Analyzing the Role of Fiscal Capacity on the Relationship Between Democracy and Economic Growth
Abstract
This article continues the discussion on the impact of democracy on growth from the perspective of fiscal capacity by using a fixed effects model to analyze the impact of democracy, fiscal capacity, and economic growth on 22 OECD countries forming the European Union (EU-OECD countries) from 1995 to 2020. The study aims to investigate the factors that can influence and change the relationship between democracy and growth. The research results show that fiscal capacity increases the positive impact of democracy on economic growth. The study provides valuable insights for economists and policymakers interested in promoting democracy and economic growth and recommends that decision-makers prioritize these factors when developing strategies to stimulate economic growth.
References
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Afonso, A., Nickel, C., & Rother, P. C. (2006). Fiscal Consolidations in the Central and Eastern European Countries. Review of World Economics, 142(2), 402–421. https://doi.org/10.1007/s10290-006-0073-9
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Baum, M. A., & Lake, D. A. (2003). The Political Economy of Growth: Democracy and Human Capital. American Journal of Political Science, 47(2), 333–347. https://doi.org/10.1111/1540-5907.00023
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Feldmann, M., & Popa, M. (2022). Populism and economic policy: Lessons from Central and Eastern Europe. Post-Communist Economies, 34(2), 219–245. https://doi.org/10.1080/14631377.2022.2029253
Feng, Y. (1997). Democracy, Political Stability and Economic Growth. British Journal of Political Science, 27(3), 391–418. https://doi.org/10.1017/S0007123497000197
Geschwind, S., & Roesel, F. (2022). Taxation under direct democracy. Journal of Economic Behavior & Organization, 200, 536–554. https://doi.org/10.1016/j.jebo.2022.06.005
Ghardallou, W., & Sridi, D. (2020). Democracy and Economic Growth: A Literature Review. Journal of the Knowledge Economy, 11(3), 982–1002. https://doi.org/10.1007/s13132-019-00594-4
Gould, A. C., & Baker, P. J. (2002). D EMOCRACY AND T AXATION. Annual Review of Political Science, 5(1), 87–110. https://doi.org/10.1146/annurev.polisci.5.100201.101909
Gur, N. (2014). Taxation and democracy: An instrumental variable approach. Applied Economics Letters, 21(11), 763–766. https://doi.org/10.1080/13504851.2014.889793
Gurgul, H., & Lach, Ł. (2013). Political instability and economic growth: Evidence from two decades of transition in CEE. Communist and Post-Communist Studies, 46(2), 189–202. https://doi.org/10.1016/j.postcomstud.2013.03.008
Hou, Y., & Moynihan, D. P. (2006). The Case for Countercyclical Fiscal Capacity. Journal of Public Administration Research and Theory, 18(1), 139–159. https://doi.org/10.1093/jopart/mum006
Inuwa, N., Adamu, S., Sani, M. B., & Modibbo, H. U. (2022). Natural resource and economic growth nexus in Nigeria: A disaggregated approach. Letters in Spatial and Resource Sciences, 15(1), 17–37. https://doi.org/10.1007/s12076-021-00291-4
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Jamil, H., Ananda, C. F., & Prasetyia, F. (2022). It takes two to Tango: The joint effect of democracy and fiscal capacity on economic growth in Indonesia. Jurnal Perspektif Pembiayaan Dan Pembangunan Daerah, 10(5), 271–286. https://doi.org/10.22437/ppd.v10i5.20816
Johnson, N. D., & Koyama, M. (2017). States and economic growth: Capacity and constraints. Explorations in Economic History, 64, 1–20. https://doi.org/10.1016/j.eeh.2016.11.002
Joshi, D. K. (n.d.). Multi-party democracies and rapid economic growth: A Twenty-first century breakthrough?
Knutsen, C. H. (2010). Investigating the Lee thesis: How bad is democracy for Asian economies? European Political Science Review, 2(3), 451–473. https://doi.org/10.1017/S1755773910000214
Knutsen, C. H. (2013). Democracy, State Capacity, and Economic Growth. World Development, 43, 1–18. https://doi.org/10.1016/j.worlddev.2012.10.014
Murshed, S. M., Bergougui, B., Badiuzzaman, M., & Pulok, M. H. (2022). Fiscal Capacity, Democratic Institutions and Social Welfare Outcomes in Developing Countries. Defence and Peace Economics, 33(3), 280–305. https://doi.org/10.1080/10242694.2020.1817259
Murtin, F., & Wacziarg, R. (2014). The democratic transition. Journal of Economic Growth, 19(2), 141–181. https://doi.org/10.1007/s10887-013-9100-6
Philipov, D., & Dorbritz, J. (2003). Demographic consequences of economic transition in countries of central and eastern Europe. Council of Europe Publ.
Piątek, D., Szarzec, K., & Pilc, M. (2013). Economic freedom, democracy and economic growth: A causal investigation in transition countries. Post-Communist Economies, 25(3), 267–288. https://doi.org/10.1080/14631377.2013.813137
Rogers, M. Z., & Weller, N. (2014). Income taxation and the validity of state capacity indicators. Journal of Public Policy, 34(2), 183–206. https://doi.org/10.1017/S0143814X1300024X
Seelkopf, L., & Lierse, H. (2020). Democracy and the global spread of progressive taxes. Global Social Policy, 20(2), 165–191. https://doi.org/10.1177/1468018120911567
Teobaldelli, D., & Schneider, F. (2013). The influence of direct democracy on the shadow economy. Public Choice, 157(3–4), 543–567. https://doi.org/10.1007/s11127-013-0098-2
Xu, G. (2019). The colonial origins of fiscal capacity: Evidence from patronage governors. Journal of Comparative Economics, 47(2), 263–276. https://doi.org/10.1016/j.jce.2019.01.001
Afonso, A., Nickel, C., & Rother, P. C. (2006). Fiscal Consolidations in the Central and Eastern European Countries. Review of World Economics, 142(2), 402–421. https://doi.org/10.1007/s10290-006-0073-9
Andersson, P. F. & UNU-WIDER. (2021). Fiscal capacity in non-democratic states: The origins and expansion of income tax (WIDER Working Paper No. 2021; WIDER Working Paper, Vol. 2021). UNU-WIDER. https://doi.org/10.35188/UNU-WIDER/2021/116-7
Baklouti, N., & Boujelbene, Y. (2020). An econometric study of the role of the political stability on the relationship between democracy and economic growth. Panoeconomicus, 67(2), 187–206. https://doi.org/10.2298/PAN170308015B
Baum, M. A., & Lake, D. A. (2003). The Political Economy of Growth: Democracy and Human Capital. American Journal of Political Science, 47(2), 333–347. https://doi.org/10.1111/1540-5907.00023
Bergsen, P., Downey, L., Krahé, M., Kundnani, H., Moschella, M., & Slobodian, Q. (2022). The economic basis of democracy in Europe: Structural economic change, inequality and the depoliticization of economic policymaking. Royal Institute of International Affairs. https://doi.org/10.55317/9781784135362
Besley, T., & Persson, T. (2009). The Origins of State Capacity: Property Rights, Taxation, and Politics. American Economic Review, 99(4), 1218–1244. https://doi.org/10.1257/aer.99.4.1218
Broms, R. (2021). Boxholm tea party: Taxation and voter turnout in a mature democracy. Electoral Studies, 71, 102318. https://doi.org/10.1016/j.electstud.2021.102318
Colagrossi, M., Rossignoli, D., & Maggioni, M. A. (2020). Does democracy cause growth? A meta-analysis (of 2000 regressions). European Journal of Political Economy, 61, 101824. https://doi.org/10.1016/j.ejpoleco.2019.101824
Feldmann, M., & Popa, M. (2022). Populism and economic policy: Lessons from Central and Eastern Europe. Post-Communist Economies, 34(2), 219–245. https://doi.org/10.1080/14631377.2022.2029253
Feng, Y. (1997). Democracy, Political Stability and Economic Growth. British Journal of Political Science, 27(3), 391–418. https://doi.org/10.1017/S0007123497000197
Geschwind, S., & Roesel, F. (2022). Taxation under direct democracy. Journal of Economic Behavior & Organization, 200, 536–554. https://doi.org/10.1016/j.jebo.2022.06.005
Ghardallou, W., & Sridi, D. (2020). Democracy and Economic Growth: A Literature Review. Journal of the Knowledge Economy, 11(3), 982–1002. https://doi.org/10.1007/s13132-019-00594-4
Gould, A. C., & Baker, P. J. (2002). D EMOCRACY AND T AXATION. Annual Review of Political Science, 5(1), 87–110. https://doi.org/10.1146/annurev.polisci.5.100201.101909
Gur, N. (2014). Taxation and democracy: An instrumental variable approach. Applied Economics Letters, 21(11), 763–766. https://doi.org/10.1080/13504851.2014.889793
Gurgul, H., & Lach, Ł. (2013). Political instability and economic growth: Evidence from two decades of transition in CEE. Communist and Post-Communist Studies, 46(2), 189–202. https://doi.org/10.1016/j.postcomstud.2013.03.008
Hou, Y., & Moynihan, D. P. (2006). The Case for Countercyclical Fiscal Capacity. Journal of Public Administration Research and Theory, 18(1), 139–159. https://doi.org/10.1093/jopart/mum006
Inuwa, N., Adamu, S., Sani, M. B., & Modibbo, H. U. (2022). Natural resource and economic growth nexus in Nigeria: A disaggregated approach. Letters in Spatial and Resource Sciences, 15(1), 17–37. https://doi.org/10.1007/s12076-021-00291-4
Jaakkola, J. (2019). A Democratic Dilemma of European Power to Tax: Reconstructing the Symbiosis Between Taxation and Democracy Beyond the State? German Law Journal, 20(05), 660–678. https://doi.org/10.1017/glj.2019.55
Jamil, H., Ananda, C. F., & Prasetyia, F. (2022). It takes two to Tango: The joint effect of democracy and fiscal capacity on economic growth in Indonesia. Jurnal Perspektif Pembiayaan Dan Pembangunan Daerah, 10(5), 271–286. https://doi.org/10.22437/ppd.v10i5.20816
Johnson, N. D., & Koyama, M. (2017). States and economic growth: Capacity and constraints. Explorations in Economic History, 64, 1–20. https://doi.org/10.1016/j.eeh.2016.11.002
Joshi, D. K. (n.d.). Multi-party democracies and rapid economic growth: A Twenty-first century breakthrough?
Knutsen, C. H. (2010). Investigating the Lee thesis: How bad is democracy for Asian economies? European Political Science Review, 2(3), 451–473. https://doi.org/10.1017/S1755773910000214
Knutsen, C. H. (2013). Democracy, State Capacity, and Economic Growth. World Development, 43, 1–18. https://doi.org/10.1016/j.worlddev.2012.10.014
Murshed, S. M., Bergougui, B., Badiuzzaman, M., & Pulok, M. H. (2022). Fiscal Capacity, Democratic Institutions and Social Welfare Outcomes in Developing Countries. Defence and Peace Economics, 33(3), 280–305. https://doi.org/10.1080/10242694.2020.1817259
Murtin, F., & Wacziarg, R. (2014). The democratic transition. Journal of Economic Growth, 19(2), 141–181. https://doi.org/10.1007/s10887-013-9100-6
Philipov, D., & Dorbritz, J. (2003). Demographic consequences of economic transition in countries of central and eastern Europe. Council of Europe Publ.
Piątek, D., Szarzec, K., & Pilc, M. (2013). Economic freedom, democracy and economic growth: A causal investigation in transition countries. Post-Communist Economies, 25(3), 267–288. https://doi.org/10.1080/14631377.2013.813137
Rogers, M. Z., & Weller, N. (2014). Income taxation and the validity of state capacity indicators. Journal of Public Policy, 34(2), 183–206. https://doi.org/10.1017/S0143814X1300024X
Seelkopf, L., & Lierse, H. (2020). Democracy and the global spread of progressive taxes. Global Social Policy, 20(2), 165–191. https://doi.org/10.1177/1468018120911567
Teobaldelli, D., & Schneider, F. (2013). The influence of direct democracy on the shadow economy. Public Choice, 157(3–4), 543–567. https://doi.org/10.1007/s11127-013-0098-2
Xu, G. (2019). The colonial origins of fiscal capacity: Evidence from patronage governors. Journal of Comparative Economics, 47(2), 263–276. https://doi.org/10.1016/j.jce.2019.01.001
Published
2023-06-01
How to Cite
LI, Qinglin; KHALID, Nur Ajrun.
Analyzing the Role of Fiscal Capacity on the Relationship Between Democracy and Economic Growth.
International Journal of Advanced Research in Economics and Finance, [S.l.], v. 5, n. 2, p. 1-11, june 2023.
ISSN 2682-812X.
Available at: <https://myjms.mohe.gov.my/index.php/ijaref/article/view/22538>. Date accessed: 13 oct. 2024.
Section
English Section
