Democracy and Firm Productivity: Evidence from Indonesia

While recent work suggests democracy does cause growth, the channels through which this effect occurs remain unclear. Exploiting quasi-random variation in the timing of district-level political regime changes induced by the collapse of President Suharto's government, we study the microlevel drivers of the democracy-growth relationship. Using Indonesian firm-level data, we find that democratization leads to an increase in firm productivity, a critical determinant of economic growth. Furthermore we find evidence of an improvement in the quality of local business regulations and the business environment for firms.