| Globalization is taking place with the rapid spread of multinational capital and political democracy. The optimists view these developments as propitious for generating peace and prosperity in the developing world. The pessimists claim that foreign capital is exploitative and that democracy is incompatible with economic growth. This study finds, however, that foreign capital and democracy both promote economic growth. Using the latest data on foreign investment and sounder testing procedures, this study finds that foreign capital potentially generates more growth than domestic capital, but foreign capital is merely a small fraction of the total investment of countries. Unlike most empirical analyses, this study gauges the institutional quality of democracy on growth, differentiating between competitive democracies and populist ones. Democracies with competitive party structures have positive effects on growth, but a high level of participation relative to the level of competition has negative effects. These results suggest that there is much less to be pessimistic about in terms of foreign capital and democracy's effects on economic development. Globalization bodes well for developing countries that are liberalizing their economies and crafting competitive polities. |
