Democratization, Quality of Institutions and Economic Growth

Abstract

There are two innovations in the paper as compared to the previous literature on democracy and growth. First, we consider not only the level of democracy, but also changes in this level in the 1970s-1990s as measured by increments of Freedom House political rights indices. Second, the distinction is made between democracy and law and order (order based on legal rules); the latter is measured by the rule of law, investors' risk and corruption indices. We discuss two interconnected threshold hypotheses: (1) in countries where law and order is strong enough, democratization stimulates economic growth, whereas in countries with poor law and order democratization undermines growth; (2) if democratization occurs under the conditions of poor law and order (so that illiberal democracy emerges), then shadow economy expands, quality of governance worsens, and macroeconomic policy becomes less prudent.We adduce a number of stylized facts to support our hypotheses. However our econometric findings are mixed: we report results that support the hypotheses as well as regressions that contradict them.

Resource Abundance, Political Corruption, and Instability of Democracy

“…This observation was corroborated in a number of researches (Barro (1996(Barro ( , 1999, Ross (1999Ross ( , 2001, Wantchekon (1999), Polterovich and Popov (2006)). These and some other papers try to explain the connection between resource abundance and authoritarianism.…”

“…The hypothesis claims that the resource curse takes place if and only if institutional quality does not exceed a threshold level that depends on the resource quantity (Mehlum, Moene and Torvik (2005), Robinson, Torvik and Verdier (2006), Zhukova (2006), Kartashev (2006)). At other hand, our recent paper (Polterovich, Popov, 2006) implies that, under weak institutions, democratization results in their further deterioration and therefore decreases rate of growth. Thus resource abundance raises chances for a country to have weak institutions, therefore democratization may worsen them further giving support or even rise to resource curse.…”

Instability of Democracy as Resource Curse

“…In fact, this study corroborates that all three channels mentioned above, really work against democratization. Polterovich and Popov (2006) demonstrate that average share of net fuel import for 1960-1975 effects positively both democratization and government effectiveness indicators. Egorov, Guriev and Sonin (2006) assumes that resource abundance increases incentives of a dictator to stay in power so that the success of economic policies turns out to be comparatively less important.…”

“…The hypothesis claims that the resource curse takes place if and only if institutional quality does not exceed a threshold level that depends on the resource quantity (Mehlum, Moene and Torvik (2005), Robinson, Torvik and Verdier (2006), Zhukova (2006), Kartashev (2006). On the other hand, our recent paper (Polterovich, Popov, 2006) We also have found that under very low institutional quality, a paradoxical effect takes place: the probability of democracy preservation may decrease with an improvement of institutional quality, so an institutional improvement large enough is needed to get out of the corrupt democracy trap.…”

“…In fact, there were only three A number of papers deal with the relationship between resource abundance and instability of democracy (Barro (1996(Barro ( , 1999, Ross (1999Ross ( , 2001, Wantchekon (1999), Polterovich and Popov (2006)). These and some other papers try to explain the connection between resource abundance and authoritarianism.…”