Polity Stability, Economic Growth, and Investment: A Dynamic Panel Analysis

In this paper, we empirically examine the effect of polity stability on economic growth and investment by using the dynamic panel estimation techniques for more than 100 countries over the period 1960-2009. Our initial results imply that democracy reduces growth in both developed and developing countries. However, there is no evidence for the existence of a significant effect of the democracy level on the overall, public and private investment. Our results also suggest that the growth and investment effects of polity stability proxied by regime durability and polity fragility measures greatly differ in developing and developed countries. Our empirical results indicate that polity stability promotes growth only in developing countries. It seems that regime durability and polity fragility affect economic growth mainly through investment. We also make a distinction between public and private investment when examining the effects of polity stability. It seems that the durability and fragility matter for private investment. Therefore, developing countries ought to put solid efforts to lessen polity instability to promote economic growth.