Essays on Growth and Political Transition

The thesis consists of a summary and three self-contained papers related to political transition and economic growth with parallel study of countries with and without Military Dictatorship (MD) history. Paper [1]: studies the experience of 83 countries in 1950-2004 and addresses the question: when do democratic transitions produce bad economic outcomes. Following the theoretical papers of Acemoglu et al. (2004, 2008), an attempt is made to control for both de jure and de facto sides of political power. The data seem to indicate that democratization induces additional socially wasteful investments into de facto power. The results also suggest that, under military governments countries with low concentration of economic power show better economic performance. In terms of Acemoglu et al. (2007), this may suggest that the institutional environment switches from a “weak” to a “strong” one. The potential tradeoff between democratization and political stability is mainly relevant to the degree of severity of reoccurring economic crises in countries with MD history. Paper [2]: investigates whether democracy renders economic performance more efficient. Efficiency, measured by (mean)/ (standard deviation) of output growth, becomes an important indicator of economic performance, if countries face a tradeoff between scenarios with high-mean and low-volatility of growth. This seems to hold when economies approach the efficient frontier. The study: (i) employs asymmetric (G)ARCH models; (ii) analyses variations in within-country effects of democratization on the growth efficiency conditional on cross-country variations in income inequality; (iii) studies the asymmetry of deviations from the mean. The results suggest (do not suggest) that in countries with no (with) MD history democratization moves economies towards the efficient frontier. Democratizations has stronger impact on the efficiency of growth in countries with higher (lower) income inequality if countries have (have not) MD history. Paper [3]: studies the survival of four different growth regimes conditional on political regime transitions that occurred during the first or prior year of the economic regime. The results suggest that in countries with no MD history, the fast-growing episodes initiated by democratization have about 40% lower hazard of termination than the episodes with no political transitions. This finding does not hold in countries with MD history. The effects of political transitions on the duration of ongoing economic regimes are additionally studied. Data suggest that transitions of both directions under economic crisis render the ongoing economic regime more durable.