Can limited government be a driving force of economic development? This idea
goes back to Montesquieu, and is closely related to recent research in institutional
economics. Measuring limited government with the Henisz political constraints
index, and economic development with income per capita, the paper first does a
causality test to see whether political constraints lead income per capita. Since
both are persistent variables, their differences are analyzed. The evidence from
the 1960-1990 period indeed suggests that increases in political constraints
precede economic growth. The effect of political constraints might take a long
time period to set in, so a second test looks at the link between income per
capita and polity persistence, conditioned on the degree of political constraints.
Polity persistence is positively linked to income per capita with high political
constraints, but there is no link with low political constraints. This broader
evidence suggests that limited government has been conducive to economic
development over the long run.
Limited government, political constraints, polity persistence, economic development, income per capita