In order to overcome any possible Nickell bias owing to lagged dependent variables, we show our results hold with GMM estimators proposed by Arellano and Bond (1991) and Hahn, Hausman, and Kuersteiner (2001). Given the pattern in Figure 1, our first strategy is to control for lags of GDP in linear regressions, including a full set of country and year fixed effects. Importantly, we allow for and estimate explicit dynamics of (log) GDP using a number of different strategies. This leads to a 0-1 measure of democracy for 184 countries annually from 1960 (or post-1960 year of independence) to 2010. We use information from both the Freedom House and Polity data sets as well as other codings of democracies to resolve ambiguous cases. We build on the important work by Papaioannou and Siourounis (2008) to develop a dichotomous index of democracy purged of spurious changes in democracy scores available in the standard datasets, and rely on this measure for most of our analysis. Finally, even with year and country fixed effects, changes in democracy may be correlated with other changes or respond to current or future economic conditions, raising obvious omitted variable bias concerns (Acemoglu et al. A reliable estimate of the impact of democracy on future GDP therefore needs to model and estimate the dynamics of the GDP process. Second, as shown in Figure 1, democratisations are preceded by a temporary fall in GDP. First, existing democracy indices are typically subject to considerable measurement error, leading to spurious changes in the democracy score of a country even though its democratic institutions do not truly change. There are several challenges in estimating the impact of democracy on growth. These are large but not implausible effects, and suggest that the global rise in democracy over the past 50 years (of over 30 percentage points) has yielded roughly 6% higher world GDP. Our central estimates suggest that a country that switches from nondemocracy to democracy achieves about 20% higher GDP per capita in the long run (over roughly the next 30 years). Our results show a robust and sizable effect of democracy on economic growth. In “Democracy Does Cause Growth”, we present evidence from a panel of countries between 19 challenging this view. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century ” But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. “One-party nondemocracy certainly has its drawbacks. Meanwhile, reacting to the rise of China, New York Times columnist Tom Friedman argues: Robert Barro’s seminal research in this area concluded that “More political rights do not have an effect on growth.The first lesson is that democracy is not the key to economic growth” (Barro 1997, pp. A belief that democracy is bad for economic growth is common in both academic political economy as well as the popular press.
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