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The Economic Effects of Democratization: A Review of the Third Wave
Lansing, Noah
Lansing, Noah
Abstract
What is the impact that democratization has on economic performance in emerging economies? During the third wave of democratization, many countries began the process of moving away from authoritarian governments with exclusionary politico-economic institutions towards inclusive liberal democracies with competitive markets. This change in the balance of power between wealth creators and wealth appropriators provides an opportunity to test the Institutions Hypothesis to explain differences in economic performance across countries. More specifically, using difference-in-differences designs, I analyze how the process of democratization impacts four important dimensions of economic development: foreign direct investment (FDI), human capital, inequality, and national reserves. I find that democratization decreases FDI under all specifications. Regime transplacements had the largest decrease in capital inflows, followed by gradual transitions and then revolutions. Democratization slightly increases human capital, although with inconsistent statistical significance. In particular, transplacements had the largest positive effect, followed by a slight increase under replacements and a minute change under a transformation. Inequality tends to increase after democratization. Inequality increases considerably for countries that had a revolution and negotiated democratizations, while there was a slightly decrease for gradual transitions. Finally, democratization has virtually no statistically significant impact on reserves under any specification. The difference-in-difference regressions point to a strong short-term impact in particular. The fixed effects models suggests that these impacts remain notable, albeit smaller, in the long term. Checks for robustness and endogeneity corroborate many of these findings.
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2024-05-01
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Economics