Democracy and Economic Growth in an Interdependent World

Abstract

We model dynamic interdependence in cross-country economic growth processes by allowing it to vary according to democratic distance among economies. Stochastic distributional dynamics and temporal effects of democracy on economic growth are studied, and spatial variation in economic growth is explored. Among important results, democratic poverty trap is found to exist indicating the possibility of persistence of (un)stable democratic equilibria at different levels of democracy. Our cross-sectional regression evinces that democracy has exerted significant growth-enhancing effect and that the democratic distribution has steadily shifted locus from low-level to high-level equilibrium. Our spatial analysis of democracy-economic growth nexus provide evidence of significant dynamic spatial autocorrelation and complementarity among countries' growth processes. Finally, it is demonstrated that the relevance of geographical proximity in facilitating interdependence in economic growth is overshadowed by relational proximity.

Arab Countries Between Winter and Spring: Where Democracy Shock Goes Next!

“…Finally, in this section, we present a brief analysis of dynamic spatial interdependence among countries' growth processes where 'space' is defined in an 'economic' or 'relational' sense as in (Diebolt et al (2013)). Since, our primary interest is to study the diffusion of democratic shocks and estimating their responsiveness conditional on the countries' development pathways, it is necessary thus to understand -as and when economic distance among countries rise -how do their growth processes respond in terms of complementarity and interdependence.…”

“…Extant literature has now convinced us to believe that democracy not only shapes a country's growth dynamics 1 (See Acemoglu, et al, 2014), it also significantly impacts growth and institutional quality among countries in 'proximity' (both in the geographic and relational sense). Among others, for instance, Diebolt et al (2013) were able to establish that 'countries which were close with respect to their democratic qualities evinced highly interdependent growth processes'. Building a democratic distance function and employing a spatial vector autoregression mechanism, the authors estimated magnitudes of dynamic complementarity in countries' growth processes as a function of democratic distance.…”

“…The first lesson is that democracy is not the key to economic growth" (Barro 1997, pp. 1 and 11), and finally (iv) Convictions: 'Democracy does cause economic growth ' (Acemoglu et al, 2014) and that 'democratic stock in a country can have a positive spillover effects making growth processes among countries highly interdependent', (Diebolt et al (2013)).…”

“…Thus, in recent years while the centrality of democracy in almost every facet of economic and social life has been well-established, the attention has now shifted towards capturing and modelling the possible ways a change in democratic setting in one country can affect others in the neighborhood (characterized essentially by economic, cultural, and social affinities) (see O'Loughlin et al (1998) for an insightful survey and d Diebolt et al (2013) for developing a spatial framework). The few theoretical explanations of this phenomenon focus exclusively on political elites.…”

“…Elkink (2011) andO'Loughlin et al (1998) provide some analysis of democracy diffusion in the international context, however, the models employed in these studies offer some theoretical insights of the effect of democratic diffusion (Elkink, 2011) or the role of geography in the analysis of spatial effects of democracy (O'Loughlin et al (1998)). In these and in the literature that followed (e.g., Diebolt et al (2013)) spatial and temporal aspects of democratic diffusion in the world system has been analyzed. However, it is not possible, following this strand of literature, to answer, how a proximity effect of democracy can motivate a persistent growth and democratic spillovers in neighboring countries.…”