Economic and Political Liberalizations Francesco Giavazzi and Guido Tabellini.

Economic and Political Liberalizations

Francesco Giavazzi and Guido Tabellini

2

Study economic and political liberalizations

Do they improve govt incentives and economic performance?Eg: what advice should IMF give to Egypt, or Pakistan

Is there an optimal sequencing? Eg: China vs Russia or India

What are the interactions?

3

Effects of economic and political liberalizations?

Two separate lines of research, on economic outcomes

1. Effects of economic liberalizations?Good for growth, investment, trade (Sachs-Werner, Wacziarg-Welch)

2. Effects of political liberalizations?Disagreement, or no effect

This paper: Interactions and feedbacks between economic and

political liberalizationsEffects on policies, not just economic outcomes

Persson (2004): effect of different types of demo on liberalizations and structural policies

4

Specific questions

• Effects of economic and political liberalizations, separately?

On economic outcomes

On other structural policies

On macro policies

• Feedback effects, and in which directions?

• Complementarities?

• Does sequencing matter?

5

Priors? • No theoretical model

• But priors and questions motivated by previous research– Economic liberalizations improve outcomes

Is it trade or other economic policy reforms?– No effect of democracy on outcomes

Is it due to opposite policy effects?democratization → less corruption, more public goodsdemocratization → more redistribution, more veto players

– Feedbacks: causality could go either way – Interactions and Sequencing: no priors

• Don’t study heterogeneity among democracies

6

Data on reformEcon. Liberalization: becoming “open”

“Closed” if: (i) average tariff > 40%; or (ii) NTB on > 40% of goods; or

(iii) socialist economy; or (iv) black mkt premium >20%; or (v) state

monopoly in exports

Wacziarg and Welch (2003), Sachs and Werner (1995)

Political liberalization: becoming “democracy” Polity2 > 0

Sample: about 150 countries in 1960-2000Some always open / closed

Others liberalize in 1960-2000

7

Data on performance

Economic Outcomes (1960-2000)

Growth, investment rate, (trade)

Governance (1982-97)

GADP, corruption

Macroeconomic policy (1960-2000, 1970-2000)Inflation (in logs), budget deficit (% GDP)

8

Difference in difference estimation (Persson 2004)

2 types of countries: “Controls” & “Treated”

Compare before/after reform in “treated”, with “controls” over

same period

(YT1 - YT

0 ) - (YC1 - YC

0 )

Exploit both cross-country & time variation

More credible identification than pure cross-country comparisons /

before-after comparison

Identifying assumption: no unobserved variable moving over

time in different ways between treated / controls

Eg.: technological progress does not affect T / C differently

Eg.: What triggers reform does not have independent influence on

performance

9

Estimationyit = ai + bt + Reformit + eit

Reform =1 in the “treated” after reform

Problems:

- Are treated / control similar?

On average, yes (controls: always open / closed)

Condition also on years*continents as regressors

- Definition of treated / controls varies with performance

- Reversals ? A few

Distinguish between temporary / permanent reforms

End of period problems: discard observations if reform at end

10

Results

Effects of liberalizations alone

Effects of democracy alone

Liberalizations and Democracy (multiple treatments)

Feedback effects

Complementarities and Sequencing

11

Liberalization increases growth and investment

Dep. Var growth Investment lib 0.99 0.85 0.36 0.39 1.12 1.21 1.62 1.62 (0.36)***

(0.39)** (0.39)** (0.34)

(0.42) (0.36) (0.36)

(0.31)*** (0.86)

(0.33)***

(0.29)*** (0.82)*

(0.30)*** (0.99)

3y_pre -0.95 -2.14

(0.49)* (0.60)

(0.42)*** (0.87)**

3y_post 0.46 -1.03

(0.46) (0.45)

(0.39)*** (1.03)

post_lib 0.94 1.76

(0.44)** (0.44)**

(0.38)*** (1.17)

treatment Perm. Perm. Perm. all all Perm. Perm. Perm. all all

Y*conts No Yes No No Yes No yes No No Yes

12

liberalization improves gadp and corruption

Dep. Var gadp Corruption lib 0.35 0.24 0.36 0.24 0.25 0.22 0.25 0.22 (0.07)***

(0.16)** (0.08)*** (0.07)***

(0.16)** (0.08)*** (0.16)

(0.06)*** (0.13)*

(0.06)*** (0.06)*** (0.13)*

(0.06)*** (0.15)

3y_pre -0.23 0.04 (0.09)***

(0.15) (0.08)

(0.14)

3y_post 0.01 0.15

(0.09) (0.22)

(0.08)* (0.18)

post_lib 0.63 0.49 (0.10)***

(0.26)** (0.21)**

(0.21)**

treatment Perm. Perm. Perm. all all Perm. Perm. Perm. all all Y*conts No Yes No No Yes No Yes No No Yes

13

Liberalization reduces inflation and deficit?

Dep. Var Inflation deficit

lib 0.16 -0.05 0.04 -0.08 -1.16 -1.07 -0.85 -0.66 (0.06)**

(0.18) (0.07) (0.06)

(0.18) (0.06) (0.18)

(0.40)*** (1.03)

(0.45)** (0.39)** (1.02)

(0.45) (1.51)

3y_pre 1.13 0.55

(0.08)*** (0.18)***

(0.50) (0.76)

3y_post 0.76 -0.66

(0.08)*** (0.17)***

(0.48) (1.07)

post_lib 0.26 -1.44

(0.08)*** (0.23)

(0.53)*** (1.27)


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No effect of democracy on growth and investment

Dep. Var growth Investment

dem 0.07 -0.00 0.36 0.39 -0.33 -0.75 0.15 0.03 (0.40)

(0.47) (0.43) (0.43)

(0.34) (0.42)

(0.36) (0.36)

(0.34) (1.04)

(0.35)** (0.35)**

(0.29) (0.83)

(0.29) (0.29)

3y_pre -0.61 -0.32

(0.61) (0.68)

(0.52) (1.00)

3y_post 0.09 -0.67

(0.55) (0.62)

(0.47) (1.07)

post_dem -0.15 -0.21

(0.48) (0.52)

(0.40) (1.38)

treatment Perm. Perm. Perm. all all Perm. Perm. Perm. all all

Y*conts No Yes No No Yes No Yes No No Yes

15

Democracy improves gadp and corruption Dep. Var gadp Corruption

dem 0.40 0.37 0.12 0.10 0.38 0.38 0.24 0.27 (0.08)***

(0.20)** (0.43) (0.43)

(0.07) (0.18)

(0.07) (0.07)

(0.07)*** (0.17)**

(0.07)*** (0.06)*** (0.17)

(0.06)*** (0.06)***

3y_pre -0.21 -0.10

(0.11)* (0.17)

(0.08) (0.16)

3y_post 0.12 0.20

(0.10) (0.22)

(0.08)** (0.22)

post_dem 0.58 0.54

(0.12)*** (0.29)**

(0.10)*** (0.24)**


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Mixed effects of democracy on inflation and deficit ?

Dep. Var Inflation deficit

dem 0.52 0.36 0.45 0.34 -0.06 0.65 -0.77 -0.37 (0.07)***

(0.18)*** (0.07)*** (0.06)***

(0.14)*** (0.06)*** (0.06)***

(0.52) (1.09)

(0.58) (0.45)* (1.15)

(0.49) (0.49)

3y_pre 0.28 2.37

(0.11)*** (0.22)

(0.71)*** (0.95)**

3y_post 0.65 1.37

(0.10)*** (0.24)***

(0.65)** (1.22)

post_dem 0.54 0.34

(0.08)*** (0.22)**

(0.67) (1.32)


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Summary• Effects of Liberalizations (after 3 years or more)

– Better economic outcomes– Better governance – Better macro-policies

• Liberalizations preceded by – Worse investment– Worse macro-policies

• Effects of Democracy– None on economic outcomes– Better governance (after 3 years or more)– Macro-policies? (changes precede reform)

• Identification: are reforms random?

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Controls (always) & treated (before liberalization)

-4

-2

0

2

4

(mea

n)

t_re

sid

s

-3-2

-10

12

(mea

n)

c_re

sid

s

1960 1970 1980 1990 2000year

(mean) c_resids (mean) t_resids

GrowthLiberalization

-.8

-.6

-.4

-.2

-5.55e-17

.2

(mea

n)

t_re

sid

s

-.1

-.0

50

.05

.1(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


GapdLiberalization

-.5

0

.5

1

(mea

n)

t_re

sid

s

-.4

-.2

-5.5

5e-1

7.2

.4(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


InflationLiberalization

-2

-1

0

1

2

(mea

n)

t_re

sid

s

-10

12

(mea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


Investment

Liberalization

-.2

0

.2

.4

.6

(mea

n)

t_re

sid

s

-.1

-.0

50

.05

.1(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


Corruption

Liberalization

-1

0

1

2

3

4

(mea

n)

t_re

sid

s

-.5

0.5

(mea

n)

c_re

sid

s1960 1970 1980 1990 2000

year


Overall_deficit_surplus

Liberalization

-4

-2

0

2

4

6

(mea

n)

t_re

sid

s

-.5

0.5

11

.5(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


GrowthDemocratization

-.4

-.2

0

.2

(mea

n)

t_re

sid

s

-.0

4-.

02

0.0

2.0

4(m

ea

n)

c_re

sid

s1960 1970 1980 1990 2000

year


GadpDemocratization

-1

-.5

0

.5

(mea

n)

t_re

sid

s

-.1

-.0

50

.05

.1(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


InflationDemocratization

-2

-1

0

1

2

(mea

n)

t_re

sid

s

-.5

0.5

1(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


Investment

Democratization

-.2

0

.2

.4

(mea

n)

t_re

sid

s

-.0

4-.

02

0.0

2(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


Corruption

Democratization

-2

0

2

4

6

8

(mea

n)

t_re

sid

s

-.4

-.2

0.2

.4(m

ea

n)

c_re

sid

s1960 1970 1980 1990 2000

year



Democratization

Controls (always) and Treated (before democracy)

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Democracy happens before liberalization….

Dep var polity2 liberalization

Lib 1.83 1.27 1.46 1.09 (0.22)***

(0.75)** (0.23)*** (0.20)***

(0.69)** (0.22)*** (0.82)

Dem 0.28 0.20 0.12 0.08 (0.02)***

(0.06)*** (0.02)*** (0.01)***

(0.05)** (0.01)*** (0.01)***

5y_pre 2.12 (0.36)***

(0.60)***

3y_pre 2.79 0.05 (0.30)***

(0.75)*** (0.02)**

(0.05)

3y_post 3.18 0.19 (0.28)***

(0.92)*** (0.02)***

(0.06)***

post_treat 2.72 0.35 (0.28)***

(1.04)*** (0.02)***

(0.07)***

Treatment Perm. Perm. Perm. all all Perm. Perm. Perm. all all Y*conts no yes No no Yes no Yes No no Yes

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But identification problematic – treated improve in the 1990s relative to controls

0

.1

.2

.3

.4

(mea

n) t_r

esids

-.04

-.02

0.02

.04.06

(mea

n) c_

resids

1960 1970 1980 1990 2000year


LiberalizationDemocratization

-1

0

1

2

3

(mea

n) t_r

esids

-1-.5

0.5

11.5

(mea

n) c_

resids

1960 1970 1980 1990 2000year


Polity2Liberalization

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Multiple treatments: dem & libControls: no reform at all

Specification: – Mutually exclusive partition (avoid bias due to

heterogeneous treatment effects)Eg. Lib_1t = 1 after Lib in single treatment countries

Lib_2t = 1 after Lib in double treatment countries…

– Test whether sequencing matters

– Allow for a few other sources of heterogeneity in treatment effects

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controls (always) and treated (before first reform)

-4

-2

0

2

4

6

(mea

n)

t_re

sid

s

-.5

0.5

11

.5(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


GrowthDemocratization

-.4

-.2

0

.2

(mea

n)

t_re

sid

s

-.0

4-.

02

0.0

2.0

4(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


GadpDemocratization

-1

-.5

0

.5

(mea

n)

t_re

sid

s

-.1

-.0

50

.05

.1(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


InflationDemocratization

-2

-1

0

1

2

(mea

n)

t_re

sid

s

-.5

0.5

1(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


Investment

Democratization

-.2

0

.2

.4

(mea

n)

t_re

sid

s

-.0

4-.

02

0.0

2(m

ea

n)

c_re

sid

s

1960 1970 1980 1990 2000year


Corruption

Democratization

-2

0

2

4

6

8

(mea

n)

t_re

sid

s

-.4

-.2

0.2

.4(m

ea

n)

c_re

sid

s1960 1970 1980 1990 2000

year



Democratization

24

Definitions of dummy variables

dem_1t

1 after demo, if 1 reform only

dem_2t

1 after demo, if had 2 reforms

lib_1t

1 after lib, if 1 reform only

lib_2t

1 after lib, if had 2 reforms

dem_after

1 after second reform, if dem came second

lib_after

1 after second reform, if lib came second

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1. Lib. improves economic outcomes

2. Demo after Lib gives a further boost

growth investment dem_1t 0.88 0.53 1.86 1.22 dem_2t 0.32 0.99 -1.11 -0.38 lib_1t 1.00 0.91 0.81 0.88 lib_2t 1.78 1.77 1.31 1.64 dem_after 0.58 -0.29 3.96 1.72 lib_after -0.66 -1.76 1.11 -0.87 Treatment all all all all Y*conts&oil No Yes No Yes

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1. Lib improves macro outcomes2. But Lib after Demo does not

Dep. var. Inflation deficit dem_1t 0.23 0.24 -3.26 -3.00 dem_2t 0.57 0.27 1.98 1.40 lib_1t 0.13 -0.05 -0.85 -0.82 lib_2t -0.49 -0.66 -3.67 -2.89 dem_afer -0.38 -0.32 -0.31 0.56 lib_after 0.42 0.66 2.19 2.67

Treatment all all All All Y*conts&oil No Yes No No Yes

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Lib and Demo improve governance, additive effects

Dep. var. gadp Corruption dem_1t -0.08 -0.02 0.02 0.10 dem_2t 0.03 0.18 0.32 0.41 lib_1t 0.17 0.13 0.16 0.19 lib_2t 0.29 0.31 0.36 0.34 dem_after 0.13 -0.04 0.09 0.06 lib_after 0.32 0.19 -0.15 -0.13

Treatment all all All all Y*conts&oil No Yes No Yes

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Summary• Sequence matters:

Democracies that follows Liberalizations give better results

Liberalizations enacted by democracies less effective

Eg: China vs Russia; Chile vs India

• Why?– Better democracy in an open environment?

Constraints on redistributive policies by democracies?

– More far reaching liberalization in Dictatorship?Dictator who opens up the economy has fewer veto players, does

it more effectively?

Economic and Political Liberalizations Francesco Giavazzi and Guido Tabellini.

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Transcript of Economic and Political Liberalizations Francesco Giavazzi and Guido Tabellini.