Democracy and Economic Development: Disentangling the Effect of Elections and Rule of Law

Abstract

Researchers continue to debate whether the various aspects of democracy affect the economic development. Investigating this relationship is still an important on-going question in the economy policy at the international level. This paper provides evidence on how the political settlements: rule of law and elections, would affect the economic development and enhances the economic growth, using data for 192 countries over the 2010-2012 period. This paper empirically investigates whether democracy has an impact on the economic convergence of countries through the quality of institutions, which are measured by the electoral component of democracy and rule of law parameters. Investigations differentiate between Islamic and non-Islamic countries (mainly European). Results indicate that the elections parameter has a first-order effect on economic development but such a relationship is not confirmed for Islamic countries. Rule of low also influences this relation, but brings less efficient impact to the economic development.

Keywords: Economic growth, democracy, rule of law, election, instrumental variable approach

JEL Classification: F50, G32, O10