Democracy, Governance, and Economic Performance.

• Author: Norton, Seth
• Position: Book Review

Democracy, Governance, and Economic Performance By Yi Feng Cambridge, Mass.: MIT Press, 2003. Pp. xvii, 383. $40.00 cloth, $27.00 paperback.

In Democracy, Governance, and Economic Performance, Yi Feng provides a panorama of some great puzzles of the intellectual landscape: Why are some countries rich and others poor? How important are political systems to economics? How do political forces affect economic performance?

Feng as landscapist attempts an ambitious work. He succeeds by providing a compendium of relevant analysis and an extensive collection of original research--including statistical tests of the politics-economics nexus. Despite disparate and diverse subject matter, a coherent picture emerges. Politics affects economics. However, like impressionist landscapes, Feng's picture is fuzzy. Some details are missing.

The principal findings are straightforward. The umbrella conclusion is that political instability and policy uncertainty adversely affect economic growth. Democracy does not affect economic growth directly but does increase economic growth indirectly by reducing political instability and policy uncertainty and by enhancing other variables linked more directly to growth--birth rates, education, investment, and economic freedom. Moreover, Feng provides evidence against some putative dysfunctional effects commonly attributed to democracy. For example, democracy does not generate more inflation than autocracy does.

Feng makes two especially notable contributions that reflect his creativity and scholarship, add to our understanding of economic performance, and thus enrich important debates in economics and political science. The first contribution links political stability and economic growth. Feng uses regression analysis to estimate the probability of irregular regime changes; then the estimated probabilities to measure political instability; and finally instability and policy uncertainty (approximated by income-distribution measures), along with a number of well-established control variables in cross-country growth equations, to show that political instability and policy uncertainty reduce economic growth.

The second notable contribution involves Feng's use of Granger causality techniques to test whether political freedom causes economic freedom or vice versa. The tests indicate a causal flow from political freedom to economic freedom, not vice versa.

It is both noteworthy and praiseworthy that Feng does not limit his...