Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries: 11 Years Later

A quick survey of countries shows that wealthier countries are more democratic. Although the correlation is readily apparent and well-documented, the issue of causation remains much fuzzier. Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries: 11 Years Later investigates whether democracy fosters growth and wealth or wealthier countries choose democracy. They find that democracy does indeed promote growth but that the timing of economic liberalization associated with democratization influences growth as much if not more than the democracy itself. They also conclude that that the type of democracy implemented (namely Presidential versus Parliamentary) affects growth and that accounting for expectations of regime change identifies a stronger growth effect of democracy.

The principle method used by Persson and Tabellini to examine causation is to study a country as it transitions into or out of democracy. Controlling for other variables, the changes in average growth from before democracy to during democracy can imply causation. The data for consists of 120 regime changes from 1960 to 2000. However, for the final part, where expectations of regime change are factored in, data from as far back as the mid-1800s are used.

The first part examines the effect of democracy and the effect of whether economic liberalization precedes or follows the beginning of a democracy on growth. Democracy accelerates growth by 0.75%, which is a large margin, and this acceleration translates into a long-run effect of income per capita to 12.5%. The one exception is that growth slows down in the time immediately surrounding the transition. Democratization is linked to economic liberalization- perhaps because similar forces encourage both types of reform. Economic liberalization is the economic equivalent of democratization. Liberalization includes opening the economy to international trade and extending the use of markets and generally enhances growth. Historically, liberalization is a product of democracy and therefore follows behind by a couple years. Argentina, Brazil, and the Philippines are examples where democracy preceded liberalization. Examples where liberalization came first are rarer but include countries like South Korea, Taiwan, and Mexico.

The authors deduce that a government should reform an economy and then tackle politics. The improvement of growth of democracy after liberalization is 3.5% compared to democracy after liberalization that is statistically insignificant (i.e. much smaller.) Economic reform appears more important than political reform. One explanation is that new democracies that lack economic reform are slowed down by conflicts in fiscal redistribution and populist agendas. Also, because property rights and enforcing the rule of law are needed to open the economy, these same tools may be prerequisite for a well-functioning democracy and are likely missing in democracies with closed economies.

The term democracy is very broad, and therefore, the authors decide to compare presidential versus parliamentary forms of government and different voting methods (majoritarian versus proportional). They find that a presidential democracy grows about 1.5% faster than a parliamentary one and that the voting method has only a small effect. They explanation they offer is that because parliamentary democracies seek consensus among broader coalitions of voters, a parliamentary government will spend more. This additional spending will distort economic activity which hurts growth. Data corroborates the additional spending assumption and finds that parliamentary governments spend 5% more of the GDP than presidential ones. The authors find that a new parliamentary government is more likely to pursue economic liberalization, which normally would be good. However, as the first part demonstrated, liberalization after growth has a much smaller effect on growth and this does not mitigate the distortions created by the additional spending of parliamentary governments.

The last facet explored was the effect of expected political reform. Democracy supports growth but how will the uncertainty of an impending coup alter growth? The answer is that political uncertainty has a negative effect on growth, but the effect of the uncertainty prior to an autocratic regime being overthrown is outweighed by the transition to democracy. Looking back as far as 1850, the authors find that under autocracy, the effect of probable regime change impedes growth slightly but only at a statistically insignificant level. Under democracy, the risk of a regime change away from democracy hurts growth at a more pronounced level. When the negative impact of regime change is factored into the original equation for growth from democracy, the 0.75% acceleration in growth grows to 1%. Including expected regime changes brings out a stronger effect on the actual transition into democracy. Thus, the implication is that “stable and persistent democracy has a stronger effect on development than democracy per se.” (Page 10). The final conclusion is that democracy is indeed too broad to push into one group, and more research into defining different forms and studying the heterogeneity of political reform will provide additional insight.