Militiades N. Georgiou, Nicholas Kyriazis and Emmanouil M. L. Economou

Correspondence: Emmanouil M. L. Economou, emmoikon@uth.gr

Department of Economics, University of Thessaly, Greece

pdf (552.2 Kb) | doi:

Abstract

In the present paper we undertake to link political stability under democracy with a set of indicators for economic freedom and financial crises, using panel data analysis. The sample covers annually the period 2000-2012 for selected European Union (EU) member-states, USA and Japan. The results support our main thesis, that political stability in democratic regimes is positively related to the set of economic freedom indicators and negatively to financial crises, because greater economic freedom influences positively investment and economic growth, while financial crises, which lead to austerity policies, which again lead to recession-depression, increase dissatisfaction among citizens with the workings of democracy and thus, to the rise of extremist parties. Our findings support the idea that political stability in democratic regimes is linked to economic stability and growth and vice-versa.

Keywords:

  democracy, economic freedom, financial crisis, panel data analysis.

References

Acemoglu, D., Johnson, S. & Robinson, J (2005). The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth. The American Economic Review, 95(3), 546-579.Acemoglu, D. & Robinson, J. (2006). Economic Origins of Dictatorship and Democracy. Cambridge University Press, New York.Acemoglu, D. & Robinson, J. (2012). Why Nations Fail. The Origins of Power, Prosperity, and Poverty. Crown Business, New York.Agnello, L. & Sousa, R. (2013). Political, Institutional, and Economic Factors Underlying Deficit Volatility. Review of International Economics 21(4), 719–732.Αlchian, A.A. & Demsetz, H. (1973). The Property Right Paradigm. The Journal of Economic History, 33(1), 16-27.Alesina, A. & Perotti, R. (1996). Income Distribution, Political Instability, and Investment. European Economic Review, 40(6), 1203–1228.Alesina, A., Ozler, S., Roubini, N. & Swagel, P. (1996). Political Instability and Economic Growth. Journal of Economic Growth, 1, 189–211.Alesina, A. & Perotti, R. (1997). The Politics of Growth: A Survey. In: Bergström, V. Ed., Government and Growth. Oxford University Press, Oxford.Amemiya, T. (2007). Economy and Economics in Ancient Greece. Routledge, London.Baltagi, B.H. (2001). Econometric Analysis of Panel Data. 2nd ed., John Wiley and Sons, Chichester.Barro, R.J. (1991). Economic Growth in a Cross-section of Countries. The Quarterly Journal of Economics, 106, 407–443.

Blomberg, B & Hess, G. (2002). The Temporal Links Between Conflict and Economic Activity. Journal of Conflict Resolution 46(1), 74–90.

Chaudry, A. & Garner, P. (2006). Political Competition Between Countries and Economic Growth. Review of Development Economics, 10(4), 666-682.Collier, P. & Hoeffler, A. (2004). Greed and Grievance in Civil War. Oxford Economic apers 56(4), 563–595.Davids, K. &‟t Hart, M. (2012). The Navy and Rise of the State: The Case of the Netherlands, c. 1570-1810. In: J. Backhaus (Ed.). Navies and State formation. Lit Verlag. Berlin.Davis, P. (2002). Estimating Multi-way Error Components Models with Unbalanced Data Structures. Journal of Econometrics, 106, 67–95.De Vries, J. & van der Woude, A. (1997). The First Modern Economy. Cambridge University Press, Cambridge.De Haan, J. & Siermann, C.L. (1996). Political Instability, Freedom and Economic Growth: Some further Evidence. Economic Development and Cultural Change, 44, 339-350.Dilliard, I. (1952). The Spirit of Liberty: Papers and Addresses of Learned Hand. Knopf, New York:Dunning, T. (2005). Resource Dependence, Economic Performance, and Political Stability. Journal of Conflict Resolution, 49(4), 451-482.Economou, E. M. L., Kyriazis, N. & Metaxas, T. (2014). The Institutional and Economic Foundations of Regional Proto-federations. Economics of Governance, doi 10.1007/s10101-014-0155-4.Economic Freedom of the World (EWF) Annual Report (2014). Available at http://www.freetheworld.com/2014/EFW2014-POST.pdf.Estrada, F., Mutascu, M.I. & Tiwari, A.K. (2011). Taxation and Political Stability Available at SSRN: http://ssrn.com/abstract=1888328 or http://dx.doi.org/10.2139/ssrn.1888328.Feng, Y (1997). Democracy, Political Stability and Economic Growth. British Journal of Political Science, 27(3), 391-418.Friedman, M. (1961). Capitalism and Freedom. New Individualist Review, 1, 3-10.Furubotn, E & Pejovich, S. (1972). Property Rights and Economic Theory: a Survey of Recent Literature. Journal of Economic Literature, 10(4), 1137-1162.Galbraith, J.K. (2008). The Predator State. How Conservatives Abandoned the Free Market and Why Liberals Should Too. Simon and Schuster Inc, New York.Gauci, P. (2001). The Politics of Trade: The Overseas Merchant in State and Society 1660-1720. Oxford University Press, Oxford.Glaeser, E., La Porta, R., Lopez de Silanes, F. & Schleifer, A. (2004). Do Institutions Cause Growth? Journal of Economic Growth 9, 271-303.Geithner, T.F. (2014). Stress Test: Reflections on Financial Crises. Crown Publisher, New York.Georgiou, M.N. (2011). Government Debt, Austerity and Strikes: A Panel Data Analysis for Europe. Available at SSRN: http://ssrn.com/abstract=1962694 or http://dx.doi.org/10.2139/ssrn.1962694.Georgiou, M.N. (2014). Political Stability Determinants. An Empirical Analysis with Panel Data. Available at SSRN: http://ssrn.com/abstract=2511106 or http://dx.doi.org/10.2139/ssrn.2511106.

Gelderblom, O. (2003). The Political Economy of Foreign Trade in England and the Dutch Republic (1550–1650). Paper Presented at the Workshop, The Political Economy of the Dutch Republic, Utrecht, the Netherlands.Gujarati, D.N. (2003). Basic Econometrics, 4th edition. McGrawHill.Gwartney, J. Lawson, R. & Hall, J. (2014). Economic Freedom of the World 2014. Annual Report. Vancouver, BC: The Fraser Institute., http://www.freetheworld.com/release.html.Halkos, G.E. (2003). Environmental Kuznets Curve for Sulphur: Evidence Using GMM Estimation and Random Coefficient Panel Data Models. Environment and Development Economics 8, 581-601.Hayek, F.A. (1973). Law Legislation and Liberty. Rules and Order. Vol. 1. University of Chicago Press, Chicago.Jong-a-Pin, R. (2009). On the Measurement of Political Instability and its Impact on Economic Growth. European Journal of Political Economy, 25, 15–29.Karayalçin, C. (2008). Divided we Stand, United we Fall. International Economic Review, 49(3): 973-997.Karger, H. (2013). The Bitter Pill: Austerity, Debt, and the Attack on Europe's Welfare States. Journal of Sociology & Social Welfare XLI(2), 33-53.Kaufmann, D. Kraay, A. & Mastruzzi, M. (2010). The Worldwide Governance Indicators: Methodology and Analytical Issues. Global Economy and Development at Brookings. Available at: http://www.brookings.edu/~/media/research/files/reports/2010/9/wgi%20kaufman n/09_wgi_kaufmann.pdf.Kennedy, P. (1989).The Rise and Fall of the Great Powers. Vintage Books, Νew York.Kyriazis, N. (2009). Financing the Athenian State: Public Choice in the Age of Demosthenes. European Journal of Law and Economics, 27(2), 109-127.Kyriazis, N. & Metaxas, T. (2011). Path Dependence, Change and the Emergence of the First Joint-stock Companies. Business History, 53(3), 363-374.Kyriazis, N. (2012). Spices and the Road to Capitalism. In: J. G. Backhaus (Ed.), Navies and State Formation: The Schumpeter Hypothesis Revisited and Reflected. Lit Werlag, Berlin.Kyriazis, N. & Economou, E. M. L. (2015). Democracy and Education: A History from Ancient Athens. In: J. G. Backhaus (Ed.), The University According to Humboldt. History, policy, and future possibilities. Springer Verlag, Berlin.La Porta, R. Lopez de Silanes, F., Shleifer, A. & Vishny, R. (1997). Legal Determinants of External Finance. The Journal of Finance, 52, 1131-1150.Lei, V., Tucker, S. & Vesely, F. (2010). Forgive or Buy back: An Experimental Study of Debt Relief. Review of Economic Design, 14, 291-309.Lipset, S.M. (1959). Some Social Requisites of Democracy. American Political Science Review, 53, 69-105.Lyttkens, C.H. (1994). A Predatory Democracy: An Essay on Taxation in Classical Athens. Explorations in Economic History, 31: 62–90.Mackil, E. (2013). Creating a Common Polity: Religion, Economy, and Politics in the Making of the Greek Koinon. University of California Press, Berkeley and Los Angeles.Malhotra, N.A. & Carnes, M.E. (2008). Political Stability Under Uncertainty: Applying Bounded Rationality to the Study of Governance and Civil Conflict. British Journal of Political Science, 38(1), 45-64. Available at SSRN: http://ssrn.com/abstract=2125437.Menard, C & Shirley, M.M. (2008). Handbook of New Institutional Economics. Springer- Verlag, Berlin- Heidelberg.

Ménard, C. (2014). The Contribution of Douglass C. North to New Institutional Economics. In: Institutions, Property Rights and Economic Growth: The Legacy of Douglass North. Cambridge University Press, Cambridge, 11-29.MacCulloch, R. (2005). Income Inequality and the Taste for Revolution. Journal of Law & Economics, 48 (1), 93-123.Munro, J.H. (2007). Τawney's Century (1540-1640): The Roots of Modern Capitalist Entrepreneurship in England. Working Paper 295, Department of Economics,University of Toronto. Retrieved: http://www.economics.utoronto.ca/public/workingPapers/tecipa-295.pdf.Mutascu, M.I., Estrada, F. & Tiwari, A. K. (2012). Taxation and Political Stability. Available at SSRN: http://ssrn.com/abstract=2009343, http://dx.doi.org/10.2139/ssrn.2009343.Nelson, J.M. (1991). A Critique by Political Scientists. In: G.M. Meier (Ed.), Politics and Policy Making in Developing Countries. ICS Press, San Francisco.Nelson, M.A., Ram, D. & Singh, N. (1998). Democracy, Economic Freedom, Fiscal Policy, and Growth in LDCs: A Fresh Look. Economic Development and Cultural Change, 46(4), 677-696.North, D. & Thomas, R.P. (1973). The Rise of the Western World: A New Economic History. Cambridge University Press, Cambridge.North, D. (1981). Structure and Change in Economic History. New York: W.W. Norton & Co.North, D. (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press, Cambridge.North, D. & Weingast, B. (1989). Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England. The Journal of Economic History, 49(4), 803-832.Lawson, P. (1993). The East India Company: A history. Longman, London.Van Nieuwkerk, M. (2009). The Bank of Amsterdam. On the Origins of Central Banking.: Sonsbeek Publishers, Amsterdam.Olson, M. (1991). Autocracy, Democracy and Prosperity. In: Zeckhauser, J. Richard, Strategy and Choice, MIT Press, Cambridge, 131-57.Olson, M. (1993). Dictatorship, Democracy, and Development. The American Political Science Review, 87(3), 567-576.Ormrod, D. (2003). The Rise of Commercial Empires: England and the Netherlands in the Age of Mercantilism, 1650-1770. Cambridge University Press, Cambridge.Ozler, S. & Rodrik, D. (1992). External Shocks, Politics and Private investment: Some Theory and Empirical Evidence. Journal of Development Economics, 39(1), 141- 162.Papaioannou, E. & Siourounis, G. (2008). Democratisation and Growth. Economic Journal 118(532), 1520-1551.Perotti, R. (1996). Growth, Income Distribution, and Democracy: What the Data Say. Journal of Economic Growth, 1(2), 149–187.Przeworski, A. & Limongi, F. (1993). Political Regimes and Economic Growth. The Journal of Economic Perspectives, 7(3), 51-69.

Przeworski, A., Alvarez, M.E., Cheibub, J.A. & Limongi, F. (2000). Democracy and Development: Political Institutions and Well-Being in the World, 1950-1990. Cambridge University Press, Cambridge.Rawls, J. (2005). Political Liberalism. Columbia University Press, New York.Rodriguez, F. & Rodrik, D. (2000). Trade Policy and Economic Growth. A Sceptic‟s Guide to Cross-national Evidence. In: Macroeconomics Annual 2000: NBER. MIT Press, Cambridge, Massachusetts:Rodrik, D. (1991). Policy Uncertainty and Private investment in Developing Countries. Journal of Development Economics, 36(2), 229–242.Rodrik, D. (2000). Participatory Politics, Social Cooperation and Economic Stability. American Economic Review, 90(2), 140-144.D. Rodrik and R. Wacziarg (2005) Do Democratic Traditions Produce Bad Economic Outcomes? American Economic Review, 95(2): 50-55.Rodger, N.A.M. (1997). The Safeguard of the Sea: A Naval History of Britain 660-1649. W.W. Norton & Company, New York and London.Roy, T. (2012). The East India Company. The World‟s Most Powerful Cooperation. New Delhi: Allen Lane-Penguin Books India.Riker, W.H. & Weimer, D.L. (1993). The Economic and Political Liberalization of Socialism: The Fundamental Problem of Property Rights. Social Philosophy and Policy, 10, 79-102.Schatzman, C. (2005). Political Challenge in Latin America: Rebellion and Collective Protest in an Era of Democratization. Journal of Peace Research, 42(3), 291-310.Schmitthoff, C.M. (1939). The Origin of the Joint-stock Company. The University of Toronto Law Journal, 3(1), 74-96.Svensson, M. Urinboyev, R. & Astrom, K. (2012). Welfare as a Means for Political Stability: A Law and Society Analysis. European Journal of Social Security, 14 (2). Available at SSRN: http://ssrn.com/abstract=2174576.Tavarez, T. & Warciarg, R. (2001). How Democracy Affects Growth. European Economic Review, 45(8), 1341-1379.Von Mises, L. (1981). Socialism: An Economic and Social Analysis. Liberty Classics, Indianapolis. Weingast, B.R. (1997). The Political Foundations of Democracy and the Rule of Law. The American Political Science Review, 91(2), 254-263.Weithman, P. (2013). Why Political Liberalism? On John Rawls's Political Turn. Oxford University Press, Oxford.Williamson, O. (1975). Markets and Hierarchies: Analysis and Antitrust Implications, Free Press: New York.Williamson, O. (1991). Comparative Economic Organization: The Analysis of Discrete Structural Alternatives. Administrative Science Quarterly, 36, 269-296.Vasileiou, E. (2014). Political Stability and Financial Crisis: What the Data Say for the European Union's countries. International Journal of Research in Business and Social Science, 3(1), 2147-4478.Vegh, C. (2013). Open Economy. Macroeconomics in Developing Countries. Massachusetts: MIT Press, Cambridge.