The international spillover effects of political transitions

Recent empirical literature on the democracy-growth nexus finds that democratization overall improves growth outcomes, but there is evidence of significant heterogeneity in the outcomes for different countries. In this paper I focus on quantifying one of the possible causes of such heterogeneity. The paper addresses the possibility of cross-country political spillover effects that impact economic growth.

The preliminary results of the panel data estimation support the hypothesis that countries surrounded by relatively more autocratic neighbors will also experience a more difficult economic adjustment to democratization. In particular, this paper presents evidence that for countries which have experienced democratization, moving away from their neighborhoods on the political spectrum implies slower GDP per capita growth in the long-run.

Although democratization may have an overall positive effect on long-run economic growth, its influence may be counterbalanced by the country‘s movement away from its neighborhood on the political spectrum. The short-run coefficients on political variables do not seem to significantly affect economic growth. However, in some specifications the countries that have not democratized seem to experience a temporary increase in the growth rate following the increase in the political distance with the neighborhood. As noted above, this result may be due to the greater "predictability" of politically restrictive regime in the times of change, which may impact short run growth.

There is some evidence, however, that the long-run effects of political variables may be region-specific. For Latin American countries in particular, democratization seems to be benefiting growth even when the absolute political distance between countries is increasing.