Essays on the political economy of economic and financial development

Papaioannou, E (2005) Essays on the political economy of economic and financial development. Doctoral thesis, University of London: London Business School.

Abstract

A new wave of research sees institutions as the key driving force of economic development. Yet many challenging questions on the institutions-development link remain open: For example, exactly which institutions and to what extent matter? What determines institutional structures? What are the major channels through which institutions influence economic development? The first three Chapters of my dissertation shed light on each of these questions. In the first essay after identifying the timing of recent democratizations I employ a before-after event study approach and study the dynamic "within" effects of democratization on growth. The panel results reveal new evidence of a significantly positive (yet non-linear J-shaped) long-run effect of democracy that sharply contrast the previous mainly cross-sectional work. Furthermore democratization is particularly beneficial, when the conditions required for its emergence and consolidation are favorable (for example when the reforming countries have relatively high levels of human capital). The second essay uses the constructed dataset of permanent democratic transitions to identify the determinants of recent democratizations distinguishing between features that drive the timing and those that determine the stability of the new political equilibrium. Specifically I examine countries that enter the sample as non-democratic to identify the systematic factors that led certain countries to abandon autocracy permanently. This approach stands in contrast to the (limited) empirical studies that pool all countries (always democratic, transition, and always autocratic) to quantify the correlates of long-run democracy. This methodology thus better addresses issues arising from reverse causality (democracy causing higher levels of human capital and economic development) and sample selection (in the beginning of the sample the richest countries were already democratic). The analysis yields new evidence that contribute to the ongoing academic interest on the deep determinants of pro-development institutions. The third essay establishes a link between both politics and legal institutions and international capital movements. The evidence thus offers a middle-ground approach on the ongoing debate on whether it is the law or politics the key determinants of financial patterns across the world. Since empirical work in finance has established a causal effect of financial development on growth the documented strong politics and institutions international financial liquidity nexus reveals a channel on how structural policies impact denJopment.