Democracy and growth: Institutions' role in a post-conflict economy

The paper addresses the relationship between democracy, autocracy, and growth. In particular, it examines whether inclusive institutions are superior to extractive institutions, even in post-conflict circumstances. The topic is highly relevant. The present world's turbulences and proxy wars ruin the economy and weaken democratic rules. The fact is that every war must end sooner or later, but it always leaves a devastated economy and ruined institutions. The immediate task is to stabilise the economy and restore democratic institutions. The consequences of military conflicts, however, are long-lasting and present a persistent threat to democracy and growth. The prevailing theory of the role of institutions in economic development links differences in per capita income across countries to the institutions in their long-term equilibrium. It applies a comparative-static method of analysis. This paper suggests another approach based on the dynamic stochastic approach. In the same country, economic growth over time was analysed in terms of changing institutions and the impacts of external shocks. The institutions were represented with two types of data: perception indices and empirical figures. More specifically, the Freedom House index of democracy and the World Bank's assessment of corruption control, together with a series of empirical variables: market openness, the depth of the financial sector, the influence of private property on the labour market, the pattern of property rights on investments (private, state, foreign), consumer sovereignty and soft fiscal constraint. The paper takes the Serbian economy as an example after the military conflict with NATO and the subsequent democratic transition from a political dictatorship (with some reference to South Korea after the war with North Korea). Serbia's experience may be unique, but it offers valuable insights into the complex relationship between democracy and growth in a post-conflict context. Immediately after the war and the renewal of democracy in Serbia, a neoliberal policy was followed. Due to the high cost of the transition, it was replaced relatively quickly by a populist policy. That policy was later substituted by an interventionist policy that initially respected the democratic rules, but not for long. A new hybrid system emerged in which weak democratic institutions coexisted with autocratic ones restored from the pre-conflict period. Hence, three institutional regimes - autocracy, democracy, and a hybrid system - were identified and econometrically tested. Finally, recommendations were proposed to maintain democracy in a post-conflict environment.