Does democracy lead to economic reforms? And vice-versa?

I missed this IMF paper written in 2010. It is doing the rounds now as an NBER 2012 paper.

The paper looks at a huge dataset connecting economics with politics. It says democracy does lead to econ reforms. However, evidence does not support econ reforms  fostering democracy:

Empirical evidence on the relationship between democracy and economic reforms is limited to few reforms, countries, and periods. This paper studies the effect of democracy on the adoption of economic reforms using a new dataset on reforms in the financial, capital and banking sectors, product markets, agriculture, and trade for 150 countries over the period 1960–2004. Democracy has a positive and significant impact on the adoption of economic reforms but there is scarce evidence that economic reforms foster democracy. Our results are robust to the inclusion of a large variety of controls and estimation strategies.

They also discuss the  literature on the subject which is always interesting to read.

While there is a vast theoretical and empirical literature that considers the determinants of economic reforms in general, there is scarce evidence, particularly empirical, on the relationship between democracy and reforms.

Economic theory does not give a clear answer on whether political liberalizations favor or hinder economic reforms or if the relationship could go both ways. Democratic regimes could lead to more reforms if reforms create more winners than losers (Giavazzi and Tabellini, 2005). Democratically elected governments may also have greater legitimacy to implement and sustain policies bearing high short-term costs; similarly institutional changes—e.g., strengthening an independent legal system or a professional civil service required to ensure political freedom and democracy—could lead also to successful market reforms. Finally, democracy could create an environment conducive to economic reforms by limiting rent-seeking and putting in place a system of checks and balances (Dethier, Ghanem and Zoli, 1999).

Read on..

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