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Unravelling the link between democracy and economic complexity: fresh evidence from the Varieties of Democracy data

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Abstract

This study contributes to the literature on the link between institutions and economic complexity by investigating, as a first attempt, the effects of different types of democracy on economic complexity. Using an unbalanced panel of 116 countries and the latest version of the Varieties of Democracy dataset (V-DEM), we address the weak time-variance of our main regressors by using the most recent sequential linear panel dynamic estimator. The main results are as follows: first, democracy (consisting of electoral, egalitarian, participatory, liberal, and deliberative democracy dynamics) increases economic complexity. Our findings remain robust to the comprehensive inclusion of relevant covariates, to the use of an alternative dependent variable and an alternative key regressors, to the use of different samples, and to the instrumentation with regional waves of democratisation. Second, we provide evidence that the effect of democracy on economic complexity is heterogeneous with respect to the initial level of economic complexity, with democracy being associated with greater economic complexity in countries with a higher level of economic complexity. Finally, we provide evidence that human capital, innovation, and financial development mediated the effect of democracy on economic complexity.

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Fig. 1

Source: Author from the Observatory of Economic Complexity (OEC)

Fig. 2

Source: Observatory of Economic Complexity (OEC)

Fig. 3

Source: Lührmann et al. (2018), and V-Dem (V11.1)

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Availability of data

The datasets used during and/or analysed during the current research are available in the DataStream, WDI: World Development Indicators: https://databank.worldbank.org/source/world-development-indicators. DPI: Database of Political Institutions: https://publications.iadb.org/en/database-political-institutions-2020-dpi2020. OEC: Observatory of Economic complexity: http://atlas.media.mit.edu. V-DEM: varieties of democracies: https://www.v-dem.net/vdemds.html. FAO: Food and Agriculture Organization: https://www.fao.org/faostat/en/#data. World Bank Catalog: https://databank.worldbank.org/source/economic-fitness. Freedom House: https://freedomhouse.org/report/freedom-world. PolityIV Project: http://www.systemicpeace.org/inscrdata.html.

Notes

  1. This method proceeds in two steps. In the first step, only the coefficients of the time-varying regressors are estimated. In the second step, the coefficients of the time-invariant regressors are estimated.

  2. See Table 11 in the Appendix for the definition of each of the five dimensions of democracy according to V-DEM.

  3. http://atlas.media.mit.edu

  4. For more details on the construction of the instrument, see Acemoglu et al. (2019), p.17.

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Acknowledgements

We would like to thank the editors and anonymous referees for their comments and suggestions, which have greatly improved the previous version of this article.

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Authors and Affiliations

  1. Faculty of Economics and Management (LAREFA), University of Dschang, Dschang, Cameroon

    Henri Njangang

  2. CEREG, Faculty of Economics and Management, University of Yaounde II, Yaoundé, Cameroon

    Youssouf Nvuh-Njoya

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  1. Henri Njangang
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Contributions

HN, introduction, data collection, empirical analysis, and wrote the first draft. YN-N, oversaw the project, provided critical feedback and edited the second drafts, and authored the new version.

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Correspondence to Henri Njangang.

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Njangang, H., Nvuh-Njoya, Y. Unravelling the link between democracy and economic complexity: fresh evidence from the Varieties of Democracy data. SN Bus Econ 3, 77 (2023). https://doi.org/10.1007/s43546-023-00459-8

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