Essays on democracy and economic freedom

Abstract

This thesis is composed of three essays, covering topics related to democracy and economic freedom. Chapter 2 examines how taxation influences democracy and economic freedom. Chapter 3 explores how remittances influence political and economic freedoms in developing countries. Chapter 4 investigates the influence of party ideology on economic policies. Endogeneity is a potential problem in all three chapters because the underlying relationships can be driven by reverse causality, measurement error, or omitted variable bias. I resolve this issue by relying on instrumental variables. My results can be summarized as follows: Chapter 2 points out that tax reliance and tax to spending ratio promote democracy and economic freedom. However, the influence of tax revenue on political and economic freedom is non-linear hump-shaped. An increase in tax revenue initially encourages democracy and economic freedom until a turning point is achieved. After that, tax revenue causes a decline in political and economic freedom. Similarly, the results of Chapter 3 suggest that the effect of remittances on political and economic freedoms is also non-linear: initially, remittances promote political and economic freedoms until a turning point is achieved, and thereafter, they hurt both freedoms. Almost 24 percent of the countries in our sample are in the negative effect zone, showing high dependency on remittances causes institutional decline. Finally, chapter 4 finds evidence that left-wing and right-wing governments deliver convergent developmental outcomes in consolidated democracies. However, in unconsolidated democracies, divergence is possible in some developmental outcomes. This research contributes to the literature by confirming that the taxation – democracy nexus exists and the impact of tax revenue on democracy and economic freedom is non-linear. It shows an excessive tax burden may be associated with a decline in both freedoms. This thesis, furthermore, elaborates that remittances do not always play an unambiguously positive role in development. Finally, economic outcomes are found to converge in democracies, regardless of ideological differences. Nevertheless, ideologically driven policy divergence can be observed in hybrid regimes and among non-Western democracies.