Unravelling the link between democracy and economic complexity: fresh evidence from the Varieties of Democracy data

This study contributes to the literature on the link between institutions and economic complexity by investigating, as a first attempt, the effects of different types of democracy on economic complexity. Using an unbalanced panel of 116 countries and the latest version of the Varieties of Democracy dataset (V-DEM), we address the weak time-variance of our main regressors by using the most recent sequential linear panel dynamic estimator. The main results are as follows: first, democracy (consisting of electoral, egalitarian, participatory, liberal, and deliberative democracy dynamics) increases economic complexity. Our findings remain robust to the comprehensive inclusion of relevant covariates, to the use of an alternative dependent variable and an alternative key regressors, to the use of different samples, and to the instrumentation with regional waves of democratisation. Second, we provide evidence that the effect of democracy on economic complexity is heterogeneous with respect to the initial level of economic complexity, with democracy being associated with greater economic complexity in countries with a higher level of economic complexity. Finally, we provide evidence that human capital, innovation, and financial development mediated the effect of democracy on economic complexity.