Analyzing the Role of Fiscal Capacity on the Relationship Between Democracy and Economic Growth
Qinglin Li1, Nur Ajrun Khalid1*
1 School of social sciences, Universiti Sains Malaysia, Penang, Malaysia
*Corresponding Author: [email protected]
Received: 25 February 2023 | Accepted: 5 May 2023 | Published: 1 June 2023
DOI:https://doi.org/10.55057/ijaref.2023.5.2.1
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Abstract: This article continues the discussion on the impact of democracy on growth from the perspective of fiscal capacity by using a fixed effects model to analyze the impact of democracy, fiscal capacity, and economic growth on 22 OECD countries forming the European Union (EU-OECD countries) from 1995 to 2020. The study aims to investigate the factors that can influence and change the relationship between democracy and growth. The research results show that fiscal capacity increases the positive impact of democracy on economic growth. The study provides valuable insights for economists and policymakers interested in promoting democracy and economic growth and recommends that decision- makers prioritize these factors when developing strategies to stimulate economic growth.
Keywords: democracy, fiscal capacity, economic growth
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1. Introduction
The purpose of this paper is to examine the relationship between political institutions and economic performance, and our study focuses on determining whether the state's fiscal capacity moderates the relationship between democracy and economic growth. This question is posed in the context of the rise of populist politics and authoritarian regimes, which threaten free market democracies (Passari, 2020), leading to the phenomenon of "democratic decline". In other words, democracies worldwide have seen regimes slowly begin to collapse from within under the impact of the system. Some scholars have questioned the quality of democracy in developed industrialized countries, which they consider insignificant and even detrimental to economic growth (Colagrossi et al., 2020; Knutsen, 2010). Fiscal pressures constantly challenge democracies and high unemployment and inflation rates have somewhat affected economic growth. This paper answers the question of the relationship between democracy and economic growth by selecting OECD member states from the European Union: Is there a moderating effect of fiscal capacity on democracy for economic growth?
The scope of the study in this paper is the EU-OECD countries. However, the relationship between democracy and economic growth has been studied more extensively(Abramson &
Montero, 2020; Baklouti & Boujelbene, 2020; Baum & Lake, 2003; Bergsen et al., 2022; Feng, 1997; Ghardallou & Sridi, 2020; Jamil et al., 2022; Knutsen, 2013). There has been little research on the EU-OECD countries that are committed to pluralistic democracy and adhere to the principles of an open and transparent market economy. Despite the high level of democracy and economic development in OECD countries, economic growth in EU-OECD countries has been low and even negative over the last decade (World Bank website). In such a context,
studying the impact of democracy on economic growth can explain the current problems in developed countries from the perspective of political institutions.
Moreover, the study shows that fiscal capacity is the ability of the state to raise revenue through taxation (Gur, 2014). Democracy is the foundation of tax. In democratic political systems, on the one hand, governments are usually required to consider the opinions and demands of the electorate to make transparent budgetary and fiscal decisions (Elsässer et al., 2022). On the other hand, democratic governments are accountable to the voters to maintain their political legitimacy. (Jaakkola, 2019). Therefore, fiscal capacity and democracy are closely related. At the same time, fiscal capacity is essential to economic development. Governments promote economic development by investing in infrastructure, promoting industrial development and ensuring social welfare (Piątek et al., 2013). Thus, by studying the impact of fiscal capacity on democracy and economic growth, we can provide policymakers with effective financial strategies to promote economic development.
This paper uses the World Bank and OECD iLibrary to collect data on crucial economically relevant research variables, including GDP per capita growth rate and national fiscal capacity indicators (income tax to total tax revenue) for EU-OECD countries. We use democracy indicator variables, mainly from the V-DEM dataset (an independent research institute founded by Prof. Staffan I. Lindberg in 2014). In this paper, we use a panel data fixed effects model to study the impact of democracy on economic growth from 1995 to 2020 as our primary model.
To analyse the fiscal capacity to obtain the moderating effect, we introduce the interaction term between democracy and fiscal capacity into the analysis.
Our main contribution is the first empirical study of the relationship between democracy and economic growth in the EU-OECD countries from the perspective of the moderating effect of fiscal capacity. We also provide new evidence on how democracy affects economic growth in developed countries. Our empirical results show that the stronger the state's fiscal capacity, the more pronounced the growth-enhancing effect of democracy on the economy in the EU-14 countries of the EU-OECD countries, i.e., the more developed and democratic economies.
However, this moderating effect is insignificant in CEE-8 countries from EU-OECD countries.
2. Literature Review
2.1 Democracy and Economic Growth
Research on the relationship between democracy and economic growth can be divided into two categories. The first category examines the effect of democracy on economic growth, and the second concerns the effect of economic growth on democracy (Baklouti & Boujelbene, 2020).
The school of thought that supports democracy for economic growth argues that democracy facilitates economic growth (Acemoglu et al., 2019). Under democratic conditions, where the power of the government is constrained from acting arbitrarily and where property rights and market institutions are protected, there are reliable institutional conditions for economic prosperity. Conversely, without constraints on political rights, political manipulation provides a platform for resource acquisition by the powerful. As a result, the country is vulnerable to economic depression. Second, public policies tend to be more responsive in democracies, which is more likely to lead to economic growth when responsive to public interests (Bao, 2018). At the same time, democracies also have a stronger welfare orientation and propensity to consume. However, redistributive and populist policies are killers of economic growth (Feldmann & Popa, 2022).
Economic growth highly depends on democracy and other variables (Feng, 1997; Gründler &
Krieger, 2016; Knutsen, 2012). Firstly, the theory of development economics emphasizes that factors such as capital accumulation (Joshi, 2011.), natural resources (Inuwa et al., 2022), human capital (Baum & Lake, 2003), savings and investment (Hou & Moynihan, 2006) have an impact on economic growth. Second, Douglas North (1990), a representative of the new institutionalist school, argues that the reduction of transaction costs, an effective property rights system, and the formation of the proper incentive structure are critical to long-term economic growth. In addition, economic growth is also associated with knowledge, technology, innovation, entrepreneurship, and the role of government (Bao, 2018). Ghardallou & Sridi (2020) suggest that the impact of democracy on economic growth is not direct and must go through specific channels like political stability, protection of property rights, and technological innovation. They also suggest the economic impact of the form of democracy and the type of electoral system. Parliamentary systems are more likely to stimulate growth than presidential systems by increasing the risk of political gridlock.
In contrast, parliamentary systems can better overcome this challenge by reducing resistance to reform, encouraging investment and positively influencing economic growth. Furthermore, proportional democracies have higher economic growth (Mankiw 1992). This is because proportional electoral rules facilitate policy stability, create a stable business environment, and encourage domestic investment by reducing sudden changes after a cabinet is formed.
Mauk, M. (2021) shows democracy is the only system guaranteeing economic growth. This view is supported by Ghardallou & Sridi (2020) and Claassen & Magalhaes (2022), who hypothesize that democracy can provide a framework for economic growth by allowing citizens to elect leaders who will implement policies that promote economic growth.
Furthermore, a democratic political system allows citizens to participate freely in political life, hold fair elections, and remain accountable to the electorate (Acemoglu and Robinson 2006).
Because of these characteristics, democratic regimes limit the power of decision-makers within the framework of the constitution and laws (Weber, 1922; Ghardallou & Sridi, 2020), which reduces the abuse of power. As a result, democracy becomes synonymous with long-term perspectives and optimal economic decisions, which facilitate the increase of domestic and foreign investment and promote the accumulation of physical capital (Pastor and Hilt 1993).
Theories against democracy for economic growth suggest that the influence of democracy on growth dynamics is unclear. (Knutsen (2010) believes that democracy can lead to social instability or political stalemate due to its political rights. Knutsen (2010) believes that democracy can lead to social unrest or political stalemate owing to its political rights, political contestation, and civil liberties. Therefore, democratic governments are unable to promote rapid economic development. For example, some policymakers and researchers seem to believe that an authoritarian regime is necessary to support economic growth, especially in relatively developing countries (Murtin & Wacziarg, 2014).
Regarding the discussion on democracy and economic growth, the skeptical school of thought argues that democracy and economic development are unrelated because democratic governments do not contribute much to economic growth. They say that the democratic nature of the political system can be ignored and emphasize that the focus should be on the party system (multi-party or two-party system) and the government's development strategy (import and export) (Feng, 1997). However, some literature focuses on the reverse effect, i.e., the causal relationship between economic growth and democracy (Benhabib et al., 2011). The empirical evidence on the relationship between political institutions and economic growth is mixed. To
sum up, we can say that rich literature exists on democracy and economic growth. However, the literature explaining the relationship between democracy and economic growth from the perspective of fiscal capacity is limited.
2.2 Democracy， Fiscal Capacity, and Economic Growth
Democracy, fiscal capacity, and economic growth are closely interrelated. The origins of democracy and warfare are connected to fiscal capacity (Andersson & UNU-WIDER, 2021;
Jamil et al., 2022; Knutsen, 2013), which in turn is an essential determinant of economic development (Xu, 2019). Throughout European history, taxation has been considered necessary to stimulate democratic transformation (Broms, 2021). Fiscal capacity refers to the state’s ability to generate revenue through taxation (Gur, 2014). The state also can implement policies through instruments such as taxation (Johnson & Koyama, 2017). During revenue shocks, governments utilize fiscal reserves to mitigate emergency spending and raise taxes to measure fiscal governance performance (Hou & Moynihan, 2006).
The emergence of the personal income tax (PIT) is closely linked to the rise of the modern fiscal state. The PIT is a tax on the directly assessed income of individual taxpayers. It has been a significant component of government budgets for nearly a century and is often used as an indicator of fiscal capacity (Besley & Persson, 2009; Murshed et al., 2022; Xu, 2019;). At the macro level, there is partial support for the idea that increased taxation is associated with more democracy. Furthermore, observational (Broms, 2015) and experimental (Weigel, 2017) evidence at the micro level suggests that tax stimulates oversight, political participation, and civic activity that affect economic performance across development contexts.
Democracy is a prerequisite for tax legitimacy, while redistributive income taxes strengthen the conditions for equal democratic participation by allocating resources and balancing citizens' political power (Jaakkola, 2019). In fact, a democratic system can increase the state's fiscal capacity. In democracies, political decisions are subject to democratic elections and extensive citizen participation and oversight. Governments require the sufficient fiscal capacity to meet citizen demands and obtain enough tax revenues from the economy to implement policies (fiscal capacity) (Johnson & Koyama, 2017) to maintain social stability and promote economic development. Knutsen (2013) argued that competitive elections increase accountability and reduce corruption because monitoring government expenditures promote efficiency and equity in fiscal governance and prevents the use of public authority for private gain. Thus, democratic institutions are conducive to improving fiscal capacity because power and responsibility are mutually constrained in representative democracies. Geschwind & Roesel (2022) note that in a direct democracy, citizens have a voice and can selectively change fiscal policy. Thus, property taxes are reduced for citizens.
Conversely, strong fiscal capacity also benefits a democratic system. In other words, when a country has a robust fiscal capacity, democratically elected politicians can implement effective economic policies, leading to increased public satisfaction and trust in the government. In contrast, countries with limited fiscal capacity tend to pursue short-sighted economic policies to reassure voters (Jamil et al., 2022). Although democracy allows politicians to choose good policies, the effectiveness of implementing policies in countries with low fiscal capacity is questionable (Knutsen, 2013). Thus, the economic impact of democracy is related to fiscal capacity.
Moreover, rulers are influenced by institutional factors when manipulating the government's fiscal capacity. Persson and Tabellini (2002) find that parliamentary systems are more likely
to cut taxes before elections than presidential systems. This is because parliamentary systems can better adapt fiscal policy to electoral demands than presidential systems. In summary, fiscal capacity and democracy are closely interconnected, and political systems respond differently to fiscal capacity.
Taxation is an instrument of fiscal policy that plays an important role in democracies, where it determines the level of fiscal capacity and correlates with the dynamics of economic development. Taxation is an essential source of income for the state, as it guarantees state revenues to finance public goods and the redistribution of wealth (Seelkopf & Lierse, 2020).
The fiscal capacity and the ability to provide public services are the foundation for the generation of the economy (Xu, 2019). Growth effects are generated by promoting redistributive policies by taxing higher-income groups (Franzese 2002; Papadia 2016).
Moreover, the development of individual freedom stimulates growth by encouraging entrepreneurship. but, it has adverse effects by exacerbating conflicts in the distribution of income and wealth. (Aisen & Veiga, 2013).
As a typical game of democratic institutions, it is implicitly uncertain regarding its impact on economic performance. Governments with strong fiscal capacity can better invest in infrastructure, education, health care, and other essential services, which helps spur economic development. Conversely, governments in countries with weak fiscal capacity tend to use tariffs as the basis of their tax systems (Besley & Persson, 2009), which can reduce social spending (Murshed et al., 2022) and weaken democratic governance (Rogers & Weller, 2014).
Furthermore, taxation is a key government policy instrument closely linked to elections. In democracies, most citizens demand more redistributive and progressive taxation (Seelkopf &
Lierse, 2020). Elections and democracy can increase tax revenues because both systems favor median decision-makers with relatively low incomes who demand taxes to finance redistribution and public goods (Gould & Baker, 2002) that generate economic activity (Jamil et al., 2022). The relationship between taxation and representation is fundamental to the emergence of democratic governance. (Broms, 2021).
When multiple decision-makers are involved in policy control, the electoral process can become complicated due to bargaining and proxy problems, particularly when these decision- makers serve different constituencies (Franzese 2002). Since taxation is an effective policy instrument for income redistribution, governments can only raise sufficient revenue to provide public goods if they can adopt modern tax policies. This is because democracies respond positively to the policy preferences of low- and middle-income voters, so politicians will respond to their voters' preferences and adopt policies that suit their economic interests (Meltzer & Richard, 1981). In contrast, democratic governments are more likely to adopt progressive taxes, such as income and inheritance taxes, when they are accountable to their constituents and the poor (Seelkopf & Lierse, 2020). In sum, progressive taxation and transfers are essential to effective fiscal redistribution. Through taxation, democratic governments strengthen their fiscal capacity and adopt progressive taxes to increase spending on public goods and stimulate economic activity.
2.3 Hypotheses
Fiscal capacity increases the impact of democracy on economic growth.
3. Research Method
3.1 Data
This paper examines the effects of democracy on economic growth by analyzing data from 22 OECD countries from the European Union. For the analysis, we have divided these 22 countries into two categories based on geopolitical factors: one in Central and Eastern European Countries (Poland, Hungary, Czech Republic, Slovakia, Estonia, Slovenia, Latvia, and Lithuania). We called CEE-8 countries. Another is non-Central and Eastern European Countries (Austria, Belgium, Denmark, France, Finland, Germany, Greece, Italy, Ireland, Luxembourg, Netherlands, Portugal, Sweden, and Spain). We will therefore refer to the EU- 14 countries and the CEE-8 countries for this assessment.
Although the economies of the OECD countries are more developed, there are still differences in the political systems and levels of economic development between the different regions of Europe during the past 30 years, especially in the countries of Central and Eastern Europe after the dramatic changes in Eastern Europe. They were replaced by extensive democracy after the collapse of communist regimes throughout Eastern Europe and the former Soviet Union. The EU is the largest union of developed countries with a solid economic base. The OECD provides a platform for countries to share their experiences and find solutions to common problems.
Therefore, 22 EU-OECD countries were selected to analyze the impact of political systems on economic development.
We used data from World Bank and the OECD iLibrary economic database for the last 26 years to measure the impact of democracy on economic growth in the OECD economies of the EU.
We assessed whether fiscal capacity has contributed to the effects of democracy on economic growth in these countries. We then also compare the WE-14 countries and CEE-8 countries’
economies in these respects in the EU-OECD countries.
We selected the V-DEM database's democracy index to measure democracy, where the participatory component index relates to civil society participation and the impact of sub- national government. The egalitarian component index is concerned with equal protection, access and equal distribution of resources. Regarding variable selection, we measure economic growth in terms of GDP per capita growth rate. GDP per capita growth rates can be accessed directly through the World Bank database. Andersson (2021) states that fiscal capacity is measured by the share of income tax to tax revenue, as personal income tax reflects a country's fiscal capacity. In this paper, we also use income tax as a proportion of tax revenue for the last 26 years for each economy to indicate the country's fiscal capacity.
Table 1: Descriptive statistics
(1) (2) (3) (4) (5)
VARIABLES N mean sd min max
country 572 11.50 6.350 1 22
year 572 2,008 7.507 1,995 2,020
gdp 568 2.167 3.706 -14.46 23.20
D_Par 572 0.633 0.0501 0.317 0.766
D_Ega 572 0.776 0.0711 0.334 0.880
CF 569 27.66 10.55 2.208 65.26
cpdem_incotx 569 0.188 0.686 -1.002 3.499
reg_cee 572 0.364 0.481 0 1
Number of countries 22 22 22 22 22
3.2 Model
A total of 22 EU-OECD countries from 1995 to 2020 were selected for our study to assess the impact of democracy on economic growth in these countries. This paper introduces the country's fiscal capacity as a control variable for the model under study.
Our study constructs the underlying empirical model to analyze the impact of democracy and fiscal capacity on GDP, as in equation (1)
𝑔𝑑𝑝𝑖𝑡= 𝛼0+ 𝛼1𝐷𝑖𝑡+ 𝛼2𝐹𝐶𝑖𝑡+ 𝑢𝑖+ 𝜆𝑡+ 𝜖𝑖𝑡 (1)
Where i denotes the countries in the sample; t represents the years; D means a vector of Democracy including the participatory component index D_Par， The egalitarian component index D_Ega; FC denotes the fiscal capacity; u_i represents the time-invariant country characteristics; λ_t is the time effects; ϵ_it denotes the disturbance term.
In this paper, after processing the data, an F-test was carried out, and the results showed that the p-value was 0, rejecting the original hypothesis, indicating that there was an individual effect in the model; to test whether the individual effect was a fixed effect or a random effect, a Hausman test was carried out and the p=0. The Hausman test showed that the individual effect was a fixed effect, so a fixed effect model was chosen, while individual and time effects were added to the model, i.e., a two-way fixed effect model. The Hausman test obtained 0, so a fixed effects model was chosen. In contrast, individual and time effects were added to the model, i.e., a two-way fixed regression was carried out using a two-way fixed effects model, and a time dummy variable was generated.
To further investigate the moderating effect of state fiscal capacity on the influence of democracy on economic growth, we also include interaction effects in our basic model, as in equation (2).
𝑔𝑑𝑝𝑖𝑡= 𝛼0+ 𝛼1𝐷𝑖𝑡+ 𝛼2𝐹𝐶𝑖𝑡+ 𝛼3(𝐷𝑖𝑡∗ 𝐹𝐶𝑖𝑡) + 𝑢𝑖+ 𝜆𝑡+ 𝜖𝑖𝑡 (2)
Where i denotes the countries in the sample; t represents the years; D means a vector of Democracy including; FC denotes the fiscal capacity; 〖(D〗_it*〖FC〗_it) is the interaction term; u_i represents the time-invariant country characteristics; λ_t is the time effects; ϵ_it denotes the disturbance term.
At this point， the marginal effects of，D_it and 〖FC〗_it on GDP per capita can be expressed as (3) and（4）：
Δ𝑔𝑑𝑝⁄ΔD= 𝛼1+ 𝛼3𝐹𝐶 (3)
Δ𝑔𝑑𝑝
⁄ΔFC= 𝛼2+ 𝛼3𝐷 (4)
The marginal effect of democracy on economic growth is also known as the moderating effect of fiscal capacity when another explanatory variable, fiscal capacity, influences it. This effect can be expressed as (5)：
Δ (Δ𝑔𝑑𝑝
⁄ΔD)
⁄ΔFC= 𝛼1+ 𝛼3𝐹𝐶 (5)
This effect of marginal utility can be interpreted as the effect of democracy on economic growth
when，𝛼3 > 0, increases as the fiscal capacity of the state increases, and conversely, when 𝛼3 < 0, the effect of democracy on economic growth, when the state's fiscal capacity increases, decreases.
To make the interaction term regressions as good as possible for the coefficients of the main terms to be interpreted, we have centralized the interaction terms (i.e., the variables are subtracted from the mean). To make the interaction term regression as good as possible for the coefficients of the main terms to be interpreted, we have centralized the interaction terms (i.e., the variables minus the mean). Due to the historical context of the development of the CEE countries, we added a regional dummy variable to this. For observation, this dummy variable divides EU-OECD countries in our sample into CEE countries (CEE-8) and non-CEE countries (EU-14).
3.3 Results and Discussion
Table 2: Result
(1) (2) (3) (4)
VARIABLES FE interaction CEE non_CEE
D_Par -14.137** -20.986** -24.693 -33.962**
(-2.26) (-2.33) (-1.37) (-2.51)
D_Ega 7.459* 21.801** 26.498* 11.199
(1.28) (2.42) (1.83) (0.83)
FC 0.109** 0.322*** 0.399*** 0.186**
(2.19) (4.82) (3.37) (1.97)
C.Dp*FC 0.911 1.015 3.042**
(1.04) (0.43) (2.35)
Constant 3.751 -10.569* -9.307 7.786
(1.50) (-1.83) (-0.69) (0.71)
Observations 565 565 201 364
R-squared 0.561 0.051 0.079 0.042
No. country 22 22 8 14
Country FE YES YES YES YES
Time FE YES YES YES YES
t-statistics in parentheses
*** p<0.01, ** p<0.05, * p<0.1
(1) In our basic fixed effects model, the ratio of income tax to government tax revenue is significant at the 5% level and positively correlated with GDP per capita growth. This reflects that the stronger a country's fiscal capacity, the faster its economic growth. Democratic participation, on the other hand, is negatively correlated at the 5% level. Andersson (2021) notes that the share of income tax revenue is used to measure fiscal capacity because income tax is a demanding national tax in terms of scope and difficulty of administration. It is, therefore, a representative measure. Our results are in line with Andersson's theory. However, in our basic model, participatory democracy negatively affects economic growth. This may be due to the inclusion of direct domination in the indicators of participatory democracy. As most developed industrial countries are representative democracies, direct democracy may be complex for politicians to control, leading to adverse economic effects (Teobaldelli & Schneider, 2013).
This reason may have led to the opposite effect of economic growth in our sample.
(2) We include interaction terms and find that the effect of decentralization is not significantly related. To the extent possible, this reflects that the state's fiscal capacity does not significantly affect the moderating impact of democracy on economic growth in our sample. This is even though national fiscal capacity and various indices of democracy significantly correlate with
economic growth. Based on the sample country selection, some of the EU-OECD countries are from Central and Eastern Europe. The CEE countries underwent a democratic transition in the 1990s with their political system reforms, frequent government changes, and cabinet reshuffles (Gurgul & Lach, 2013). And this unstable political system cannot provide a stable environment for economic development. There are also differences in population, income levels, educational attainment, and foreign investment compared to other developed countries in the EU (Philipov
& Dorbritz, 2003). Therefore, we model the interaction effects by generating new dummy variables for categorical regression analysis depending on whether the country is in Central and Eastern Europe or not.
(3) Considering our sample, the country's context, and the transition period's impact. We ran regression analyses classifying our sample into Central and Eastern Europe (CEE-8) and non- CEE countries (EU-14). At this point, we found very different results. In the CEE-8 countries, our interaction term is not significant and only state fiscal capacity and egalitarian democracy contribute significantly to economic growth. This is consistent with earlier evidence on the absence of a moderating effect of national fiscal capacity in the CEE transition period. This is because, first, in the pretransition period in CEE, political instability and dramatic social unrest were experienced. Even though political democratization and marketization of the economy, large-scale institutional reforms did not significantly increase the country's productive living standards (Ju, 2016). Secondly, citizens' incomes are low, and the transformation of the economy has not brought significant results and still falls far short of Western standards (Philipov & Dorbritz, 2003). The third is that the emergence of populist parties and governments over the last 20 years or more has increased the difficulty of democratic governance in the CEE countries, which have experienced a further democratic recession (Feldmann & Popa, 2022). A fourth factor is that CEE countries have a lower administrative capacity and no active economic institutions (Afonso et al., 2006). Consequently, the fiscal capacity of the CEE countries is limited.
(4) However, for the CEE-8 countries, the interaction term is significant at the 5% level.
Moreover, fiscal capacity has a significant positive association with economic growth in the EU-14 countries. This implies that the country's fiscal capacity in the EU-14 countries can contribute to the role of democracy in economic growth.
4. Conclusion
This paper examines the role of fiscal capacity in the relationship between democracy and economic growth over the last 26 years. In 22 EU-OECD countries, we analyze this issue using a fixed effects model. We use an index of democracy, an indicator of fiscal capacity and an indicator of GDP per capita as proxies for the main variables. The empirical analysis showed that the moderating effect of fiscal capacity on democracy and economic growth was not significant in the CEE-8 countries; in the EU-14 countries, we found a significant contribution of the country's fiscal capacity to democracy and economic growth. Such a result may be related to the unstable political environment, the influence of populist politics and the difficulties of economic reform that characterize the CEE countries in the process of democratic transition and consolidation. The paper also provides new evidence on how democracy affects economic growth in developed countries. At the same time, the study provides valuable insights for policymakers. Future researchers can use more variables and specific cases to analyze the impact of fiscal capacity on the relationship between democracy and economic growth.
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