Economic and Political Liberalizations

Abstract

This paper studies empirically the effects of and the interactions amongst economic and
political liberalizations. Economic liberalizations are measured by a widely used indicator
that captures the scope of the market in the economy, and in particular of policies
towards freer international trade (cf. Sachs and Werner 1995, Wacziarg and Welch 2003).
Political liberalizations correspond to the event of becoming a democracy. Using a
difference-in-difference estimation, we ask what are the effects of liberalizations on
economic performance, on macroeconomic policy and on structural policies. The main
results concern the quantitative relevance of the feedback and interaction effects
between the two kinds of reforms. First, we find positive feedback effects between
economic and political reforms. The timing of events indicates that causality is more
likely to run from political to economic liberalizations, rather than viceversa, but we
cannot rule out feedback effects in both directions. Second, the sequence of reforms
matters. Countries that first liberalize and then become democracies do much better
than countries that pursue the opposite sequence, in almost all dimensions.