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Democracy does cause growth

Ever wondered how democracy transforms economies? This study reveals that transitioning to democracy can boost GDP per capita by 20% long-term. Learn how democracy fuels growth through education, investment, and reforms.

Frequently Asked Questions (FAQ)

  1. Does democracy promote economic growth? Yes, research strongly suggests democracy positively impacts economic growth. This conclusion is based on robust analysis of data from 175 countries over decades, using various econometric techniques.

  2. What is the magnitude of democracy’s effect on GDP per capita? Democratization increases GDP per capita by about 1% in the short run and 20-35% long-term (depending on the specific estimator used). For instance, some models suggest a 35.6% long-run increase, while semi-parametric estimations indicate GDP per capita is about 15% higher 25-30 years after democratization. This long-term impact is statistically significant.

  3. Are there pre-trends in GDP before democratization? The study acknowledges that democracy is often preceded by a temporary dip in GDP. However, using semi-parametric techniques and controlling for GDP dynamics, the research finds no significant causal pre-trends suggesting that the growth effect is merely a continuation of prior trajectories. The positive impact appears linked to the democratic transition itself.

  4. What is the impact of reversals to autocracy on GDP? Reversals to autocracy lead to a decline in GDP per capita, reducing it by about 0.7% in the short term and approximately 19% in the long term. This mirrors the positive effect of democratization but in the opposite direction.

  5. How does democracy affect GDP? What are the potential mechanisms? While the paper doesn’t definitively prove the exact channels, it finds suggestive evidence that democracy may boost GDP through mechanisms such as:

    • Increased investment (both physical and human capital).
    • Economic reforms promoting market efficiency.
    • Increased trade openness.
    • Higher tax revenue allowing for more public goods provision.
    • Improvements in human capital (e.g., education).
    • Reduced social unrest and increased political stability.

  6. What instrumental variable addresses endogeneity concerns? To address the concern that economic factors might influence democracy (reverse causality or omitted variables), the research uses regional waves of democratization and reversals as an instrumental variable. The core idea is that a country is more likely to democratize if its neighbors are democratizing, and these regional waves are arguably exogenous to the specific country’s short-term economic performance, affecting its GDP primarily through its influence on the country’s own democratic status.

  7. Is democracy’s impact on GDP heterogeneous across countries? Yes, the positive effect of democracy on GDP appears larger in countries with higher initial GDP per capita and higher levels of human capital (education). This suggests that democracy might be particularly beneficial for growth in economies that already possess a certain level of economic and human capital development.

  8. What are the research limitations? While robust, the research cannot definitively establish causality with absolute certainty due to the inherent complexities of macro-level analysis. It primarily focuses on the overall impact of democracy on GDP and provides suggestive evidence for mechanisms rather than conclusive proof of specific channels. Further research is needed to explore how different democratic institutions affect various economic sectors and outcomes.

Resources & Further Watching

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