This study revisits the potential effect of democracy on economic development in a broad sample of countries, and also separately in a subsample of post-communist countries. The results are reassuring: democracy has a robustly positive impact on economic growth, and also on key factors of economic growth—investment in physical and human capital. Moreover, the sustained level of democracy, embodied in accumulated democratic capital, especially robustly correlates with economic development. When comparing the relative roles of democracy and economic freedom, democracy takes primacy in the global sample while both democracy and economic freedom seems to play important roles in the subsample of post-communist countries.
- Economic freedom
- Economic development
- Democratic capital
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The East Asian countries—China, Vietnam, Laos and Cambodia—show different pattern, with no output fall. Economic reforms in these countries started earlier (1978 in the case of China), and were much more gradual (see Roland 2000).
Estimates of economic performance based on the official statistics can be misleading (this is also mentioned by Havrylyshyn, in Chap.10 of this volume). This is because Soviet era national accounts were based on Net Material Product, whereas the subsequent statistics measure GDP. Because of the differences between these two measures, the official statistics may considerably understate the increase in income and wellbeing. More direct measures of consumption generally show much greater improvements in living standards than the official statistics.
In the graphs of political and economic freedom, the extent of freedom is depicted by the width of the band corresponding to each country.
Persson and Tabellini (2009) follow a similar approach but choose a lower depreciation value and include also spatial effects in their measure.
Note that the empirical analysis below utilizes growth of per capita output computed as log-difference of output rather than percentage growth.
The following countries are considered post-communist: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Cambodia, China, Croatia, Cuba, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyzstan, Laos, Latvia, Lithuania, Moldova, Montenegro, Mongolia, North Macedonia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam.
The steady-state value of democratic capital is given by equation (20.2). A country with perfect democracy (i.e. democracy index of 1) would thus converge to a steady state value of 5 (1/0.2, where 0.2 is the depreciation rate). Within the sample, value of 4.5 was attained, for example, by Spain in 1991 and Slovenia in 2004.
I did not include life expectancy in the models of growth presented in the preceding sections, as it is closely correlated not only with human capital but also with output per person.
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Fidrmuc, J. (2021). Democracy as a Driver of Post-Communist Economic Development. In: Douarin, E., Havrylyshyn, O. (eds) The Palgrave Handbook of Comparative Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-50888-3_20
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