Time-Consistent Polities and Growth in Developing Countries: An ...
Working Paper Series Department of Economics Alfred Lerner College of Business & Economics University of Delaware Working Paper No. 2005-02
Time-Consistent Polities and Growth in Developing Countries: An Empirical Analysis
James L. Butkiewicz Halit Yanikkaya
Time-Consistent Polities and Growth in Developing Countries: An Empirical Analysis James L. Butkiewicz Department of Economics University of Delaware Newark, DE 19716 [email protected] Work (302) 831 1891 Fax (302) 831 6968 Home (410) 392 3419 Halit Yanikkaya Department of Economics Celal Bayar University Manisa, Turkey 45030 Work (236) 233 0657 Fax (236) 233 2729 [email protected]
August 2005
Abstract Property rights are known to promote economic growth. Durable political regimes, regardless of type, can create stable environments that facilitate growth. Polity stability has an effect similar to property rights, promoting investment enhancing growth. Examination of the growth effects of regime stability finds that stable polities are important for growth in autocracies, but not democracies.
That regime stability is not important for democracies
indicates that parameter heterogeneity can be important when estimating empirical growth models. Not just democracies, but also stable autocracies with predictable rules-of-the-game create positive environments for economic growth.
JEL Classifications: O40. H11 Keywords: Property Rights, Stability, Growth, Democracy, Autocracy
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1. Introduction Studies of the determinants of growth have established the importance of property rights for creating a positive growth environment. Establishing a stable system of property rights promotes long-term agreements.
Thus, property rights facilitate long-term commitments,
including investment. With the potential returns to economic decisions protected by property rights, agents are free to pursue those opportunities offering the greatest potential returns, thereby stimulating growth. Property rights data is available for only a subset of all countries. In particular, available property rights data for developing countries is limited.
Also, defining property rights is
subjective. An alternative approach examines the durability of regimes. Unstable regimes create a time-inconsistency problem. Durable regimes establish stable rules governing economic behavior. As long as the rules are clear and stable, regardless of regime type, people find ways to maximize their utility. Optimal behavior changes when the rules are variable. Stable political systems are able to cope with a variety of problems, including economic and financial crises, domestic conflicts and civil war. A stable regime should possess the capacity to resolve the problem or crisis, and most importantly survive. A long-lived autocracy can establish a stable system of rules that foster growth. In an autocracy each regime change can create uncertainty about the continuity of rules. Rule uncertainty is time inconsistent, and likely discourages growth. In this paper we report the results of an investigation of the impact of regime stability on growth. Our maintained hypothesis is that regime stability is more important for growth than regime type, especially for autocratic regimes. That is, regime stability, and not democracy per se, fosters growth. Since data for regime stability are available for a large number of developing
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countries, our sample includes a much larger number of countries than studies investigating the effects of property rights on growth. The outline of this paper is as follows. Section 2 reviews the theoretical and empirical literature on political stability and economic growth. Section 3 describes the standard growth model, data, and data sources used in the analysis. Section 4 reports the estimation results for the various measures of polity stability. In this section, we also examine some econometric problems that potentially affect cross-country growth estimates. Section 5 discusses a case consistent with the findings. Finally, Section 6 concludes the paper. 2. Literature Review It is typically assumed that the stability of political systems has concomitant economic value because of its undeniable common sense appeal—investors prefer predictability, security, and safety. It is commonly believed that political stability is a necessary condition for growth and prosperity. Previous studies note very different channels through which political instability adversely affects economic growth. A number of papers (Alberto Alesina, Sule Ozler, Nouriel Roubini, and Phillip Swagel, 1992; Alex Cukierman, Sebastian Edwards, and Guido Tabellini, 1992; Sebastian Edwards and Guido Tabellini, 1991; Sule Ozler and Guido Tabellini, 1991; Torsten Persson and Lars E. Svensson, 1989; and Guido Tabellini and Alberto Alesina, 1990) argue that governments in politically unstable and polarized countries are more likely to adopt inefficient or suboptimal policies such as an inefficient tax system, higher present government consumption, or accumulation of larger external debts, all of which have adverse growth effects in the long run. It is also known that politically unstable and polarized countries find it difficult to undertake needed reforms or to implement them in order to create a good economic as well as a 4
stable political environment (Alberto Alesina and Allan Drazen, 1991; David Dollar and Jakob Svensson, 2000).
Political instability may also reduce the effectiveness of those reform
programs that are implemented. Several authors (Morris Goldstein, 2003, and Anne O. Krueger, 2003) observe that during the 1997 crisis in Indonesia, compliance with structural conditions was seriously handicapped by prolonged political instability. For example, Krueger (2003, pp. 339340) states that “(O)ne of the manifestations of political instability was the apparent inability of the government itself to agree on a course of action. Announcements were repeatedly reversed, decisions taken were amended or not implemented, and inaction appeared to rule.” Alberto Alesina and Roberto Perotti (1996) argue that sociopolitical instability caused by income inequality leads to uncertainty in the political and economic environments, which in turn, adversely affects growth by reducing investment. Similarly, Jakob Svensson (1998) claims that governments in politically unstable and polarized societies tend to maintain a low quality of property rights, which may be the rational choice of policy makers maximizing the joint welfare of their social or ethnic group, as opposed to social welfare. Thus, political instability defined as the probability of an imminent government change reduces growth by discouraging domestic investment and shifting savings towards non-marketable production or capital flight. Despite an extensive literature, there is considerable ambiguity about the measurement of stability. Indeed, it is hard to define and measure stability in a way that can be used in empirical studies. In the literature, there are two approaches to measuring political instability. The first measures the propensity to observe government changes that “can be ‘constitutional’, i.e. take place within the law, or ‘unconstitutional’ i.e. they can be coups d’etat.” (Alesina and Perotti, 1996, p.1205) The other does not focus on government changes but employs either simple measures of government stability, social unrest, and political violence or indices that summarize
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these variables. For example, Butkiewicz and Yanikkaya (2005) take the latter approach and, using a large number of sociopolitical instability measures, find that the estimated growth effects are sensitive to the measures used. Their two main findings are that political violence measures have significant negative growth effects, and that the detrimental effects of instability are greater in middle- and high-income and good-democracy countries. This paper investigates the growth effects of polity stability using several new measures of stability from the POLITY IV dataset (Monty G. Marshall and Keith Jaggers, 2005). These variables measure the number of years a polity has endured without abrupt, major change. Different studies use different features of the political system to measure the stability of political systems (Ted Robert Gurr, 1974). For example, Ernest A. Duff and John F. McCamant (1968, p. 1125) defined a stable political system as "one which can manage to change within its structures." Similarly, Gurr (1974, p. 1484) describes a stable political system as “one whose authority patterns remain similar over a long period of time”.
Using the persistence and
adaptability of each historical and contemporary polity as the independent variables, he finds that that the most durable polities were ones which had undergone a number of minor or gradual changes in authority characteristics. Although he fails to find that, at least for non-European countries, democratic regimes tended to be more durable than polities characterized by either autocratic traits or mixed authority traits, Robert Harmel (1980) finds that when he employs more restrictive definitions of abrupt polity change, democracies prove to have been more persistent and adaptable than autocracies in most regions, both historically and in contemporary periods. Using the regime change data from the POLITY IV dataset, Ricardo Hausmann, Lant Pritchett and Dani Rodrik (2004) find that regime changes matter in the sense that political-
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regime changes are statistically significant predictors of growth accelerations. However, they investigate improvements in growth rates, not growth performance over long periods. Thus, their approach differs from the typical growth model. Our approach is to examine the long-term growth effects of polity stability. 3. Model, Data and Estimation
The effect of regime durability or polity persistence on developing country growth is analyzed using an empirical growth model. The model is derived from an augmented Solow growth model that includes both physical and human capital. This empirical framework was originally developed by Robert J. Barro (1991) and N. Gregory Mankiw, David Romer and David N. Weil (1992). In general form, this model is specified as
γ it = F ( y t , k t , ht ; Z ( t ) ) ,
(1)
where γit is country i’s growth rate of real GDP per capita in period t, yt is initial GDP per capita, kt is the physical capital stock per person, and ht is human capital per person. The model assumes conditional convergence. That is, growth converges to a steady state, but each country’s steady state is determined by a variety of economic, political, cultural and geographic factors, as measured by the variables in the vector Zt. These factors include: fertility rates, proxies for location, and the political and cultural measures discussed below. Growth rates are also affected by these factors. For two countries starting with identical levels of income per capita, the one with the higher steady-state equilibrium level of income experiences more rapid growth.
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The model is estimated for a panel of over one hundred developing nations for three periods: 1970-1979, 1980-1989 and 1990-1999. The dependent variable is the decade average rate of growth of real GDP per capita. The natural logarithms of telephone mainlines per worker and of lagged life expectancy are used for physical and human capital, respectively. The lagged logarithm of the fertility rate measures the effect of population growth on economic growth. Regional dummies for Sub-Saharan Africa, Latin America and East Asia are also used in the estimates. Data for GDP per capita are from the Penn World Table 6.1 (Alan Heston, Robert Summers, and Bettina Aten, 2002). Data for life expectancy, fertility rates, and telephones mainlines per worker are from the World Bank’s World Development Indicators 2004. Data for the regime durability, polity persistency, incoherent polities, and regime change measures are from the Polity IV data set (Marshall and Jaggers, 2005). Regime durability or polity persistency is assumed to establish stable, coherent rules. It is well known that the rules-of-the-game created by stable systems of property rights promote growth. Thus, regime stability and property rights may be correlated. To investigate this potential connection, property rights data from James Gwartney and Robert Lawson (2004) and two measures of property rights (government repudiation of contracts and the risk of government expropriation) from Easterly (William Easterly, 1999) are used in the estimates. Alberto Alesina, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat and Roman Waciarg (2003) have established that ethnic fractionalization deters growth, possibly through negative effects on the quality of governmental institutions and policy choices. To assess the relative impacts of these forces, their ethnic fractionalization measure (Ethnicity) is used to jointly estimate the effects of ethnic fractionalization and polity stability.
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The model is estimated using the Seemingly Unrelated Regression (SUR) method. The three-decade panel is unbalanced, with the coefficients, except for decade constant terms, restricted to the same value for all decades. Two potential problems are parameter heterogeneity and outlier effects. Regime stability may be less important for democratic nations, even developing nations, as democracy depends upon a stable institutional framework. Autocracies may lack the same stable framework. For autocracies, regime or polity stability may develop predictable environments that are conducive to investment and growth. To investigate this possibility, the sample is divided into democratic and autocratic groupings, and separate models are estimated for each group. Estimates may also be sensitive to outlier observations. Sensitivity analysis is conducted by excluding outlier observations and reestimating the models to determine whether a few outliers influence the results. 4. Results
Estimates for the basic model are reported in column number 1 in Table 1. The model is estimated for a sample of 106 developing countries over three decades, for a total of 236 observations.1
Initial GDP per capita, human capital (life expectancy) and fertility are
statistically significant with the correct signs. Physical capital (telephone mainlines per worker) is not significant; however, initial GDP per capita may also proxy physical capital.
The
estimated rate of convergence, between 2% and 3%, is consistent with other estimates of the rate of convergence. Of the regional dummies, only the Latin America variable is significant at conventional levels. Insert Table 1 about here.
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The first version of the model includes a polity variable2 and a dummy variable for regime durability.3
The polity variable is a measure of institutionalized democracy and
autocracy, that ranges from +10 (maximum democracy) to –10 (maximum autocracy).
In
column 1, the estimated coefficient for polity has the incorrect sign and is insignificant. The new variable in the estimated model is a dummy for regime durability. Polity IV defines regime durability as “the number of years since the most recent regime change (defined by a three point change in the polity score over a period of three years or less) or the end of transition period defined by the lack of stable political institutions.” If a regime change occurs in the first five years of a decade or the last five years of a previous decade (we use five-year lagged values of regime durability due to the potential existence of endogeneity), the dummy is assigned a zero value; otherwise its value is 1. The estimated coefficient for this variable has the correct, positive, sign but is insignificant. Above we discussed the possibility of parameter heterogeneity, the possibility that parameters vary between country types. We divide the sample into two groups4: democracies (55 observations) and autocracies (181 observations). The estimates are reported in columns 2 and 3 of Table 1. There are a number of differences between the two estimates, including different estimated rates of convergence and different effects of human capital and fertility. Regime durability now has a statistically significant positive effect on growth for autocratic countries, and an insignificant effect for democracies. These results are consistent with the hypothesis that durable autocratic regimes establish stable environments that are conducive to growth. If regime durability results in stable rules, then regime durability may be correlated with property rights. Property rights measures include an index developed by Gwartney and Lawson 10
(2004) and the Political Risk Service’s ICRG data (from Easterly, 1999) for risk of government expropriation and repudiation of contracts. Mean values of these property rights measures for stable and unstable regimes are shown in Table 2. In all cases, stable regimes on average have stronger property rights. Insert Table 2 about here Results for estimates including the Gwartney-Lawson property rights measures and regime durability are reported in Table 3.5 The property rights variable is significant in the estimates for the combined sample and for the divided democracy-autocracy samples, while the regime durability variable is not significant in any of the estimates.6 Estimates using the risk of expropriation as a measure of property rights appear in the next three columns of Table 3.7 Estimating the model using this measure of property rights obtains significant coefficients for expropriation in the full sample and for autocracies with stable regimes (columns 4 to 6 in Table 3).8 Insert Table 3 about here Alesina et. al., (2003) state that fractionalization can negatively affect government quality.
Columns 7-9 report estimates for 235 observations using the Alesina et. al.
fractionalization measure with regime durability.9 The fractionalization variable has a significant negative effect on growth for the complete sample. For autocratic countries, fractionalization and regime durability are both significant at the 10% level. These results suggest that while fractionalization harms growth, durability increases growth even in fractionalized countries.10 Additional estimates reported in Table 4 indicate that the channel by which durability promotes growth is through investment. Investment rates are estimated for the full sample and
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for the limited sample used to estimate the effects of property rights. The explanatory variables are the same as those used to estimate the growth specifications. The results in column 3 indicate that regime durability promotes investment in autocratic countries. The property rights variable is not significant in any of the specifications. Insert Table 4 about here. We investigate the explanatory power of other polity measures.11 A measure we call polity inconsistency proves to have significant explanatory power for both growth and investment, even when the Gwartney-Lawson property rights variable is included in the estimates. The polity inconsistency measure is based on a measure of polity persistence which is more sensitive than the regime durability measure. The regime durability measure changes when there is a three point change for any of six polity indicators.12 The Polity IV Persistence measure changes whenever any of the six polity indicators changes. Our polity inconsistency measure is the number of times in a decade that there is a change in polity persistence. To correct for possible endogeneity, this variable is constructed using the last five years of the previous decade and the first five years of the current decade. A high value of polity inconsistency is expected to reduce growth and investment. The estimated growth and investment effects of polity inconsistency are reported in Table 5. As is evident from the results reported in columns 3 and 6 of the table, polity inconsistency has significant growth effects in autocracies, even when the property rights measure is included in the estimates.
The effect of polity inconsistency on investment is significant in the
specification including property rights.
Overall these results suggest that stable political
environments are more important for growth than the choice between democracy and autocracy. Insert Table 5 about here. 12
Estimated growth effects can be sensitive to a few extreme observations. To test the sensitivity of the results presented above, the specifications are reestimated excluding four observations with very high or very low growth rates,13 and six observations with frequent regime changes.14 The results presented in Table 6 indicate that the growth effect of property rights is not sensitive to outliers. The regime durability variable is generally significant with the correct sign for autocratic countries, excepted for the smaller sample that includes the property rights variable, and when the six cases of frequent regime changes are excluded and the ethnicity variable is included. The ethnicity measure is sensitive to outliers, especially the exclusion of the four extreme growth cases, and when all ten outliers are excluded. In this latter estimate, the regime durability measure has a significant positive effect for autocratic countries, while the ethnicity measure is insignificant.15 Insert Table 6 about here. The estimated magnitude of the growth impact of regime durability is consistently an increase of 0.6% in the annual growth rate of real GDP per capita. In a span of 70 years, this results in an improvement of over 50% in the average standard of living. Polity stability can make a substantial contribution to economic welfare. 5. Discussion
China is probably the best example of the vital importance of polity stability. Lacking a Western style rule of law, it has neither formally defined property rights nor a democratic government. Yet, China has been the largest recipient of foreign direct investment in the developing world for many years. This suggests that investors value polity stability, well-
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defined rules, more than the type of political regime, especially in autocratic countries. If investors observe profitable opportunities in either the near or long term, capital flows into a country as long as the country has clear and well-defined rules and a stable regime. A weak rule of law, or lack of economic and politic rights are negative factors that weigh in investment decisions, but they are by no means determinative. Dani Rodrik, Arvind Subramanian, and Francesco Trebbi (2002) point out that while private property rights is a primary component of their measure of institutional quality, this does not necessarily mean that private property rights are superior to other forms of property rights. They note that while Russia has a formal legal system that is characteristically European, and China does not, China ranks much higher than Russia by their institutional quality indicator. The significance of polity stability in autocratic countries provides insight into “the developmental state view,” which is said to characterize the development policy of East Asian countries. Stability of regime rather than regime type is largely responsible for the faster growth rate in countries such as China and Singapore. 6. Conclusion
This paper examines the growth effects of regime durability and polity inconsistency in democratic and autocratic developing countries. An important finding is that the estimated growth effects of polity measures are sensitive to parameter heterogeneity. The effects of stable polities are important for autocracies, and not important for democracies. Stable autocratic polities establish consistent rules of the game, or a form of property rights.
This stable
environment is conducive to investment and growth, and increases the average growth of GDP per capita in autocracies by 0.7% annually.
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Developing democracies are typified by well defined property rights and mechanisms for orderly transitions of power. In these countries, polity stability is not an important determinant of growth. Correspondingly, the ethnic fractionalization measure is not statistically significant for democratic developing countries even though it reduces growth in autocratic countries. Sensitivity analysis indicates that the estimated effects of property rights measures are not sensitive to outliers, although the sample for property rights estimates is smaller due to data limitations. The ethnic fractionalization measure is the most sensitive to extreme observations. The regime durability measure exhibits some sensitivity to extreme observations, but in general, regime durability has a significant positive effect on growth in autocratic countries. Overall, these results indicate that polity stability is far more important for growth and investment than government type. Predictable rules of the game promote growth, even in autocracies. Democracies per say do not have an automatic growth advantage. Time-consistent polities promote growth, regardless of polity type.
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References
Alesina, Alberto, and Allan Drazen. (1991). "Why Are Stabilizations Delayed?" American Economic Review, 81(5), 1170-1188. Alesina, Alberto, Sule Ozler, Nouriel Roubini, and Phillip Swagel. (1992). “Political Instability and Economic Growth.” Journal of Economic Growth, 1(2), 189-211. Alesina, Alberto, and Roberto Perotti. (1996). “Income Distribution, Political Instability, and Investment,” European Economic Review, 40, 1203-1228. Alesina, Alberto, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat and Roman Waciarg. (2003). “Fractionalization,” Journal of Economic Growth,” 8(2), 155-194. Barro, Robert J., (1991). “Economic Growth in a Cross Section of Countries.” Quarterly Journal of Economics, 106 (2), 407- 433. Butkiewicz, James L. and Halit Yanikkaya, (2005), “The Impact of Sociopolitical Instability on Economic Growth: Analysis and Implications,” Journal of Policy Modeling, forthcoming. Cukierman, Alex, Sebastian Edwards, and Guido Tabellini. (1992). “Seigniorage and Political Instability,” American Economic Review, 82(3), 537-555. Dollar, David, and Jakob Svensson. (2000). “What Explains the Success or Failure of Structural Adjustment Programmes,” Economic Journal, 110, 894-917. Duff, Ernest, A., and John F. McCamant. (1968). “Measuring Social and Political Requirements for System Stability in Latin America,” American Political Science Review, 62(4), 11251143. Easterly, William. (1999). “Life during Growth,” Journal of Economic Growth, 4, 239-275. Edwards, Sebastian, and Guido Tabellini. (1991). “Political Instability, Political Weakness and Inflation: An Empirical Analysis,” NBER Working Papers Series, No: 3721. Goldstein, Morris. (2003). IMF structural conditionality: How much is too much? In Feldstein, M. (Ed.) Economic and financial crises in emerging market economies. (pp. 363-437). NBER Conference Series. Chicago: University of Chicago Press. Gwartney, James and Robert Lawson (2004). Economic Freedom of the World: 2004 Annual Report. Vancouver: The Fraser Institute. Data from http://www.freetheworld.com. Gurr, Ted Robert. 1974. “Persistence and Change in Political Systems, 1800-1971.” American Political Science Review 68: 1482-504. Harmel, Robert. 1980. "Gurr's 'Persistence and Change' Revisited: Some Consequences of Using Different Generationalizations of 'Change of Polity."' European Journal of Political Research 8: 189- 214. Hausmann, Ricardo, Lant Pritchett, and Dani Rodrik, (2004). “Growth Accelerations,” NBER Working Papers Series, No: 10566. Heston, Alan, Robert Summers and Bettina Aten (2002). . Center for International Comparisons at the University of Pennsylvania (CICUP), October 2002.
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Krueger, Anne O. (2003). “IMF stabilization programs. In Feldstein, M. (Ed.) Economic and financial crises in emerging market economies. (pp. 297-346). NBER Conference Series. Chicago: University of Chicago Press. Jaggers, Keith, and Ted Robert Gurr. 1995. “Tracking Democracy’s Third Wave with the Polity III Data.” Journal of Peace Research 32: 469-82. Mankiw, N. Gregory, Romer, David, and Weil, David N. (1992). “A Contribution to the Empirics of Economic Growth.” Quarterly Journal of Economics 107 (2), 407 – 437. Marshall, Monty G. and Keith Jaggers (2005). “Political Regime Characteristics and Transitions, 1800-2003.” Polity IV Project. Data from http://www.cidcm.umd.edu/inscr/polity/polreg.htm. Ozler, Sule, and Guido Tabellini. (1991). “External Debt and Political Instability”, NBER Working Papers Series, No: 3772. Persson, Torsten, and Lars E. Svensson. (1989). “Why a Stubborn Conservative Would Run a Deficit: Policy with Time Inconsistent Preferences,” Quarterly Journal of Economics, 104, 325-345. Political Risk Services (2005). International Country Risk Guide. Data from http://www.countrydata.com. Rodrik, Dani, Arvind Subramanian, and Francesco Trebbi, (2002) “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development” Kennedy School of Government, Harvard University. Svensson, Jakob. (1998). “Investment, Property Rights and Political Instability: Theory and Evidence,” European Economic Review, 42, 1317-1341. Tabellini, Guido, and Alberto Alesina. (1990) "Voting on the Budget Deficit," American Economic Review, 80(1), 37-49. World Bank (2004). World Development Indicators 2004. Washington, D.C.
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Table 1 Estimated Growth Effects of Polity Stability
Independent variable Variable Log (Initial GDP per capita) Log (Life Expactancy, lagged) Log (Fertility rates, lagged) Log (Telephone mainlines per worker) Polity (democracy- autocracy) Dummy for Regime Durability Sub-Saharan African Dummy Latin American Dummy East Asian Dummy
Real GDP Per Capita Growth Rates 1 2 3 Democratic Developing Autocratic Developing All Developing Countries Countries Countries -2.69*** -8.18*** -2.39*** (2.87) (3.15) (2.51) 11.42*** 27.29*** 8.08* (2.64) (2.86) (1.70) -5.39*** -1.97 -6.56*** (2.70) (0.53) (2.88) 0.70 2.20 0.34 (1.10) (1.58) (0.54) -0.010 (0.34) 0.35 0.13 0.68** (1.09) (0.19) (1.93) -0.50 1.06 -1.07* (0.86) (0.88) (1.65) -1.83*** -2.93*** -1.44** (3.01) (2.85) (2.19) 1.12 0.12 1.92** (1.59) (0.10) (2.35) .21, .31 .20, .36 .25, .46 .22, (236) .55, (55) .20, (181)
R2 for each equation, (N) SUR estimates for decade averages. Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level * Significant at the 10% level.
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Table 2 Property Rights and Regime Durability
1970-1999 Data for all Developing Countries Mean Index Values by Regime Type for Different Regime Durability Measures Unstable Stable Unstable Stable Unstable Stable Regimes Regimes Regimes Regimes Regimes Regimes Regime Durability EFW Property Rights Index
3.9
4.45
Polity Persistency 4.04
Government Repudiation of 4.78 5.15 4.98 Contracts Risk of Governmenet 5.15 5.61 5.35 Expropriation Note: A large index value indicates stronger property rights
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Incoherent Polities
4.68
4.09
4.3
4.91
4.83
5.06
5.46
5.3
5.43
Table 3 Estimated Growth Effects of Property Rights and Polity Stability
Independent variable
1
2
3
Real GDP Per Capita Growth Rates 4 5 6
7
8
9
All Democratic Autocratic All Democratic Autocratic All Democratic Autocratic Developing Developing Developing Developing Developing Developing Developing Developing Developing Countries Countries Countries Countries Countries Countries Countries Countries Countries Variable Property Rights (0-10) 0.31*** 0.43* 0.42*** (2.50) (1.80) (2.93) Expropriation (1-10) 0.40*** -0.05 0.56*** (3.25) (0.19) (3.94) Ethnicity (0-1) -2.14*** -2.91 -1.55* (2.55) (1.30) (1.80) Dummy for Regime Durability 0.069 -0.15 0.46 0.39 -0.06 0.79*** 0.32 0.013 0.62* (0.21) (0.24) (1.22) (1.33) (0.08) (2.52) (1.00) (0.02) (1.73) SUR estimates for decade averages. Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level. * Significant at the 10% level.
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Table 4 Effects of Property Rights and Polity Stability on Investment
Independent variable
2 Democratic All Developing Developing Countries Countries Variable Log (Initial GDP per capita) -4.26 -3.60 (1.60) (0.53) Log (Life Expactancy, lagged) 6.88 24.83 (0.54) (1.12) Log (Fertility rates, lagged) 2.05 -2.82 (0.37) (0.26) Log (Telephone mainlines per worker) 7.81*** 1.52 (4.35) (0.39) Polity (democracy- autocracy) -0.01 (0.14) Property Rights (0-10) Dummy for Regime Durability Sub-Saharan African Dummy Latin American Dummy East Asian Dummy
1
1.13 (1.43) 1.23 (0.72) -3.80** (2.10 4.44** (2.15) .32, .28 .19, (234)
0.44 (0.27) 3.17 (1.02) 0.49 (0.17) 3.07 (0.96) .18, .11 .10, (55)
R2 for each equation, (N) SUR estimates for decade averages Coefficients restricted to be equal across decades except constsnts. Absolute value of t-statistics in parentheses ***Significant at the 1% level. **Significant at the 5% level. * Significant at the 10% level.
Investment Rates 3 4 Autocratic Developing All Developing Countries Countries -4.11 -2.42 (1.41) (0.87) -7.63 9.70 (0.50) (0.68) 0.56 -7.22 (0.08) (1.39) 9.60*** 5.42*** (4.74) (2.80) -0.10 (1.13) 0.17 (0.48) 1.50* 0.62 (1.76) (0.75) 0.81 -1.97 (0.39) (1.19) -5.01** -4.43*** (2.39) (2.92) 5.91** 3.83* (2.34) (1.92) .45, .32 .06, .42 .21, (179) .49, (151)
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5 Democratic Developing Countries -5.40 (0.69) 3584 (1.14) -15.03 (1.26) -0.34 (0.08)
6 Autocratic Developing Countries -3.49 (1.12) 0.24 (0.01) -7.87 (1.23) 6.07*** (2.67)
0.81 (1.05) -0.63 (0.31) 3.99 (1.28) 1.28 (0.45) 5.34 (1.67) .10, .45 .29, (36)
0.23 (0.54) 0.62 (0.68) -3.94 (1.64) -6.36*** (3.37) 2.92 (1.09) .16, .43 .51, (114)
Table 5 Effects of Property Rights and Polity Inconsistency on Growth and Investment 1
Variable Polity Inconsistency
All Developing Countries
2 Democratic Developing Countries
-0.38*** (3.14)
-1.07*** (4.72)
3 Autocratic Developing Countries Growth Rates -0.34*** (2.60)
Property Rights
4 All Developing Countries
5 Democratic Developing Countries
6 Autocratic Developing Countries
-0.29*** (2.50) 0.29** (2.39)
-0.16 (0.51) 0.33 (1.46)
-0.32** (2.36) 0.43*** (3.00)
-0.92 (1.09) 0.16 (0.19)
-0.82*** (2.48) 0.29 (0.71)
Investment Rates -0.45 -0.94*** (1.38) (3.31) Property Rights 0.18 (0.55) SUR estimates for decade averages - coefficients for key variables only Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level * Significant at the 10% level. Polity Inconsistency
-0.67*** (0.29)
-1.54** (2.45)
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Table 6 Sensitivity Analysis Variable
All Developing Countries
Democratic Developing Countries All sample
Autocratic Developing Countries
Property Rights (0-10)
All Developing Countries 0.32*** (2.50)
Democratic Developing Countries All sample 0.43* (1.80)
Autocratic Developing Countries
0.35 (1.09)
0.13 (0.19)
0.68** (1.93)
0.069 (0.21)
w/o 4 outlier observations Property Rights (0-10)
0.27*** (2.45)
-0.15 (0.24)
0.46 (1.22)
0.43* (1.71)
0.30 (0.50)
0.58** (1.97)
w/o 6 countries-frequent regime chg Property Rights (0-10)
0.12 (0.43)
-0.15 (0.24)
0.50 (1.48)
w/o 6 countries-frequent regime chg 0.30** 0.43* 0.43*** (2.22) (1.80) (2.61)
Ethnicity (0-1) Regime Durability
0.32 (0.92)
0.13 (0.19)
0.67* (1.71)
0.06 (0.17)
w/o 4 obs and 6 countries Property Rights (0-10)
0.27** (2.21)
-0.15 (0.24)
0.45 (1.10)
0.49* 0.30 0.60* 0.12 (1.74) (0.50) (1.88) (0.41) SUR estimates for decade averages - coefficients for key variables only Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level. * Significant at the 10 % level.
-2.14*** (2.55) 0.32 (1.00)
-2.91 (1.30) 0.013 (0.02)
-1.55* (1.80) 0.62* (1.73)
w/o 4 outlier observations -0.99 (1.51) 0.44* (1.69)
-0.15 (0.24)
23
0.46 (1.29)
-2.07 (1.06) 0.25 (0.42)
-0.59 (0.83) 0.58** (1.95)
w/o 6 countries-frequent regime chg -2.08** (2.33) 0.29 (0.85)
w/o 4 obs and 6 countries 0.43* 0.39*** (1.80) (2.62)
Ethnicity (0-1) Regime Durability
Autocratic Developing Countries
w/o 4 outlier observations 0.43* 0.38*** (1.80) (2.85)
Ethnicity (0-1) Regime Durability
Democratic Developing Countries All sample
0.42*** (2.93)
Ethnicity (0-1) Regime Durability
All Developing Countries
-2.91 (1.30) 0.013 (0.02)
-1.53* (1.66) 0.61 (1.55)
w/o 4 obs and 6 countries -0.83 (1.20) 0.49* (1.72)
-2.07 (1.06) 0.25 (0.42)
-0.45 (0.60) 0.60* (1.89)
Endnotes: 1
Data is not available for all countries for each decade.
2
Estimates using the Gastil indices instead of the polity variable does not change our results in any significant way. Given the high correlation between these two sets of variables, this is not a surprise (see Jaggers and Gurr, 1995). 3
While polity measures have been used in other studies, we are unaware of any study using a regime durability measure.
4
If a country’s polity score (ranges between +10 and -10) is greater then zero, it is classified as a democratic country, otherwise it is classified as an autocratic country.
5
Due to the limited coverage of the property rights data, the sample size is 152.
6
The estimated rates of convergence are still appreciably different for the two regime types, but other significant coefficients have similar magnitudes. 7
For the risk of government expropriation, since we do not have the data for the 1970s, 1980 values are used for the 1970s estimate. For this variable, the sample size is 172. 8
Use of government repudiation of contracts in place of the expropriation variable as an alternative property rights measure obtains identical coefficients for both the repudiation of contracts and regime durability variables. 9
Use of the larger sample precludes inclusion of the property rights variable in the estimates.
10
When we include the widely-used index of ethnolinguistic fractionalization in 1960 as an explanatory variable, we obtain insignificant coefficients in all three estimates for both the ethnicity index and regime durability variables. Substituting the polity inconsistency variable for regime durability obtains significant, negative coefficients for polity inconsistency in all three estimates, while the estimated effects of the ethnicity index are also insignificant in this specification.
11
In addition to polity persistence, we estimate specifications using Polity variables for coherent polities, regime change, positive regime change, and negative regime change. None of these variables has robust, significant growth effects. The coherent polities and negative regime change measures do have robust, significant effects on investment. As an alternative property rights measure, the model is estimated with the risk of expropriation variable. Polity stability has a significant, positive effect on growth for autocratic developing countries using three measures of stability (regime durability, polity persistence and regime change).
12
The six polity indicators are: Regulation of chief executive recruitment, competitiveness of chief executive recruitment, openness of executive recruitment, executive constraints, regulation of participation, and competitiveness of participation. See Marshall and Jaggers (2005) for a detailed explanation of these measures.
13
The four cases are: Equatorial Guiana, 1990s growth = 17.25%; Botswana, 1970s growth = 11.77%; Democratic Republic of the Congo, 1990s growth = - 8.2%; and Sierra Leone, 1990s growth = -6.4%.
14
The six countries are: Chile, Ethiopia, Nigeria, Panama, Senegal, and El Salvador.
15
For another check of the sensitivity of our results, fixed effects regressions (allowing for time and country effects) are also estimated. In the fixed-effect estimates, the regime durability variable is generally insignificant with the correct sign for autocratic countries, excepted for the smaller sample that includes the property rights variable, and when the six (and ten) cases of frequent regime changes are excluded. The polity persistence variable has significant, negative coefficients regardless of the use of property right variable. Other Polity variables also have estimated coefficients similar to the results reported above.
24
Time-Consistent Polities and Growth in Developing Countries: An Empirical Analysis
James L. Butkiewicz Halit Yanikkaya
Time-Consistent Polities and Growth in Developing Countries: An Empirical Analysis James L. Butkiewicz Department of Economics University of Delaware Newark, DE 19716 [email protected] Work (302) 831 1891 Fax (302) 831 6968 Home (410) 392 3419 Halit Yanikkaya Department of Economics Celal Bayar University Manisa, Turkey 45030 Work (236) 233 0657 Fax (236) 233 2729 [email protected]
August 2005
Abstract Property rights are known to promote economic growth. Durable political regimes, regardless of type, can create stable environments that facilitate growth. Polity stability has an effect similar to property rights, promoting investment enhancing growth. Examination of the growth effects of regime stability finds that stable polities are important for growth in autocracies, but not democracies.
That regime stability is not important for democracies
indicates that parameter heterogeneity can be important when estimating empirical growth models. Not just democracies, but also stable autocracies with predictable rules-of-the-game create positive environments for economic growth.
JEL Classifications: O40. H11 Keywords: Property Rights, Stability, Growth, Democracy, Autocracy
2
1. Introduction Studies of the determinants of growth have established the importance of property rights for creating a positive growth environment. Establishing a stable system of property rights promotes long-term agreements.
Thus, property rights facilitate long-term commitments,
including investment. With the potential returns to economic decisions protected by property rights, agents are free to pursue those opportunities offering the greatest potential returns, thereby stimulating growth. Property rights data is available for only a subset of all countries. In particular, available property rights data for developing countries is limited.
Also, defining property rights is
subjective. An alternative approach examines the durability of regimes. Unstable regimes create a time-inconsistency problem. Durable regimes establish stable rules governing economic behavior. As long as the rules are clear and stable, regardless of regime type, people find ways to maximize their utility. Optimal behavior changes when the rules are variable. Stable political systems are able to cope with a variety of problems, including economic and financial crises, domestic conflicts and civil war. A stable regime should possess the capacity to resolve the problem or crisis, and most importantly survive. A long-lived autocracy can establish a stable system of rules that foster growth. In an autocracy each regime change can create uncertainty about the continuity of rules. Rule uncertainty is time inconsistent, and likely discourages growth. In this paper we report the results of an investigation of the impact of regime stability on growth. Our maintained hypothesis is that regime stability is more important for growth than regime type, especially for autocratic regimes. That is, regime stability, and not democracy per se, fosters growth. Since data for regime stability are available for a large number of developing
3
countries, our sample includes a much larger number of countries than studies investigating the effects of property rights on growth. The outline of this paper is as follows. Section 2 reviews the theoretical and empirical literature on political stability and economic growth. Section 3 describes the standard growth model, data, and data sources used in the analysis. Section 4 reports the estimation results for the various measures of polity stability. In this section, we also examine some econometric problems that potentially affect cross-country growth estimates. Section 5 discusses a case consistent with the findings. Finally, Section 6 concludes the paper. 2. Literature Review It is typically assumed that the stability of political systems has concomitant economic value because of its undeniable common sense appeal—investors prefer predictability, security, and safety. It is commonly believed that political stability is a necessary condition for growth and prosperity. Previous studies note very different channels through which political instability adversely affects economic growth. A number of papers (Alberto Alesina, Sule Ozler, Nouriel Roubini, and Phillip Swagel, 1992; Alex Cukierman, Sebastian Edwards, and Guido Tabellini, 1992; Sebastian Edwards and Guido Tabellini, 1991; Sule Ozler and Guido Tabellini, 1991; Torsten Persson and Lars E. Svensson, 1989; and Guido Tabellini and Alberto Alesina, 1990) argue that governments in politically unstable and polarized countries are more likely to adopt inefficient or suboptimal policies such as an inefficient tax system, higher present government consumption, or accumulation of larger external debts, all of which have adverse growth effects in the long run. It is also known that politically unstable and polarized countries find it difficult to undertake needed reforms or to implement them in order to create a good economic as well as a 4
stable political environment (Alberto Alesina and Allan Drazen, 1991; David Dollar and Jakob Svensson, 2000).
Political instability may also reduce the effectiveness of those reform
programs that are implemented. Several authors (Morris Goldstein, 2003, and Anne O. Krueger, 2003) observe that during the 1997 crisis in Indonesia, compliance with structural conditions was seriously handicapped by prolonged political instability. For example, Krueger (2003, pp. 339340) states that “(O)ne of the manifestations of political instability was the apparent inability of the government itself to agree on a course of action. Announcements were repeatedly reversed, decisions taken were amended or not implemented, and inaction appeared to rule.” Alberto Alesina and Roberto Perotti (1996) argue that sociopolitical instability caused by income inequality leads to uncertainty in the political and economic environments, which in turn, adversely affects growth by reducing investment. Similarly, Jakob Svensson (1998) claims that governments in politically unstable and polarized societies tend to maintain a low quality of property rights, which may be the rational choice of policy makers maximizing the joint welfare of their social or ethnic group, as opposed to social welfare. Thus, political instability defined as the probability of an imminent government change reduces growth by discouraging domestic investment and shifting savings towards non-marketable production or capital flight. Despite an extensive literature, there is considerable ambiguity about the measurement of stability. Indeed, it is hard to define and measure stability in a way that can be used in empirical studies. In the literature, there are two approaches to measuring political instability. The first measures the propensity to observe government changes that “can be ‘constitutional’, i.e. take place within the law, or ‘unconstitutional’ i.e. they can be coups d’etat.” (Alesina and Perotti, 1996, p.1205) The other does not focus on government changes but employs either simple measures of government stability, social unrest, and political violence or indices that summarize
5
these variables. For example, Butkiewicz and Yanikkaya (2005) take the latter approach and, using a large number of sociopolitical instability measures, find that the estimated growth effects are sensitive to the measures used. Their two main findings are that political violence measures have significant negative growth effects, and that the detrimental effects of instability are greater in middle- and high-income and good-democracy countries. This paper investigates the growth effects of polity stability using several new measures of stability from the POLITY IV dataset (Monty G. Marshall and Keith Jaggers, 2005). These variables measure the number of years a polity has endured without abrupt, major change. Different studies use different features of the political system to measure the stability of political systems (Ted Robert Gurr, 1974). For example, Ernest A. Duff and John F. McCamant (1968, p. 1125) defined a stable political system as "one which can manage to change within its structures." Similarly, Gurr (1974, p. 1484) describes a stable political system as “one whose authority patterns remain similar over a long period of time”.
Using the persistence and
adaptability of each historical and contemporary polity as the independent variables, he finds that that the most durable polities were ones which had undergone a number of minor or gradual changes in authority characteristics. Although he fails to find that, at least for non-European countries, democratic regimes tended to be more durable than polities characterized by either autocratic traits or mixed authority traits, Robert Harmel (1980) finds that when he employs more restrictive definitions of abrupt polity change, democracies prove to have been more persistent and adaptable than autocracies in most regions, both historically and in contemporary periods. Using the regime change data from the POLITY IV dataset, Ricardo Hausmann, Lant Pritchett and Dani Rodrik (2004) find that regime changes matter in the sense that political-
6
regime changes are statistically significant predictors of growth accelerations. However, they investigate improvements in growth rates, not growth performance over long periods. Thus, their approach differs from the typical growth model. Our approach is to examine the long-term growth effects of polity stability. 3. Model, Data and Estimation
The effect of regime durability or polity persistence on developing country growth is analyzed using an empirical growth model. The model is derived from an augmented Solow growth model that includes both physical and human capital. This empirical framework was originally developed by Robert J. Barro (1991) and N. Gregory Mankiw, David Romer and David N. Weil (1992). In general form, this model is specified as
γ it = F ( y t , k t , ht ; Z ( t ) ) ,
(1)
where γit is country i’s growth rate of real GDP per capita in period t, yt is initial GDP per capita, kt is the physical capital stock per person, and ht is human capital per person. The model assumes conditional convergence. That is, growth converges to a steady state, but each country’s steady state is determined by a variety of economic, political, cultural and geographic factors, as measured by the variables in the vector Zt. These factors include: fertility rates, proxies for location, and the political and cultural measures discussed below. Growth rates are also affected by these factors. For two countries starting with identical levels of income per capita, the one with the higher steady-state equilibrium level of income experiences more rapid growth.
7
The model is estimated for a panel of over one hundred developing nations for three periods: 1970-1979, 1980-1989 and 1990-1999. The dependent variable is the decade average rate of growth of real GDP per capita. The natural logarithms of telephone mainlines per worker and of lagged life expectancy are used for physical and human capital, respectively. The lagged logarithm of the fertility rate measures the effect of population growth on economic growth. Regional dummies for Sub-Saharan Africa, Latin America and East Asia are also used in the estimates. Data for GDP per capita are from the Penn World Table 6.1 (Alan Heston, Robert Summers, and Bettina Aten, 2002). Data for life expectancy, fertility rates, and telephones mainlines per worker are from the World Bank’s World Development Indicators 2004. Data for the regime durability, polity persistency, incoherent polities, and regime change measures are from the Polity IV data set (Marshall and Jaggers, 2005). Regime durability or polity persistency is assumed to establish stable, coherent rules. It is well known that the rules-of-the-game created by stable systems of property rights promote growth. Thus, regime stability and property rights may be correlated. To investigate this potential connection, property rights data from James Gwartney and Robert Lawson (2004) and two measures of property rights (government repudiation of contracts and the risk of government expropriation) from Easterly (William Easterly, 1999) are used in the estimates. Alberto Alesina, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat and Roman Waciarg (2003) have established that ethnic fractionalization deters growth, possibly through negative effects on the quality of governmental institutions and policy choices. To assess the relative impacts of these forces, their ethnic fractionalization measure (Ethnicity) is used to jointly estimate the effects of ethnic fractionalization and polity stability.
8
The model is estimated using the Seemingly Unrelated Regression (SUR) method. The three-decade panel is unbalanced, with the coefficients, except for decade constant terms, restricted to the same value for all decades. Two potential problems are parameter heterogeneity and outlier effects. Regime stability may be less important for democratic nations, even developing nations, as democracy depends upon a stable institutional framework. Autocracies may lack the same stable framework. For autocracies, regime or polity stability may develop predictable environments that are conducive to investment and growth. To investigate this possibility, the sample is divided into democratic and autocratic groupings, and separate models are estimated for each group. Estimates may also be sensitive to outlier observations. Sensitivity analysis is conducted by excluding outlier observations and reestimating the models to determine whether a few outliers influence the results. 4. Results
Estimates for the basic model are reported in column number 1 in Table 1. The model is estimated for a sample of 106 developing countries over three decades, for a total of 236 observations.1
Initial GDP per capita, human capital (life expectancy) and fertility are
statistically significant with the correct signs. Physical capital (telephone mainlines per worker) is not significant; however, initial GDP per capita may also proxy physical capital.
The
estimated rate of convergence, between 2% and 3%, is consistent with other estimates of the rate of convergence. Of the regional dummies, only the Latin America variable is significant at conventional levels. Insert Table 1 about here.
9
The first version of the model includes a polity variable2 and a dummy variable for regime durability.3
The polity variable is a measure of institutionalized democracy and
autocracy, that ranges from +10 (maximum democracy) to –10 (maximum autocracy).
In
column 1, the estimated coefficient for polity has the incorrect sign and is insignificant. The new variable in the estimated model is a dummy for regime durability. Polity IV defines regime durability as “the number of years since the most recent regime change (defined by a three point change in the polity score over a period of three years or less) or the end of transition period defined by the lack of stable political institutions.” If a regime change occurs in the first five years of a decade or the last five years of a previous decade (we use five-year lagged values of regime durability due to the potential existence of endogeneity), the dummy is assigned a zero value; otherwise its value is 1. The estimated coefficient for this variable has the correct, positive, sign but is insignificant. Above we discussed the possibility of parameter heterogeneity, the possibility that parameters vary between country types. We divide the sample into two groups4: democracies (55 observations) and autocracies (181 observations). The estimates are reported in columns 2 and 3 of Table 1. There are a number of differences between the two estimates, including different estimated rates of convergence and different effects of human capital and fertility. Regime durability now has a statistically significant positive effect on growth for autocratic countries, and an insignificant effect for democracies. These results are consistent with the hypothesis that durable autocratic regimes establish stable environments that are conducive to growth. If regime durability results in stable rules, then regime durability may be correlated with property rights. Property rights measures include an index developed by Gwartney and Lawson 10
(2004) and the Political Risk Service’s ICRG data (from Easterly, 1999) for risk of government expropriation and repudiation of contracts. Mean values of these property rights measures for stable and unstable regimes are shown in Table 2. In all cases, stable regimes on average have stronger property rights. Insert Table 2 about here Results for estimates including the Gwartney-Lawson property rights measures and regime durability are reported in Table 3.5 The property rights variable is significant in the estimates for the combined sample and for the divided democracy-autocracy samples, while the regime durability variable is not significant in any of the estimates.6 Estimates using the risk of expropriation as a measure of property rights appear in the next three columns of Table 3.7 Estimating the model using this measure of property rights obtains significant coefficients for expropriation in the full sample and for autocracies with stable regimes (columns 4 to 6 in Table 3).8 Insert Table 3 about here Alesina et. al., (2003) state that fractionalization can negatively affect government quality.
Columns 7-9 report estimates for 235 observations using the Alesina et. al.
fractionalization measure with regime durability.9 The fractionalization variable has a significant negative effect on growth for the complete sample. For autocratic countries, fractionalization and regime durability are both significant at the 10% level. These results suggest that while fractionalization harms growth, durability increases growth even in fractionalized countries.10 Additional estimates reported in Table 4 indicate that the channel by which durability promotes growth is through investment. Investment rates are estimated for the full sample and
11
for the limited sample used to estimate the effects of property rights. The explanatory variables are the same as those used to estimate the growth specifications. The results in column 3 indicate that regime durability promotes investment in autocratic countries. The property rights variable is not significant in any of the specifications. Insert Table 4 about here. We investigate the explanatory power of other polity measures.11 A measure we call polity inconsistency proves to have significant explanatory power for both growth and investment, even when the Gwartney-Lawson property rights variable is included in the estimates. The polity inconsistency measure is based on a measure of polity persistence which is more sensitive than the regime durability measure. The regime durability measure changes when there is a three point change for any of six polity indicators.12 The Polity IV Persistence measure changes whenever any of the six polity indicators changes. Our polity inconsistency measure is the number of times in a decade that there is a change in polity persistence. To correct for possible endogeneity, this variable is constructed using the last five years of the previous decade and the first five years of the current decade. A high value of polity inconsistency is expected to reduce growth and investment. The estimated growth and investment effects of polity inconsistency are reported in Table 5. As is evident from the results reported in columns 3 and 6 of the table, polity inconsistency has significant growth effects in autocracies, even when the property rights measure is included in the estimates.
The effect of polity inconsistency on investment is significant in the
specification including property rights.
Overall these results suggest that stable political
environments are more important for growth than the choice between democracy and autocracy. Insert Table 5 about here. 12
Estimated growth effects can be sensitive to a few extreme observations. To test the sensitivity of the results presented above, the specifications are reestimated excluding four observations with very high or very low growth rates,13 and six observations with frequent regime changes.14 The results presented in Table 6 indicate that the growth effect of property rights is not sensitive to outliers. The regime durability variable is generally significant with the correct sign for autocratic countries, excepted for the smaller sample that includes the property rights variable, and when the six cases of frequent regime changes are excluded and the ethnicity variable is included. The ethnicity measure is sensitive to outliers, especially the exclusion of the four extreme growth cases, and when all ten outliers are excluded. In this latter estimate, the regime durability measure has a significant positive effect for autocratic countries, while the ethnicity measure is insignificant.15 Insert Table 6 about here. The estimated magnitude of the growth impact of regime durability is consistently an increase of 0.6% in the annual growth rate of real GDP per capita. In a span of 70 years, this results in an improvement of over 50% in the average standard of living. Polity stability can make a substantial contribution to economic welfare. 5. Discussion
China is probably the best example of the vital importance of polity stability. Lacking a Western style rule of law, it has neither formally defined property rights nor a democratic government. Yet, China has been the largest recipient of foreign direct investment in the developing world for many years. This suggests that investors value polity stability, well-
13
defined rules, more than the type of political regime, especially in autocratic countries. If investors observe profitable opportunities in either the near or long term, capital flows into a country as long as the country has clear and well-defined rules and a stable regime. A weak rule of law, or lack of economic and politic rights are negative factors that weigh in investment decisions, but they are by no means determinative. Dani Rodrik, Arvind Subramanian, and Francesco Trebbi (2002) point out that while private property rights is a primary component of their measure of institutional quality, this does not necessarily mean that private property rights are superior to other forms of property rights. They note that while Russia has a formal legal system that is characteristically European, and China does not, China ranks much higher than Russia by their institutional quality indicator. The significance of polity stability in autocratic countries provides insight into “the developmental state view,” which is said to characterize the development policy of East Asian countries. Stability of regime rather than regime type is largely responsible for the faster growth rate in countries such as China and Singapore. 6. Conclusion
This paper examines the growth effects of regime durability and polity inconsistency in democratic and autocratic developing countries. An important finding is that the estimated growth effects of polity measures are sensitive to parameter heterogeneity. The effects of stable polities are important for autocracies, and not important for democracies. Stable autocratic polities establish consistent rules of the game, or a form of property rights.
This stable
environment is conducive to investment and growth, and increases the average growth of GDP per capita in autocracies by 0.7% annually.
14
Developing democracies are typified by well defined property rights and mechanisms for orderly transitions of power. In these countries, polity stability is not an important determinant of growth. Correspondingly, the ethnic fractionalization measure is not statistically significant for democratic developing countries even though it reduces growth in autocratic countries. Sensitivity analysis indicates that the estimated effects of property rights measures are not sensitive to outliers, although the sample for property rights estimates is smaller due to data limitations. The ethnic fractionalization measure is the most sensitive to extreme observations. The regime durability measure exhibits some sensitivity to extreme observations, but in general, regime durability has a significant positive effect on growth in autocratic countries. Overall, these results indicate that polity stability is far more important for growth and investment than government type. Predictable rules of the game promote growth, even in autocracies. Democracies per say do not have an automatic growth advantage. Time-consistent polities promote growth, regardless of polity type.
15
References
Alesina, Alberto, and Allan Drazen. (1991). "Why Are Stabilizations Delayed?" American Economic Review, 81(5), 1170-1188. Alesina, Alberto, Sule Ozler, Nouriel Roubini, and Phillip Swagel. (1992). “Political Instability and Economic Growth.” Journal of Economic Growth, 1(2), 189-211. Alesina, Alberto, and Roberto Perotti. (1996). “Income Distribution, Political Instability, and Investment,” European Economic Review, 40, 1203-1228. Alesina, Alberto, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat and Roman Waciarg. (2003). “Fractionalization,” Journal of Economic Growth,” 8(2), 155-194. Barro, Robert J., (1991). “Economic Growth in a Cross Section of Countries.” Quarterly Journal of Economics, 106 (2), 407- 433. Butkiewicz, James L. and Halit Yanikkaya, (2005), “The Impact of Sociopolitical Instability on Economic Growth: Analysis and Implications,” Journal of Policy Modeling, forthcoming. Cukierman, Alex, Sebastian Edwards, and Guido Tabellini. (1992). “Seigniorage and Political Instability,” American Economic Review, 82(3), 537-555. Dollar, David, and Jakob Svensson. (2000). “What Explains the Success or Failure of Structural Adjustment Programmes,” Economic Journal, 110, 894-917. Duff, Ernest, A., and John F. McCamant. (1968). “Measuring Social and Political Requirements for System Stability in Latin America,” American Political Science Review, 62(4), 11251143. Easterly, William. (1999). “Life during Growth,” Journal of Economic Growth, 4, 239-275. Edwards, Sebastian, and Guido Tabellini. (1991). “Political Instability, Political Weakness and Inflation: An Empirical Analysis,” NBER Working Papers Series, No: 3721. Goldstein, Morris. (2003). IMF structural conditionality: How much is too much? In Feldstein, M. (Ed.) Economic and financial crises in emerging market economies. (pp. 363-437). NBER Conference Series. Chicago: University of Chicago Press. Gwartney, James and Robert Lawson (2004). Economic Freedom of the World: 2004 Annual Report. Vancouver: The Fraser Institute. Data from http://www.freetheworld.com. Gurr, Ted Robert. 1974. “Persistence and Change in Political Systems, 1800-1971.” American Political Science Review 68: 1482-504. Harmel, Robert. 1980. "Gurr's 'Persistence and Change' Revisited: Some Consequences of Using Different Generationalizations of 'Change of Polity."' European Journal of Political Research 8: 189- 214. Hausmann, Ricardo, Lant Pritchett, and Dani Rodrik, (2004). “Growth Accelerations,” NBER Working Papers Series, No: 10566. Heston, Alan, Robert Summers and Bettina Aten (2002). . Center for International Comparisons at the University of Pennsylvania (CICUP), October 2002.
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Krueger, Anne O. (2003). “IMF stabilization programs. In Feldstein, M. (Ed.) Economic and financial crises in emerging market economies. (pp. 297-346). NBER Conference Series. Chicago: University of Chicago Press. Jaggers, Keith, and Ted Robert Gurr. 1995. “Tracking Democracy’s Third Wave with the Polity III Data.” Journal of Peace Research 32: 469-82. Mankiw, N. Gregory, Romer, David, and Weil, David N. (1992). “A Contribution to the Empirics of Economic Growth.” Quarterly Journal of Economics 107 (2), 407 – 437. Marshall, Monty G. and Keith Jaggers (2005). “Political Regime Characteristics and Transitions, 1800-2003.” Polity IV Project. Data from http://www.cidcm.umd.edu/inscr/polity/polreg.htm. Ozler, Sule, and Guido Tabellini. (1991). “External Debt and Political Instability”, NBER Working Papers Series, No: 3772. Persson, Torsten, and Lars E. Svensson. (1989). “Why a Stubborn Conservative Would Run a Deficit: Policy with Time Inconsistent Preferences,” Quarterly Journal of Economics, 104, 325-345. Political Risk Services (2005). International Country Risk Guide. Data from http://www.countrydata.com. Rodrik, Dani, Arvind Subramanian, and Francesco Trebbi, (2002) “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development” Kennedy School of Government, Harvard University. Svensson, Jakob. (1998). “Investment, Property Rights and Political Instability: Theory and Evidence,” European Economic Review, 42, 1317-1341. Tabellini, Guido, and Alberto Alesina. (1990) "Voting on the Budget Deficit," American Economic Review, 80(1), 37-49. World Bank (2004). World Development Indicators 2004. Washington, D.C.
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Table 1 Estimated Growth Effects of Polity Stability
Independent variable Variable Log (Initial GDP per capita) Log (Life Expactancy, lagged) Log (Fertility rates, lagged) Log (Telephone mainlines per worker) Polity (democracy- autocracy) Dummy for Regime Durability Sub-Saharan African Dummy Latin American Dummy East Asian Dummy
Real GDP Per Capita Growth Rates 1 2 3 Democratic Developing Autocratic Developing All Developing Countries Countries Countries -2.69*** -8.18*** -2.39*** (2.87) (3.15) (2.51) 11.42*** 27.29*** 8.08* (2.64) (2.86) (1.70) -5.39*** -1.97 -6.56*** (2.70) (0.53) (2.88) 0.70 2.20 0.34 (1.10) (1.58) (0.54) -0.010 (0.34) 0.35 0.13 0.68** (1.09) (0.19) (1.93) -0.50 1.06 -1.07* (0.86) (0.88) (1.65) -1.83*** -2.93*** -1.44** (3.01) (2.85) (2.19) 1.12 0.12 1.92** (1.59) (0.10) (2.35) .21, .31 .20, .36 .25, .46 .22, (236) .55, (55) .20, (181)
R2 for each equation, (N) SUR estimates for decade averages. Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level * Significant at the 10% level.
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Table 2 Property Rights and Regime Durability
1970-1999 Data for all Developing Countries Mean Index Values by Regime Type for Different Regime Durability Measures Unstable Stable Unstable Stable Unstable Stable Regimes Regimes Regimes Regimes Regimes Regimes Regime Durability EFW Property Rights Index
3.9
4.45
Polity Persistency 4.04
Government Repudiation of 4.78 5.15 4.98 Contracts Risk of Governmenet 5.15 5.61 5.35 Expropriation Note: A large index value indicates stronger property rights
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Incoherent Polities
4.68
4.09
4.3
4.91
4.83
5.06
5.46
5.3
5.43
Table 3 Estimated Growth Effects of Property Rights and Polity Stability
Independent variable
1
2
3
Real GDP Per Capita Growth Rates 4 5 6
7
8
9
All Democratic Autocratic All Democratic Autocratic All Democratic Autocratic Developing Developing Developing Developing Developing Developing Developing Developing Developing Countries Countries Countries Countries Countries Countries Countries Countries Countries Variable Property Rights (0-10) 0.31*** 0.43* 0.42*** (2.50) (1.80) (2.93) Expropriation (1-10) 0.40*** -0.05 0.56*** (3.25) (0.19) (3.94) Ethnicity (0-1) -2.14*** -2.91 -1.55* (2.55) (1.30) (1.80) Dummy for Regime Durability 0.069 -0.15 0.46 0.39 -0.06 0.79*** 0.32 0.013 0.62* (0.21) (0.24) (1.22) (1.33) (0.08) (2.52) (1.00) (0.02) (1.73) SUR estimates for decade averages. Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level. * Significant at the 10% level.
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Table 4 Effects of Property Rights and Polity Stability on Investment
Independent variable
2 Democratic All Developing Developing Countries Countries Variable Log (Initial GDP per capita) -4.26 -3.60 (1.60) (0.53) Log (Life Expactancy, lagged) 6.88 24.83 (0.54) (1.12) Log (Fertility rates, lagged) 2.05 -2.82 (0.37) (0.26) Log (Telephone mainlines per worker) 7.81*** 1.52 (4.35) (0.39) Polity (democracy- autocracy) -0.01 (0.14) Property Rights (0-10) Dummy for Regime Durability Sub-Saharan African Dummy Latin American Dummy East Asian Dummy
1
1.13 (1.43) 1.23 (0.72) -3.80** (2.10 4.44** (2.15) .32, .28 .19, (234)
0.44 (0.27) 3.17 (1.02) 0.49 (0.17) 3.07 (0.96) .18, .11 .10, (55)
R2 for each equation, (N) SUR estimates for decade averages Coefficients restricted to be equal across decades except constsnts. Absolute value of t-statistics in parentheses ***Significant at the 1% level. **Significant at the 5% level. * Significant at the 10% level.
Investment Rates 3 4 Autocratic Developing All Developing Countries Countries -4.11 -2.42 (1.41) (0.87) -7.63 9.70 (0.50) (0.68) 0.56 -7.22 (0.08) (1.39) 9.60*** 5.42*** (4.74) (2.80) -0.10 (1.13) 0.17 (0.48) 1.50* 0.62 (1.76) (0.75) 0.81 -1.97 (0.39) (1.19) -5.01** -4.43*** (2.39) (2.92) 5.91** 3.83* (2.34) (1.92) .45, .32 .06, .42 .21, (179) .49, (151)
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5 Democratic Developing Countries -5.40 (0.69) 3584 (1.14) -15.03 (1.26) -0.34 (0.08)
6 Autocratic Developing Countries -3.49 (1.12) 0.24 (0.01) -7.87 (1.23) 6.07*** (2.67)
0.81 (1.05) -0.63 (0.31) 3.99 (1.28) 1.28 (0.45) 5.34 (1.67) .10, .45 .29, (36)
0.23 (0.54) 0.62 (0.68) -3.94 (1.64) -6.36*** (3.37) 2.92 (1.09) .16, .43 .51, (114)
Table 5 Effects of Property Rights and Polity Inconsistency on Growth and Investment 1
Variable Polity Inconsistency
All Developing Countries
2 Democratic Developing Countries
-0.38*** (3.14)
-1.07*** (4.72)
3 Autocratic Developing Countries Growth Rates -0.34*** (2.60)
Property Rights
4 All Developing Countries
5 Democratic Developing Countries
6 Autocratic Developing Countries
-0.29*** (2.50) 0.29** (2.39)
-0.16 (0.51) 0.33 (1.46)
-0.32** (2.36) 0.43*** (3.00)
-0.92 (1.09) 0.16 (0.19)
-0.82*** (2.48) 0.29 (0.71)
Investment Rates -0.45 -0.94*** (1.38) (3.31) Property Rights 0.18 (0.55) SUR estimates for decade averages - coefficients for key variables only Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level * Significant at the 10% level. Polity Inconsistency
-0.67*** (0.29)
-1.54** (2.45)
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Table 6 Sensitivity Analysis Variable
All Developing Countries
Democratic Developing Countries All sample
Autocratic Developing Countries
Property Rights (0-10)
All Developing Countries 0.32*** (2.50)
Democratic Developing Countries All sample 0.43* (1.80)
Autocratic Developing Countries
0.35 (1.09)
0.13 (0.19)
0.68** (1.93)
0.069 (0.21)
w/o 4 outlier observations Property Rights (0-10)
0.27*** (2.45)
-0.15 (0.24)
0.46 (1.22)
0.43* (1.71)
0.30 (0.50)
0.58** (1.97)
w/o 6 countries-frequent regime chg Property Rights (0-10)
0.12 (0.43)
-0.15 (0.24)
0.50 (1.48)
w/o 6 countries-frequent regime chg 0.30** 0.43* 0.43*** (2.22) (1.80) (2.61)
Ethnicity (0-1) Regime Durability
0.32 (0.92)
0.13 (0.19)
0.67* (1.71)
0.06 (0.17)
w/o 4 obs and 6 countries Property Rights (0-10)
0.27** (2.21)
-0.15 (0.24)
0.45 (1.10)
0.49* 0.30 0.60* 0.12 (1.74) (0.50) (1.88) (0.41) SUR estimates for decade averages - coefficients for key variables only Coefficients restricted to be equal across decades except constants. Absolute value of t-statistics in parentheses *** Significant at the 1% level. ** Significant at the 5% level. * Significant at the 10 % level.
-2.14*** (2.55) 0.32 (1.00)
-2.91 (1.30) 0.013 (0.02)
-1.55* (1.80) 0.62* (1.73)
w/o 4 outlier observations -0.99 (1.51) 0.44* (1.69)
-0.15 (0.24)
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0.46 (1.29)
-2.07 (1.06) 0.25 (0.42)
-0.59 (0.83) 0.58** (1.95)
w/o 6 countries-frequent regime chg -2.08** (2.33) 0.29 (0.85)
w/o 4 obs and 6 countries 0.43* 0.39*** (1.80) (2.62)
Ethnicity (0-1) Regime Durability
Autocratic Developing Countries
w/o 4 outlier observations 0.43* 0.38*** (1.80) (2.85)
Ethnicity (0-1) Regime Durability
Democratic Developing Countries All sample
0.42*** (2.93)
Ethnicity (0-1) Regime Durability
All Developing Countries
-2.91 (1.30) 0.013 (0.02)
-1.53* (1.66) 0.61 (1.55)
w/o 4 obs and 6 countries -0.83 (1.20) 0.49* (1.72)
-2.07 (1.06) 0.25 (0.42)
-0.45 (0.60) 0.60* (1.89)
Endnotes: 1
Data is not available for all countries for each decade.
2
Estimates using the Gastil indices instead of the polity variable does not change our results in any significant way. Given the high correlation between these two sets of variables, this is not a surprise (see Jaggers and Gurr, 1995). 3
While polity measures have been used in other studies, we are unaware of any study using a regime durability measure.
4
If a country’s polity score (ranges between +10 and -10) is greater then zero, it is classified as a democratic country, otherwise it is classified as an autocratic country.
5
Due to the limited coverage of the property rights data, the sample size is 152.
6
The estimated rates of convergence are still appreciably different for the two regime types, but other significant coefficients have similar magnitudes. 7
For the risk of government expropriation, since we do not have the data for the 1970s, 1980 values are used for the 1970s estimate. For this variable, the sample size is 172. 8
Use of government repudiation of contracts in place of the expropriation variable as an alternative property rights measure obtains identical coefficients for both the repudiation of contracts and regime durability variables. 9
Use of the larger sample precludes inclusion of the property rights variable in the estimates.
10
When we include the widely-used index of ethnolinguistic fractionalization in 1960 as an explanatory variable, we obtain insignificant coefficients in all three estimates for both the ethnicity index and regime durability variables. Substituting the polity inconsistency variable for regime durability obtains significant, negative coefficients for polity inconsistency in all three estimates, while the estimated effects of the ethnicity index are also insignificant in this specification.
11
In addition to polity persistence, we estimate specifications using Polity variables for coherent polities, regime change, positive regime change, and negative regime change. None of these variables has robust, significant growth effects. The coherent polities and negative regime change measures do have robust, significant effects on investment. As an alternative property rights measure, the model is estimated with the risk of expropriation variable. Polity stability has a significant, positive effect on growth for autocratic developing countries using three measures of stability (regime durability, polity persistence and regime change).
12
The six polity indicators are: Regulation of chief executive recruitment, competitiveness of chief executive recruitment, openness of executive recruitment, executive constraints, regulation of participation, and competitiveness of participation. See Marshall and Jaggers (2005) for a detailed explanation of these measures.
13
The four cases are: Equatorial Guiana, 1990s growth = 17.25%; Botswana, 1970s growth = 11.77%; Democratic Republic of the Congo, 1990s growth = - 8.2%; and Sierra Leone, 1990s growth = -6.4%.
14
The six countries are: Chile, Ethiopia, Nigeria, Panama, Senegal, and El Salvador.
15
For another check of the sensitivity of our results, fixed effects regressions (allowing for time and country effects) are also estimated. In the fixed-effect estimates, the regime durability variable is generally insignificant with the correct sign for autocratic countries, excepted for the smaller sample that includes the property rights variable, and when the six (and ten) cases of frequent regime changes are excluded. The polity persistence variable has significant, negative coefficients regardless of the use of property right variable. Other Polity variables also have estimated coefficients similar to the results reported above.
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