Institutional and Financial Determinants of Development : New Evidence from Advanced and Emerging Markets

The paper tests the democratization-development hypothesis, namely that democratization has a positive impact on growth, economic development and changes in well-being. We employ a probit model to estimate the probabilistic indicator for democracy for a large sample of countries. Panel regressions are applied to explain the impact on growth of democratic political institutions, economic institutions and efficiency of financial management, along with other more "traditional" factors. The empirical findings support the hypothesis of the decisive role of democratic political and efficient economic institutions in stimulating economic growth. The main results also highlight the importance of effective allocation of financial resources. In addition to the growth regression results, it is argued, consistently with the capabilities approach to development by Sen, that many of the explanatory variables in the growth regression are positively related to development as capabilities enhancement. This is particularly true for democratic freedoms. Finally the problem of 'optimal'institutional development is discussed within the context of resource allocation, migration flows and political decision making