Democracy, volatility and development

The empirical literature on democracy and economic performance largely focuses on the impact of democracy on mean growth using cross-country data. The first essay focuses on volatility as an outcome rather than mean growth, and forges a robust alternate link between democracy and development by arguing that democracy makes economic performance less volatile over time, and that stability is an important component of development. This essay studies the determinants of growth and its volatility as a two-equation system, and uses Islamic countries as an instrument for democracy, and measures of economic diversification as instruments for volatility. The theory presented in the second essay characterizes political systems in terms of a distribution of power across political groups, and studies the impact of greater concentration of power on economic performance. When the qualities of available policy alternatives are uncertain, greater democracy (i.e. decentralization of decision-making authority) leads to more stable policy choices and outcomes. This helps explain the strong negative link between democracy and volatility uncovered in the first essay.;The second essay also shows that if these political groups engage in competition or conflict, greater political competition leads to more wasteful expenditures on conflict. This helps explain the empirical finding in the third essay---that political competition has a negative impact on growth and on the provision of productive public services such as health and education, although the other component of democracy---political participation has a positive impact. This essay constructs democracy indicators for over 4000 municipalities in Brazil, and studies their impact on economic performance. Municipality-level growth regressions control for the effects of local crop production and their price movements, the sectoral composition of the local economy, income inequality, inflation, ethnic and religious composition of the population, and a conditional convergence parameter, in addition to the democracy indicators. We also study the determinants of public service allocation across municipalities. We find that political participation enhances growth partly by forcing politicians to provide more public services.