The political economy of productivity growth

Abstract

This paper empirically evaluates the importance of institutions and political stability for productivity growth. We explore this relation in a novel way by evaluating the impact of political and institutional variables on the structural change and within-sector components of labor productivity growth. Our results do not provide robust evidence that democracy/autocracy affects productivity growth, either through structural change or within-sector productivity growth. However, political instability appears to have adverse effects on both components of productivity growth. Our estimates also show that economic freedom is associated with within-sector productivity growth. More precisely, our results suggest that an institutional context that favors business dynamism, that is, free entry, the growth of the more productive firms and the exit of the less productive, may be crucial for long-run productivity growth and economic development.