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    Democracy, Diversification, and Growth Reversals


    Cuberes, David and Jerzmanowski, Michal (2008) Democracy, Diversification, and Growth Reversals. Economic Journal, Forthcoming. pp. 1-49.

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    Abstract

    Several studies have documented a negative relationship between democracy and volatility. The latter is usually measured at high frequency - as the standard deviation of annual GDP growth rates. On the other hand, growth researchers have recently focused on the medium term and documented frequent shifts in the trend-growth process within countries. In this paper we aim to connect these two strands of the literature: we ask whether trend-volatility is also lower in more democratic countries. We find evidence of a common pattern in less democratic countries - there appear to be frequent medium term reversals of growth, i.e. episodes when a period of exceptionally high growth is followed by a period of exceptionally low or even negative growth, and vice versa. When compared with factors commonly associated with volatility such as measures of quality of institutions, macroeconomic policies and financial development, we find that democracy is the most robust predictor of a country's propensity for growth reversals. Motivated by this evidence we construct a model in which non-democracies have high barriers of entry for new firms. This leads to less sectoral diversification: fewer sectors are operated but more resources are channeled to each. In an uncertain environment this leads to infrequent but large growth accelerations when one of the few sectors operated is successful. However, these accelerations are followed by large declines when fortunes change in favor of the missing sectors. We present empirical evidence that confirms the positive relationship between democracy and industrial diversification.
    Item Type: Article
    Keywords: medium term growth; growth volatility; democracy; diversification;
    Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
    Item ID: 19610
    Depositing User: David Cuberes
    Date Deposited: 26 Mar 2025 16:00
    Journal or Publication Title: Economic Journal, Forthcoming
    Refereed: Yes
    URI: https://mural.maynoothuniversity.ie/id/eprint/19610
    Use Licence: This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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