ECONOMIC DEVELOPMENT AS A MATTER OF POLITICAL GEOGRAPHY

Abstract

Can limited government be a driving force of economic development? Thisidea goes back to Montesquieu, and is closely related to recent researchin institutional economics. Measuring limited government with the Heniszpolitical constraints index, and economic development with income percapita, the paper first does a causality test to see whether politicalconstraints lead income per capita. Since both are persistent variables,their differences are analyzed. The evidence from the 1960-1990 periodindeed suggests that increases in political constraints precede economicgrowth. The effect of political constraints might take a long timeperiod to set in, so a second test looks at the link between income percapita and polity persistence, conditioned on the degree of politicalconstraints. Polity persistence is positively linked to income percapita with high political constraints, but there is no link with lowpolitical constraints. This broader evidence suggests that limitedgovernment has been conducive to economic development over the long run.