Democracy, Political Stability and Economic Growth

Abstract

This article investigates the interactions between democracy, political stability and economic growth. Two aspects of the study differentiate it from previous research. First, a simultaneous approach is adopted which combines the study of economic growth and political stability with that of economic growth and democracy. Secondly, a distinction is made between types of political instability, because different kinds of government change have different effects on economic growth and democracy. This analysis employs three-stage least-squares estimation, and utilizes aggregate data covering ninety-six countries from 1960 to 1980. The results indicate that democracy has a positive indirect effect upon growth through its impacts on the probabilities of both regime change and constitutional government change from one ruling party to another. In addition, the evidence indicates that the two kinds of political change mentioned above have significant and opposite effects on growth; that growth has a negative effect on regime change and a positive effect on the probability of the ruling party remaining in power; and that long-run economic growth tends to exert a positive effect upon democracy.