Economic and Political Liberalizations

This paper studies empirically the effects and the interactions of economic and political liberalizations. Economic liberalizations are measured as reforms that increase the scope of the market. Political liberalizations correspond to the event of becoming a democracy. Using difference-in-difference estimation, we study the effects on economic performance, macroeconomic policy and structural policies. Our main contribution is the analysis of the joint effects of both liberalizations, and the finding that the sequence of reforms matters. Countries that first liberalize the economy and then become democracies do much better than countries that pursue the opposite sequence, in almost all dimensions.