Democracy and Economic Growth in Ghana

Abstract

The study of democracy and economic growth is a growing research area both in economics and political economy all over the globe. This study primarily examines the empirical relationship between democracy and economic growth in Ghana using time series data from 1971-2009. It specifically explores the short-run and long-run relationship between democracy and economic growth as well as the direction of causality between them. The research further seek to find the extent to which tax revenue share in GDP impacts economic growth in Ghana. The study employed the Autoregressive Distributed Lag Bounds (ARDL) approach of estimation strategy due to its small sample property and its applicability of whether a series are integrated of I(O) or I(1). Granger –causality test was also employed to determine the direction of causality between democracy and economic growth. The study reveals a contemporaneous relationship between democracy and economic growth in the short-run and bidirectional causality in the long-run. It further ascertains that democracy impacts greatly on economic growth and statistical significant at 1% and 5% both in the long and short run. The research further reveals that tax revenue impacts negatively on economic growth but was statistically insignificant in both models. When it was interacted with democracy, it was still negative and statistically insignificant in the short run but became statistically significant at 1% in the long-run. The error correction Model captures the speed of adjustment to the long-run equilibrium. The ecm(-1) results reveals a high speed of 61% of long-run equilibrium adjustment every year after a short-run shock for both models. Ghana should continue encouraging its democratic credentials but should allow this credentials to be accompanied with strong and quality institutions to help uphold our democracy in times of crises. The need for tax reforms and to closely integrate these reforms with structural adjustment measures will help bring growth. The tax net should cover more people in the underground economy by creating more satellite tax revenue stations to curb the laxity of our revenue collection authority in the mobilization of taxes for development in the long. The findings and policy recommendations of this research provides a vital information relevant for developing countries involved in the democratization process.