THE RELATIONSHIP BETWEEN DEMOCRACY AND ECONOMIC GROWTH IN MUSLIM MENA COUNTRIES (SPATIAL ECONOMETRIC APPROACH)

JOURNAL OF SMART ECONOMIC GROWTH www.jseg.ro ISSN: 2537-141X Volume 2, Number 3, Year 2017 THE RELATIONSHIP BETWEEN DEMOCRACY AND ECONOMIC GROWTH IN MUSLIM MENA COUNTRIES (SPATIAL ECONOMETRIC APPROACH) Arash Nayebyazdi Abstract: Impact of democracy and governance on the economic growth and development has always been a matter of conflict among researchers. In this research, by using data of 18 Muslim countries of MENA region during 2008-2014 by spatial econometric approach, impact of democracy on the economic growth is studied by democeracy index. The results show that democracy in the surveyed region has had a negative impact on the economic growth. The results of spatial panel data model indicate that there is a spatial relationship between the economic growth of MENA region countries and physical capital has also a spatial spillover effect. Key words: Democracy, Economic growth, Spatial econometrics Jel classification: P26, 047, R11 1 – Introduction The relationship between democracy and economic growth has always been a matter of conflict in recent decades. By studying different countries the impact of democracy on economic growth has known as a useless relation and the relationship is still vague (Doucouliagos and Ali Ulubasoglu 2008). Studies in different countries have shown different results. Despite causality between democracy and economic growth, evaluation of this relationship has considerable importance. This question is examined to see whether political right development is one of the affecting factors on policy making (Travers and Wacziarg, 2000). However, some believe that democracy and economic growth are complement of each other and act to strengthen each other and also there is a strong solidarity between democracy and growth (Uslu, 2012). Political and economic freedom, political stability and predictability 123 JOURNAL OF SMART ECONOMIC GROWTH www.jseg.ro ISSN: 2537-141X Volume 2, Number 3, Year 2017 of economic policies provide growth and development of economic promotion (Heidari, Alinejad and Jahangirzadeh, 2013). Some others believe that democracy has a negative or neutral impact on economic growth. In this viewpoint, despite acceptance of indirect positive impacts of democracy like higher stability property rights on economic growth, there is a belief that results of econometric research indicates that negative effects are adjusted by positive or neutral impacts (Gerring, Bond, Barndt and Moreno, 2005). There are many disputes on this matter that which one of growth and democracy concepts will cause each other `s creation. So, to investigate this issue there is at least five theoretical models (CHEN, 2007): the first viewpoint belongs to modernizations who precedence economic growth over democracy and its factor. (Lipset, 1959) The second approach is from Samuel Huntington who looks at this subject as a process. He believes that economic development output will cause corruption, so political system will move to post institution building democracy. (Huntington, 1968) The third viewpoint on contrary to modernizations, by evaluation of China believes that economic development will not lead to democracy, because authoritarian regimes with autocratic governance plan to show people that it is possible to benefit from economic development without political liberalization (Mesquita & Downs, 2005). The forth viewpoint is on this basis that democratic systems have better economic and social welfare indicators than undemocratic systems, so democracy is prior to development in developing countries. (Siegle, Einstein & Halperin, 2004) Although the fifth viewpoint believes that policy effects economic performance, but the impact of political regimes` type on economic growth is not significant (Przeworski and Limongi, 1993; Przeworski, Alvarez 1950, Cheibub, and Limongi, 2000). In this study, our assumption is on this basis that democracy impacts on economic growth is important. In this study, the effect of democracy index on economic growth is evaluated by using data panel of MENA region member Muslim countries. As surveyed countries are located in the same geographical region and probability of proximity effect exists, spatial econometric models are used to allow us to evaluate the effect of proximity. This study consists of six parts: in the first part introduction of report is presented. In the second part subject literature and in the following sections methodology and data will be examined. In the fifth part of paper experimental results obtained from modeling will be submitted. In the sixth part of paper summary and conclusion will come. 124 JOURNAL OF SMART ECONOMIC GROWTH www.jseg.ro ISSN: 2537-141X Volume 2, Number 3, Year 2017 2- Literature By analyzing countries` data in 1987- 2002 via GMM, the relationship between democracy and per capita income is evaluated. According to their conclusion, square of democracy effects economic growth. This means that at lower levels of democracy, economic growth will rise first, then after it wanes after reaching the maximum point. Libman 2011 , by studying the areas controlled by Russian federation in 2000 – 2004 , it is concluded that areas with high levels of democracy which are similar to autocratic governments have better economic performance than combined governments. (Democratic and autocratic) Doucouliagos and Ulubasoglu (2008) in their study conclude that a definite conclusion about democracy effect on economic growth can not be reachable. Although they believe that by indirect effect of democracy on human capital improvement, less inflation, reduction of political instability and creation of more economic freedom, economic growth will be pushed up further, but democracy does not have direct impact on the economic growth. DRURY, KRIECKHAUS and LUSZTIG (2006) evaluated the effect of corruption and democracy on economic growth in more than a hundred countries in 1982-1997 period. According to the authors while democracy has indirect effect on economic growth but corruption has negative and direct effect on growth. One of the indirect benefits of democracy is ability of decreasing the final effect of corruption on economic growth. It does not mean that there is no corruption in democratic countries, but politician's electoral mechanism prevents them from engaging in corruption to avoid jeopardizing their political life. It will cause better economic performance. Mobarak (2005) has evaluated the effects of economy and democracy fluctuations on economic growth. He concludes that democracy and pluralism will decrease fluctuation and reduction of fluctuation will increase growth. The writer believes that in lack of clear comprehensive consensus relationship between democracygrowth, a strong relationship between democracy and stability is proven. Heo and Tan (2001) by evaluating 14 developing countries, causality relationship between democracy and economic growth is examined by Granger causality (...truncated)