Democracy and Reforms

There has been a sneaking suspicion that regulatory reforms (a la Doing Business) are easier in less democratic countries as the rulers can decide what to reform without the pain of a lengthy parliamentary or civil society debate. As it turns out, this is incorrect. Democracies are bigger reformers.

This is the main finding in a recent paper by Simeon Djankov and Mohammad Amin, Democracy and Reforms.

The abstract: "We use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reform, because politicians have the incentive to embrace growth-enhancing reforms to win elections. On the other hand, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. We test these hypotheses, using data on microeconomic reforms from the World Bank's Doing Business database. These data do not suffer the endogeneity issues associated with other datasets on changes in economic institutions. The results provide a robust support for the claim that democracy is good for growth-enhancing reforms."

This is surprising at first, but on second thought it becomes obvious: democracies bring political competition, and political competition brings the desire to do better economically....hence reforms.

The next question is what other important variables correlate with reforms. Mohammad and I are now working on a paper linking natural resources and the propensity to reform. This is particularly relevant in the past few years, with commodity prices shooting up. Perhaps their recent collapse (not cocoa though) will bring about more reforms. A case of positive externality.