPRA Paper
• Language: English
• Keywords: Resilience; Economic growth; Developing countries; Democracy; Survival models
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

References

Abiad, A., Bluedorn, J., Guajardo, J. & Topalova, P. (2015). The Rising Resilience of Emerging Market and Developing Economies. World Development, 72, 1-26. https://doi.org/10.1016/j.worlddev.2015.02.005. Acemoglu, D., Johnson, S., Robinson, J. & Thaicharoen, Y. (2003). Institutional causes, macroeconomic symptoms: volatility, crises and growth. Journal of Monetary Economics, 50(1), 49-123. https://doi:10.1016/S0304-3932(02)00208-8. Acemoglu, D., Naidu, S., Restrepo, P. & Robinson, J.A. (2019). Democracy does cause growth. Journal of Political Economy, 127(1), 47-100. https://doi.org/10.1086/700936. Adam, M. (2002). Guerres africaines. Etudes rurales, 167-186. https://doi.org/10.4000/etudesrurales.7978 Berg, A., Ostry, J. & Zettelmeyer, J. (2012). What makes growth sustained?. Journal of Development Economics, 98, 149-166. https://doi.org/10.1016/j.jdeveco.2011.08.002. Collier, P., Goderis, B. & Hoeffler, A. (2006). Shocks and growth: adaptation, precaution and compensation. Oxford: Department of Economics, Oxford University. Dahl, R. (1972). Polyarchy: participation and opposition. New Haven: Yale University Press. Duval, R. & Vogel, L. (2008). Economic resilience to shocks: The role of structural policies. OECD Journal: Economic Studies, 2008(1), 1-38. Essers, D. (2012). Democracy and external shock resilience in developing countries: evidence from the great recession. (Working Paper). Institute of Development Policy and Management, University of Antwerp. Guillaumont, P. (2009). A retrospective Economic Vulnerability Index. Policy Brief Series. 3. FERDI. Retrieved from: http://byind.ferdi.fr/en. on January 14. Hausmann, R., Pritchett, L. & Rodrik, D. (2005). Growth accelerations. Journal of Economic Growth, 10, 303-329. https://doi.org/10.1007/s10887-005-4712-0. Hausmann, R., Rodriguez, F. & Wagner, R. (2008). Growth Collapses. In Reinhart, C.M., & Vehg, C.A. (eds.), Money, crises, and transition: Essays in honor of Guillermo A. Calvo (376-428). Lonodon: MIT Press. Jerzmanowski, M. (2006). Empirics of hills, plateaus, mountains and plains: A Markov-switching approach to growth Journal of Development Economics, 81(2), 357-38. https://doi.org/10.1016/j.jdeveco.2005.05.005. Jones, B.F. & Olken, B. (2008). The Anatomy of Start-Stop Growth. The Review of Economics and Statistics, 90(3), 582-587. http://www.mitpressjournals.org/doi/pdf/10.1162/rest.90.3.582. Kunal, S., Lant, P., Sabyasachi, K. & Selim R. (2018). Democracy Versus Dictatorship? The Political Determinants of Growth Episodes, Journal of Development Perspectives 2(1-2), 3-28. https://doi.org/10.5325/jdevepers.2.1-2.0003. Marshall, M.G., Gurr T.R. & Keith, J. (2019). Polity IV Project: Political Regime Characteristics and Transitions, 1800-2018, Dataset Users’ Manual. CSP. Retrieved from: http://www.systemicpeace.org/inscr/p4manualv2018.pdf. On January 14, 2021. Mobarak, A.S. (2005). Democracy, Volatility, and Economic Development. Review of Economics and Statistics, 87(2), 348-361. https:// doi: 10.1162/0034653053970302. North, D.C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. Olson, M. (1982). The rise and decline of nations: economic growth, stagflation, and social rigidities. New Haven: Yale University Press. Ostry, J.D. Berg, A. & Tsangarides, C.G. (2014). Redistribution, inequality and growth (IMF Staff Discussion Note, SDN1402). Retrieved from: https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf on January 14, 2021. Palisson, F. (1989). Détermination des paramètres du modèle de Weibull à partir de la méthode de l’actuariat. Revue de Statistique Appliquée, 37(4), 5-39. Retrieved from : http://www.numdam.org/article/RSA_1989__37_4_5_0.pdf Quinn, D. P. & Woolley, J.T. (2001). Democracy and National Economic Performance: The Preference for Stability. American Journal of Political Science, 45(3), 634-657. https://doi.org/10.2307/2669243. Reddy, S. & Minoiu, C. (2009). Real income stagnation of countries 1960-2001. Journal of Development Studies, 45, 1-23. https://doi.org/10.1080/00220380802265249. Rodrik, D. (1999). Where did all the growth go? External shocks, social conflict and growth collapses. Journal of Economic Growth, 4(4), 385–412. https://doi.org/10.1023/A:1009863208706. Rodrik, D. (2000). Participatory politics, social cooperation, and economic stability. American Economic Review, 90(2), 140-144. https:// doi: 10.1257/aer.90.2.140.