Democracy and the quality of economic institutions: theory and evidence

Abstract

We present a simple model, illustrating how democracy may improve the quality of the economic institutions. The model further suggests that institutional quality varies more across autocracies than across democracy and that the positive effect of democracies on economic institutional quality increases in people’s human capital. Using a panel data set that covers 150 countries and the period from 1920 to 2019, and different measures of economic institutional quality, we show results from fixed effect and instrumental variable regressions that are in line with the predictions of our model.

Government Expenditure and Economic Growth: Does Corruption and Democracy Matter?

“…The quality of institutions will improve the effectiveness of government expenditure and thus promote economic growth. The institution quality will vary from democracy to autocracy and also depend on the level of human quality in an economy (Friedman,[12], Oslon, [13], Krieger, [14]. Several measures of democracy (political freedom) exist, binary measures, Vdem polyarchy, continuous and the dichotomous machine learning index, and lexical index of electoral democracy (Gründler & Krieger, 2021, Krieger, 2022.…”

“…The institution quality will vary from democracy to autocracy and also depend on the level of human quality in an economy (Friedman,[12], Oslon, [13], Krieger, [14]. Several measures of democracy (political freedom) exist, binary measures, Vdem polyarchy, continuous and the dichotomous machine learning index, and lexical index of electoral democracy (Gründler & Krieger, 2021, Krieger, 2022. Continuous machine learning indicators as a democracy measure have been used in the study since it produces a less biased index in comparison to dichotomous (Krieger, 2022).…”

“…Several measures of democracy (political freedom) exist, binary measures, Vdem polyarchy, continuous and the dichotomous machine learning index, and lexical index of electoral democracy (Gründler & Krieger, 2021, Krieger, 2022. Continuous machine learning indicators as a democracy measure have been used in the study since it produces a less biased index in comparison to dichotomous (Krieger, 2022). Political participation influences how governments spend resources, opportunistic governments will choose the optimal combination of rent and public good instruments to attract political support.…”

Reanalysing the link between democracy and economic development

“…However, recent literature has developed into a broad consensus that democratization and democracy foster economic growth (e.g. Acemoglu et al, 2019; Colagrossi et al, 2020; Eberhardt, 2022; Gerring et al, 2005; Giavazzi and Tabellini, 2005; Gründler and Krieger, 2022; Krieger, 2022; Madsen et al, 2015; Papaioannou and Siourounis, 2008; Persson and Tabellini, 2007; Rodrik and Wacziarg, 2005).…”

“…However, this paper adds a third criterion that is meaningful to categorize the results from different studies: The robustness and quality of the democracy measure (see also Boese, 2019; Gründler and Krieger, 2022). In particular, newer studies examine the aspects of the construction of democracy measures (definition of democracy, conceptualization, aggregation rules) and how different steps in the creation of democracy measures affect empirical growth (Gründler and Krieger, 2022; Krieger, 2022). In this setting, while democracy seems to cause economic growth in the long-run for the 19th and twentieth centuries, the effects vary across different democracy measures and time periods under study.…”