Does Political Structure Really Matter? Evidence on Political Structure, Financial Development and Economic Growth

Within a broad framework that incorporates financial and human capital variables, this document investigates the importance of political structure on economic growth. The paper:

• Presents an empirical investigation into the relationship between economic growth and political structure using cross-section, as well as, panel data;
• Explores the functional form of an appropriate model for economic growth and experiments with the most efficient ways of estimating it;
• Augments standard estimating models to include the effects of different political regimes and region specific parameters;
• Proposes measures to test the implications of military conflict on economic growth.

The study suggests that:

• Economies with relatively free political and economic regimes fare better in the growth process than those which repress these freedoms;
• Open political systems safeguard citizens against governmental intrusion and encourage competition and predictability, which generate the motivation to work, save and invest;
• Military conflict puts a strain on the available supplies of capital, skilled capital and foreign exchange.

The result of the study support the:

• Compatibility perspective, which advocates that full political rights and civil liberties generate conditions most conducive to economic development;
• Classical school, which argues that political rights and liberty are vital preconditions for economic progress.

The paper concludes that future research needs to develop more comprehensive measures of the political system, particularly on the political factors that specifically relate to economic growth.