Local Democracy and Economic Growth

Abstract

Theoretical work on the institutional sources of economic growth regards decentralization and democracy in a positive light. Despite this, empirical work shows that neither fiscal decentralization nor national democracy is a robust predictor of per capita GDP growth. We argue that these theories have failed to bear fruit because they ignore the linchpin of decentralization and democracy, namely local democracy. Democracy at a local level enhances economic growth by enabling decentralized policy selection and incentivizing local politicians to select policies that benefit economic development, including the provision of local public goods.We test for the relationship using a novel measure of local democracy with global coverage and time series extending from 1900 to the present. We find robust evidence that local democracy nurtures growth. This relationship holds up when accounting for country-and year-fixed effects, when controlling for democracy at the national level, and when we treat our measure of local democracy as an endogenous regressor. Additional tests reveal that the relationship is clearer in contexts where our argument suggests that it should operate more strongly, namely (nationallevel) democracies and in periods and regions where local-level institutions have a more pronounced role in policy-making.3

A business case for democracy: regime type, growth, and growth volatility

“…24 Other statistical studies arguably "over-control" by holding constant factors that enhance growth, but which are also affected by democracy. 25 This practice of "blocking off" relevant indirect effects has led researchers to under-estimate the growth benefits of democracy. A metaanalysis of 84 studies substantiates this point, finding that the studies that control for several policy or outcome variables, including inflation, economic freedom, education, and political instability, are less likely to find a positive relationship.…”

Why does inclusion matter?

“…Another crucial issue that lies at the core of the nature of inclusion and its corollary, exclusion, is identity. As a collective phenomenon, exclusion happens when belonging to a certain group has a considerable impact on an individual's access to economic opportunities, development, and other resources, as well as on their ability to participate in the political process and exercise their rights (Stewart, 2010[11]; Klasen et al, 2018 [12]). Identity-based exclusion happens when certain groups are systematically excluded, discriminated against and disempowered on the basis of one or more shared characteristics in ways that profoundly affect their life chances.…”

“…These have resulted in an ever increasing number of people and groups who are marginalised and left behind (Fukuyama, 2011[39]; Plattner, 2011 [40]; Paz Arauco et al, 2014 [13]; Hardoon, 2017 [41]; Fuentes and Cookson, 2018 [9]). This has been the case even in contexts of steady (and sometimes spectacular) rates of growth among a variety of emerging and middle-income economies, at least until recently (Bermeo, 2009[42]; Klasen et al, 2018 [12]).…”

One Size Does Not Fit All: The Heterogenous Impact of Democracy on Economic Growth in Indonesia

“…Practically, There are only three studies that measure democracy at the sub-national level, namely the study by Harbers et al (2019) on the case of India and Gervasoni (2010) on the case of Argentina, with a focus that is not directly on the effects of economic growth. Meanwhile, Knutsen et al (2016) measure the impact of local democracy on national economic growth, but the unit of analysis is the country. This study is expected to enrich findings regarding the effects of democracy on economic growth at the sub-national level.…”