Previous chapters have used cross-country analyses to establish that political polarization is associated with distortions in various types of economic and institutional reform and with slower economic growth. However, these cross-national tests have only examined data collected at the national level and have not explored whether the individuals depicted in the theory behave as predicted. The theory suggests that businesspeople in less polarized democracies should view policy as more predictable and engage in more productive economic activity than their counterparts in more polarized democracies and in autocracies. Identifying the link between individual behavior and economic outcomes is important because high levels of political polarization and bad economic outcomes may “go together” for reasons other than those depicted in the argument. For example, polarization may induce gridlock, which, in turn, blunts efforts to conduct economic and institutional reforms (McCarty et al. 2006). Alternatively, polarization may shape levels of uncertainty and thereby influence policy choices.

This chapter examines the relationship between political polarization and reform outcomes in two ways. I begin by analyzing the determinants of reversals of the reform index used in previous chapters on the notion that reversal should be significantly more likely in more polarized democracies than in less polarized democracies or in autocracies. I then turn to an analysis of the perceptions of policy instability and investment as recorded in a survey of businesspeople in twenty-three postcommunist countries conducted in 1999.