Democracy, Political Stability and Economic performance. A Panel Data Analysis

In the present paper we undertake to link political stability under democracy with a set of indicators for economic freedom and financial crises, using panel data analysis. The sample covers annually the period 2000-2012 for selected European Union (EU) member-states, USA and Japan. The results support our main thesis, that political stability in democratic regimes is positively related to the set of economic freedom indicators and negatively to financial crises, because greater economic freedom influences positively investment and economic growth, while financial crises, which lead to austerity policies, which again lead to recession-depression, increase dissatisfaction among citizens with the workings of democracy and thus, to the rise of extremist parties. Our findings support the idea that political stability in democratic regimes is linked to economic stability and growth and vice-versa.