Political economy and structural transformation: democracy, regulation and public investment

Abstract

Technological progress is widely recognized as a fundamental driver of economic development and structural transformation. Nevertheless, substantial variations in productivity persist both within and across countries. While the literature on misallocation has made important progress, we still have a limited understanding of the extent to which these misallocations are driven by political factors and the actions (or inactions) of governments. This paper reviews the literature on various political distortions, including state capture, patronage, and firm-political connections, and their impacts on economic outcomes. The review emphasizes empirical research, especially in low- and middle-income countries, highlighting the need for coherent theoretical frameworks and policy interventions to address political distortions. The paper also provides suggestions for future research, aiming to advance our understanding of the complex interplay between political dynamics and structural transformation.