Previous chapters demonstrated a link between political polarization, democracy, and policy choices. Extensive political polarization in democracies and autocratic rule more generally impedes the development of state regulatory institutions and slows economic reforms. But so far the analysis has not examined economic performance. Is political polarization associated with slower economic growth? If so, how does it work? In addition, how do initial conditions shape economic performance? This chapter finds that political polarization is correlated with slower economic growth. In addition, there is some evidence that polarization impedes growth by slowing economic and institutional reform. Finally, initial conditions have a profound impact on economic growth, but these effects decline significantly over time.

I begin by developing an argument linking political polarization to economic performance on the basis of insights generated in Chapter 1 before presenting arguments linking economic reform and initial condition to economic growth. I then assess these arguments by examining variations in growth rates across the postcommunist world from 1990 to 2004. Given disagreements about the proper way to analyze economic growth, particularly over periods as short as those examined here, the empirical results should be seen as suggestive rather than definitive.

I focus on economic growth rather than investment, in part, because of data constraints. Perhaps the best data on investment at the national level come from the EBRD, but its measure includes investment by both the state and the private sector.