Democracy, institutions and growth An application to Former Communist Countries (1990-2008) Domenico...

Democracy, institutions and growthAn application to

Former Communist Countries (1990-2008)

Domenico RossignoliUniversità Cattolica del Sacro Cuore - Milano

11th International Academic Conference on economic and social development

EACES workshop "Comparative empirical studies: what can we learn for transition and developing countries?"

11th International Academic Conference on Economic and Social Development

2

Brief Index

• Review of the literature: uncertainty on direct democracy/growth relationship; consensus on institutions/growth relationship

• Offering a new indirect approach: democracy, institutions and growth

• An empirical application on Former Communist Countries

Democracy, institutions and growth


3

Exploring existing literature (1)

• No significant direct relationship between democracy and growth (Barro, 1996; Helliwell, 1994; Przeworski et al. 2000)

• Indirect positive effect through human capital (Wacziarg, 2001)

No clear evidence of a direct correlation between democracy and growth



4

Exploring existing literature (2)

• Institutions and growth relationship explored

– Theorically (North, 1990; Olson, 1993)

– Empirically (Acemoglu, 2005; Rodrik, 2003)


Wide academic consensus about positive institutions effect on long-run growth


5

Connecting democracy and growth through institutions

• Political and economic systems are linked through institutions.

• What are institutions? “the rules of the game in a society and more

formally [as] the humanly devised constraints that shape human interaction” (North, 1990)


DemocracyPolitical

Institutions

Economic Institutions

Environmental Conditions

Economic Growth


6

A simple classification

A simple classification offered: • Environmental Conditions

– Rule of Law– Political Stability

• Economic Institutions– Property Rights– Economic Freedom



7

An empirical application: former communist countries

• Selected Sample– 28 former communist countries, – 1995-2008, economic data from World Bank

• First step: OLS regression– Real GDP growth as dependent variable– Standard control variables– Institutional variables (direct relationship)

• Second Step: OLS regression– Institutional variables as dependent variables– Political Rights Index as determinant


Hypothesis: democracy is positively correlated with growth-enhancing institutions. Thus, it indirectly affects economic growth


8

Summary of institutional proxiesProxied institutions Proxy variable Source Period

coverage

Democracy Political Rights Index Freedom House Foundation 1995-2008

Political Stability Political Stability and Absence of Violence Index

World Governance Indicators, World Bank

1996-2008

Rule of Law Rule of Law Index World Governance Indicators, World Bank

1996-2008

Property Rights Protection Property Rights Index Heritage Foundation 1995-

2008

Economic Freedom Overall Economic Freedom Heritage Foundation 1995-2008



9


(1) (2) (3) (4)Log GNI per capita, 1995 -0.008 (0.011) -0.025** (0.012) -0.024* (0.013) -0.024 (0.014)Household Final Consumption -0.020** (0.050) -0.059 (0.054) -0.052 (0.059) -0.048 (0.071)Investment 0.232 (0.115) 0.163 (01.00) 0.156 (0.105) 0.156 (0.104)Government Expenditure -0.094 (0.075) -0.068 (0.072) -0.061 (0.078) -0.058 (0.089)Openness to trade -0.017 (0.012) -0.029** (0.011) -0.030** (0.011) -0.030**(0.011)Secondary School Enrollment 0.016 (0.051) -0.050 (0.071) -0.055 (0.076) -0.056 (0.081)Life Expectation at Birth 0.004 (0.003) 0.003 (0.002) 0.003 (0.002) 0.003 (0.002)Oil Dummy 0.011 (0.014) 0.012 (0.013) 0.012 (0.013) 0.013 (0.014)Former Soviet Union Dummy 0.025 (0.018) 0.016 (0.015) 0.016 (0.016) 0.017 (0.016)

Political Stability 0.019** 0.020** 0.020*(0.009) (0.009) (0.010)

Improvement in Rule of Law index

0.022** 0.022* 0.021*(0.010) (0.011) (0.012)

Property Rights Protection 0.000(0.001)

Overall Economic Freedom 0.000(0.001)

N 24 24 24 24R2 0.702 0.808 0.809 0.809

Institutions and growth: results

OLS, robust standard errors in parenthesis. Significance level:**= 5 per cent ***= 1 per cent.


10

Findings

• Political stability and rule of law proxies show significant and positive coefficients.

• Chosen economic institutions proxies show not significant coefficients.

• Environmental conditions are positively correlated with economic growth in this transition countries’ sample.



11


Political Stability

(1)

Rule of Law

(2)

Increase in Rule of Law

(3)

Property Rights

(4)

Economic Freedom

(5)

Political Rights -1.437(1.109)

-0.227(0.498)

0.334** (0.137)

-2.819(2.675)

-2.458(1.423)

Squared Political Rights

2.750***(0.855)

1.905***(0.460)

N 28 28 28 28 28R2 0.711 0.898 0.117 0.033 0.077

Political Rights -4.347**(1.634)

-0.958(0.909)

0.470*(0.231)

-2.672(2.888)

-1.887 (2.193)

Squared Political Rights

4.863***(1.241)

2.409***(0.779)

N 16 16 16 16 16R2 0.799 0.893 0.364 0.050 0.051

Democracy and institutions correlation



12

Democracy and institutions: some findings

1. Democracy/Political Stability and Democracy/Rule of Law relationship are shown positive and significant in a quadratic form.


Democracy and environmental conditions are positively correlated

Democracy and institutions: some findings

2. Democracy/Property Rights Protection and Democracy/Economic Institutions relationship are shown negative but not significant.

11th International Academic Conference on Economic and Social Development 13


Democracy and economic institutions relationship is not significant


14

Democracy and Environmental Conditions: EU influence (1)

ALBARM

AZE

BLR

BIH

BGRHRV

CZEEST

GEO

HUN

KAZ

KGZ

LVALTU

MKD

MDA

MNE

POL

ROM

RUS

SRB

SVK

SVN

TJK

TKM UKR

UZB

-1.5

-1-.

50

.51

Po

litic

al S

tab

ility

0 .2 .4 .6 .8 1Political Rights

Fitted values average 95-08

World Bank, Political Stability Index; Freedom House, Political Rights Index

1995-2008Democracy and Political Stability


15

ALB

ARM

AZE

BLR

BIH

BGRHRV

CZEEST

GEO

HUN

KAZ KGZ

LVALTU

MKDMDA

MNE

POL

ROM

RUS SRB

SVK

SVN

TJKTKM

UKR

UZB

-1.5

-1-.

50

.51

Rule

of L

aw

0 .2 .4 .6 .8 1Political Rights

Fitted values average 95-08

World Bank, Rule of Law Index; Freedom House, Political Rights Index

1995-2008Democracy and Rule of Law

Democracy and Environmental Conditions: EU influence (2)


16

Further investigations

• The paper presents positive and significant correlation between democracy and economic freedom using a different proxy (Fraser Institute) but only half of the sample is covered.

• The paper also shows direct positive and significant correlation between democracy and human capital (proxied by previously used variables).


17

Democracy and Human CapitalSecondary School

Enrollment(1)

Life Expectation

(2)

Political Rights 0.096**(0.037)

7.122***(1.244)

N 28 28

R2 0.207 0.461

Political Rights 0.103**(0041)

4.837**(1.793)

N 16 16

R2 0.231 0.301



18

Conclusions• Institutions are positively related to economic growth.

• In particular, environmental conditions, namely rule of law and political stability have significant and positive effect on economic growth.

• Democracy may indirectly affect economic growth through institutions: political rights are positively and significantly correlated with growth-enhancing institutions.

• Human capital is also positively affected by democracy.

• European Integration may have fostered the democracy/institutions relationship in selected countries.



19

Final considerations

• Further research needed:

– To improve measurement of institutions

– To improve the empirical application of the model

– To get an aggregate model linking democracy to growth through institutions

– To include a panel dataset in order to catch dynamic aspects not considered so far.



20

References• Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Institutions as a fundamental cause of long-run

growth. In P. Aghion, & S. Durlauf (A cura di), Handbook of economic growth (p. 385-472). Amsterdam: Elsevier.

• Aghion, P. (2006). On institutions and growth. In T. S. Eicher, & C. Garcìa-Penalosa (A cura di), Institutions, development and economic growth. Cambridge & London: MIT Press.

• Barro, R. J. (1996). Democracy and economic growth. Journal of Economic Growth , 1 (1), 1-27.• Feng, Y. (2003). Democracy, governance and economic performance. Cambridge MA and London: MIT

Press.• Gastil, R. D. (1986). Freedom in the world. Westport: Greenwood Press.• Gwartney, J., & Lawson, R. (2003). The concept and measurement of economic freedom. European Journal

of Political Economy , 19, 405-430.• Helliwell, J. F. (1994). Empirical linkages between democracy and economic growth. British Journal of

Political Science , 24, 225-248.• North, D. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge

University Press.• Olson, M. (1991). Autocracy, democracy and prosperity. In J. R. Zeckhauser, Strategy and chioce (p. 131-

157). Cambridge, MA: MIT Press.• Persson, T., & Tabellini, G. (2003). The economic effect of constitutions. London & Cambridge, MA: MIT

Press.• Przeworski, A., Alvarez, M. E., Cheibub, J. A., & Limongi, F. (2000). Democracy and development.

Cambridge, MA: Cambridge University Press.• Rodrik, D. (2003). In search of prosperity. Princeton: Princeton University Press.



21

Thank you for your attention!

Democracy, institutions and growth An application to Former Communist Countries (1990-2008) Domenico...

Documents

Transcript of Democracy, institutions and growth An application to Former Communist Countries (1990-2008) Domenico...