To capture the cyclical component of economic activity, we use annual growth in GDP at constant prices. The data are from the IMF’s World Economic Outlook, April 2018 update (IMF 2018). The data are available for 193 nations over the period 1980-2018. The identification strategy consists of instrumenting economic growth with commodity terms of trade shocks. Data on commodity prices are obtained from the IMF’s database for a basket of 45 commodities (see Gruss and Kebhaj, 2019).

To measure the level of democracy, we use the Polity IV database from the Center of Systemic Peace (Marshall et al., 2018). We use the following three measures: political competition, constraints to the executive and a composite measure of democracy. The first measure (POLCOMP) combines measures of the regulation of participation and the competitiveness of participation in the political arena. This variable takes values between 1 (suppressed) and 10 (institutionalized electoral) political competition. The second measure (XCONST) captures the extent to which there are executive constraints in a polity. The measure refers to the presence or absence of formal checks on the power of the executive branch. It takes values between 1 (unlimited authority) and 7 (executive parity or subordination). The third measure (POLITY2) captures the level of democracy. The composite index combines data on the (i) competitiveness and openness of executive recruitment, (ii) constraints on executive power, and (iii) political competition. This variable takes values between -10 (strongly autocratic) and +10 (strongly democratic).

We consider a country as having: i) strong (weak) political competition if the country’s average political competition index is greater or equal to (strictly lower than) 7; ii) strong (weak) executive constraints if its average executive constraint index is greater or equal to (strictly lower than) 5; and iii) a democratic (autocratic) political system, if the average Polity2 index is greater or equal to (strictly lower than) 0. For example, the United States is coded as having a high level of political competition, with an average score of 9.8 over the sample period 1980 to 2018. We find that 77 countries have strong political competition and 88 have weak competition; 79 countries have strong executive constraints and 86 have weak ones; there are 111 democratic countries and 55 autocratic ones.

In section 3 we use alternative cutoff points for the various measures. We also use an alternative measure of democracy from Freedom House.

Data on education attainments are from Barro and Lee’s (2013) data set, obtained from the 2018 Update July 4. Structural reforms are from Ostry et al. (2009). The data set captures reforms along 6 dimensions: (i) domestic finance; (ii) capital account (iii) current account transactions; (iv) trade (v) agricultural regulation (vi) network reforms. Each of these indicators is normalized to take values between 0 and 1, where higher values denote more liberalization. In our analyses, the variables are organized into three groups using principal component analysis, where the first principal component is used in the analysis. Indicators (i),(v),(vi) are grouped as 'domestic' indices; indicators (ii),(iii),(iv) are termed 'international' indices. Finally, an aggregate index is used. Note that reforms are defined as changes in the indices.

We also use Doing Business data from the World Bank (2020) to capture regulatory reforms. Doing Business benchmarks aspects of business regulation based on work on the regulation of 7