On a comparative analysis of the impact of democracy on regulatory reform.

Date01 December 2022
AuthorNguena, Christian-Lambert
  1. Introduction

    Institutional factors are increasingly presented as fundamental factors in the economic performance of countries (Rodrik, 1999, Acemoglu et al., 2001), even if others such as geography or climate are put forward by some (Sachs, 2003). Economic policies now take the place of intermediary variables, or "transmission channels" at best, but empirical work sometimes even rejects this role (Easterly and Levine, 2003). "Institutions" or "governance" are however very broad concepts mixing heterogeneous elements, sometimes even including economic policies, which does not shed light on the question of specific impacts.

    The world has undergone a mutation and evolution in terms of heterogeneous democracy (1) both in space and time. As for the specific case of Africa, between 1885 (Berlin conference) and 1990, it underwent significant changes (2). In the United States, the revolution of 1776 led to the establishment, until the beginning of the 19th century, of an original democracy (3). The French Revolution (1789) concerned, in turn, the formation of a National Constituent Assembly, the vote on the Declaration of human rights and the adoption of the new Constitution establishing central suffrage. Finally, the English "revolution" of 1649and 1688 with the signature of a law (the Bill of Rights) (4). In the 1960s, regimes that present themselves as democracies but which are in reality dictatorships are set up in Latin America (5).

    This democratic renewal responds to the failures of autocratic regimes to achieve the goals of building national unity and economic development that they were thought better suited to achieve. If external shocks and variables linked to geography has been put forward to explain the deterioration of the economic conditions of the economies concerned, more voices have instead thought that the way of managing, has certainly been very determining (Sachs and Warner, 1997; Ndulu and O'Connel, 1999; Collier and Gunnings, 1999). Poor governance in practice would thus be the main reason for the inability to formulate and implement regulatory reforms.

    The empirical determinants of regulatory reforms remain an understudied field with more focus on the effects of democracy on reforms (Persson and Tabellini, 2006; Persson, 2009; Grosjean and Senik, 2011; Olper and Raimondi, 2013; Giuliano et al, 2013; Tresiman, 2014). Most of the work has focused on the issue of democracy and economic growth (6). An in-depth review of empirical studies shows that two approaches have been used to examine the link between democracy and reform / economic growth. These are cross-sectional econometric studies on the one hand, and comparative-historical approaches on the other. These two types of work produce opposite results in several cases (Huber et al., 1993). Overall, the questions of whether the two processes are complementary, the impact of one on the other, the causality direction have been addressed in the literature. Going beyond, and in the view to contribute to the existing literature, the question of the importance of democracy in the implementation of regulatory reforms with a comparative approach based on the Oaxaca--Blinder decomposition technics can be legitimated.

    Thus, this literature has limitations at least for the following two reasons: Firstly, it is more dedicated to the effects of democracy on macro regulatory reforms. Amin and Djankov (2014) are, to our knowledge, those who were interested in micro regulatory reforms to facilitate business for the first time. Secondly, and beyond the limit presented above, the empirical literature on the subject did not take into account the heterogeneity of their study sample; in fact, the specific characteristics of each region cannot only bias the results but also, cannot lead to specific recommendations. By focusing on a set of countries that have much in common like transition economies, we expect to make more useful generalizations about the impact of democracy on regulatory reforms. The present work can therefore claim to contribute to the literature by focusing on the impact of democracy on regulatory reforms and distinguishing itself from previous empirical studies which rather focus on the direct effects of democracy on reform without considering the heterogeneity of the sample.

    In addition, one limitation of the literature and especially the seminal empirical research of Amin and Djankov (2014) is that it is pure cross-country. However, it is well-known that cross-country regressions are much more prone to omitted variable bias problems than regressions based on change over time in the variables (Arellano & Bond, 1991). This is mainly why we move forward with panel data (Nguena et al., 2014, 2021).

    We build on existing literature with a claim of contribution by considering the transition economies on one hand and the rest of the world on the other, but also by taking more attention to micro reforms like Amin and Djankov (2014) did in their work. Figure 1 below presents the global correlation between both phenomena along with the diversification of the number of regulatory reforms between these two blocks. It appears that even if there is a positive correlation, the number of reforms for transition economies is superior to the one of the other economies. Moreover, figure A1 in annex shows an overwhelmingly opposite performance of democracy between both blocks. Until today, this statistical difference did not attract attention as explained above, since research investigation on this subject did not take into account regional specificities in general.

    Thus, why is there a difference in the level of regulatory reforms between these two blocks? Moreover, given that there is a significant difference of democracy in these two blocks and considering the literature on the importance of democracy for the economic development dynamic, can we explain this difference in terms of reforms implementation with the country level of democracy? The objective of this paper is to analyze the impact of democracy on regulatory reforms with a comparative approach between transition economies and the rest of the world. It is also a way of checking whether there is a convergence between this type of economy and the other economies in the world in terms of regulatory reforms.

    The main idea is that democracy would have been an advantage for transition economies in the facilitation of the implementation of regulatory reforms. Indeed, transition economies have received particular attention, especially after the fall of the Berlin Wall (Roland, 2012, 2014). This attention has been at least on two levels: it was necessary that these economies, which were for the most part communist, become market economies (Tresiman, 2014). This implies that reforms had to be undertaken to support the expansion of the market on one hand; also, it was necessary to help these economies, especially from a geopolitical point of view, to come towards the reputed democratic Western bloc on the other hand. However, one of the major postulates is that democracy is pro-market (Senik and Grosjean, 2007, 2008, 2011; EBRD, 1999; Aslund, 2013). One should therefore hypothetically expect a positive effect of democratization on pro-market reforms (Tresiman, 2014).

    Such an investigation has at least the following threefold interest: Firstly, it contributes to the literature filling the gap on the understanding of the determinants of regulatory reforms; secondly, the convocation in the literature for the first time on this types of problematics of the Oaxaca--Blinder decomposition technic which is widely used to identify and quantify the separate contributions of group differences in measurable characteristics and thirdly, it offer the possibility for developing countries to capitalize from transition economies experience depending to the results of the analysis.

    The baseline analysis using OLS, demonstrated that regulatory reforms are sensitive to an economy being in transition or not. Going further, to control the possibility of the individual constant error term to be dependent on the explanatory variables with OLS tehnics, we have estimated a Poisson model. At this level, democracy presented a non-significant impact for transition economies and a positively significant impact irrespective of the reform indicator type for other economies. Moreover, to provide a final answer to the main question which is to know if the country level of democracy determines the difference in terms of reforms implementation, we have applied the Blinder-Oaxaca decomposition method. We mainly concluded that democracy is not the basis of these observed differences.

    The rest of the study is organized as follows: Section 2 presents the theoretical framework; section 3 highlights the model and methodology; Section 4, the interpretation and discussion of the results; and finally, section 5 provides us with a conclusion and policy recommendation.

  2. Democracy and regulatory reforms: theoretical framework

    This section presents a brief discussion about the impact of political variables like democracy on policymaking within the domain of regulatory reforms. Regulatory reforms in the context of the post-communist transition nations are usually thought of as the wide-ranging changes which can be made to the existing economic regulatory, institutional and structural organization. Figure 2 borrowed from Staehr et al. (2009) is a diagrammatical piece showing a few of the variables influencing economic reforms. To avoid cluttering the figure 2, several other possibly critical components such as external economic and political improvements are left out. Besides, only parts of the complex interactions between diverse variables are shown.

    Starting from the bottom of Figure 2, the economic reforms are assumed to result from the political decision-making process. The composition of parliament, the government's ideological orientation and...

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