Democracy and Prosperity in Two Decades of Transition

Theoretical and empirical findings on the relation between political liberties and economic prosperity have been anything but conclusive so far. Specifically, it is still unclear as to whether democracy enhances or reduces the capacity of governments to pursue market oriented reforms. In that respect, the transition countries of Eastern Europe as well as the former Soviet Union invite empirical investigation, since they all started from more or less the same state of pure dictatorship as well as central planning. Empirical investigations in the 1990s and early 2000s suggest a positive relation between democratization and liberalization, whereas the relation between democracy and growth was much less clear. This paper revisits these relationships by using a panel of 25 transition countries over 19 years. The results suggest a non-linear relationship such that initial democratization promotes growth but neither does a further increase in the indices. Furthermore, democracy and liberalization turns out to be positively related but with small coefficients, suggesting that democratization did not belong to the main driving forces behind market oriented reforms.