democracy and growth
DESCRIPTION
Democracy and growth. Thorvaldur Gylfason. outline. Sources of economic growth around the world Economic policy and institutions matter for growth Democracy as an aspect of social capital Democracy is good for growth Cross-country patterns in data 164 countries, World Bank data 1960-2000 - PowerPoint PPT PresentationTRANSCRIPT
Thorvaldur Gylfason
Sources of economic growth around the worldEconomic policy and institutions matter for
growth Democracy as an aspect of social capital
Democracy is good for growth Cross-country patterns in data
164 countries, World Bank data 1960-2000 Including political data on aspects of democracy
Cross-country regressions Interactions of human, real, financial, natural,
and social capitalsocial capital, including democracydemocracy
GDP per capita 1900-2003 GDP per capita 1900-2003 (US$ at 1990 prices)
Argentina and Sweden went hand in hand 1900-1930, and then grew apart
Sweden pursued free tradefree trade, liberal liberal democracydemocracy, and income equalityincome equality, and avoided high inflation
Argentina did not
0
4,000
8,000
12,000
16,000
20,000
24,000
1900 1925 1950 1975 2000
ARGENTINASWEDEN
Sweden 2.1% per yearArgentina 1.0% per year
1.011103 = 3.1
GDP per capita 1965-2004 GDP per capita 1965-2004 (US$ at 2000 prices)
Botswana and Nigeria went hand in hand 1965-1970, and then grew apart
Botswana practiced democracydemocracy, stressed education,education, and resisted corruption
Nigeria’s finance minister: “Oil has made us lazy”
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
65 70 75 80 85 90 95 00
BOTSWANANIGERIA
Botswana 7.1% per yearNigeria 0.6% per year
1.06539 = 11.7
GhanaGhanaLesothoLesotho
NamibiaNamibia
BotswanaBotswana
KoreaKorea
Iceland was Ghana
Resource Resource
cursecurse
Interactions
among
determinants of
growth
Listen to King Faisal King Faisal of Saudi Arabia (1964-1975), as quoted by his Oil Minister, Sheik Yamani:“In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.”
Lee Kwan YewLee Kwan Yew, founding father of Singapore (1959-1991), would not have been surprised either:“I thought then that wealth depended mainly on the possession of territory and natural natural resourcesresources, whether fertile land ..., or valuable minerals, or oil and gas. It was only after I had been in office for some years that I recognized ... that the decisive factors were the peoplepeople, their natural abilities, educationeducation and training.”
Democracy makes it easier to replace bad governments by better ones and for ideas to compete in the political arena, thus fostering efficiencyefficiency and diversificationdiversification, which is good for growthgood for growth
Democracy plays into the hands of pressure groups pressure groups that abuse their power by swaying public policies and institutions in their favor, which is bad for bad for growthgrowth
Empirical question
Schumpeter (1942)“the democratic method is that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote.”
Source of dataPolity IV (Marshall and Jaggers, 2001)21-point scale, from -10 to 10, extensive coverage of countries
Democracy
Oligocracy
Autocracy
1946: 20 out of 701946: 20 out of 70
2000: 90 out of 1702000: 90 out of 170
Nu
mb
er
of
cou
ntr
ies
0.51
Democracy is good for growth
Rank correlation
A rise in democracy index by
7 points goes along with an
increase in per capita growth
by one percentage point per
year
164 countries
0.75Corruption hurts growth
0.60Different aspects of social capital go together
0.62Human capital and social capital go together
-0.67Natural capital crowds out social capital
-0.67
Natural capital share and growth are inversely related
0.69Education is good for growth
An increase in school life
expectancy by 3 years
goes along with an
increase in per capita
growth by one
percentage point per
year
-0.62
Social content of growth
A decrease in fertility by 3
children per woman goes along
with an increase in per capita
growth by 2 percentage points
per year
-0.82Natural capital crowds out human capital
-0.74
Natural capital crowds out social capital
-0.46
Inflation impedes growth
Stabilization increases efficiency by reducing
production distortions, uncertainty, inflation tax,
and overvaluation
-0.46
Inflation impedes growth
High inflation is a sure sign of lax fiscal and
monetary policies, so sound policies support rapid sound policies support rapid
growthgrowth
High inflation is a sure sign of lax fiscal and
monetary policies, so sound policies support rapid sound policies support rapid
growthgrowth
Null hypothesisDemocracy is good for growth, and so are investment, education, health care, usw.
Alternative hypothesisDemocracy is not good for growth, or worse
Not trying to demolish other potential explanations of growth
• Rather, trying to find a complementary role for democracy: add, not subtract
Institutions,
economic policies,
and natural
resources side by
side
Theoretical frameworkNeoclassical vs. endogenous growth
False contrastEmpirically indistinguishableEndogenous growth, endogenous democracy
Long run vs. medium termMedium term: Policy-relevant choiceForty years of data, 1960-2000Long run is irrelevant except as a benchmark
Empirical strategy1) Levels of income vs. rates of growth2) Recursive modeling vs. instruments3) Averages vs. initial values of independent
variablesPrefer averages when available so as not to discard data after the initial period
4) Cross sections vs. panelsBegin with cross sections, will add panels
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Conditional
convergence requires
b > 0 < 1
One-to-one
correspondence
between parameters
Economic growth depends on the accumulation of capital and the efficiency with which it is used
Five, or rather six, kinds of capital
1)1) SocialSocial capital: democracy, corruption
2)2) HumanHuman capital: education, fertility3)3) RealReal capital: investment4)4) FinancialFinancial capital: low inflation5)5) ForeignForeign capital: openness -- ignore
6) 6) NaturalNatural capital
Model 1
Initial income
-0.74(5.2)
Natural capital
Democracy
School life expectancy (log)Fertility
Investment rate (log) Inflation distortionCountries 164
Adjusted R2 0.14
Model 1 Model 2
Initial income
-0.74(5.2)
-0.49(3.1)
Natural capital
-0.04(5.3)
Democracy
School life expectancy (log)Fertility
Investment rate (log) Inflation distortionCountries 164 125
Adjusted R2 0.14 0.18
Model 1 Model 2 Model 3
Initial income
-0.74(5.2)
-0.49(3.1)
-0.77(3.8)
Natural capital
-0.04(5.3)
-0.03(3.1)
Democracy 0.10(3.0)
School life expectancy (log)Fertility
Investment rate (log) Inflation distortionCountries 164 125 113
Adjusted R2 0.14 0.18 0.18
Model 1 Model 2 Model 3 Model 4
Initial income
-0.74(5.2)
-0.49(3.1)
-0.77(3.8)
-1.66(9.5)
Natural capital
-0.04(5.3)
-0.03(3.1)
-0.01(2.8)
Democracy 0.10(3.0)
0.09(3.6)
School life expectancy (log)
3.86(8.8)
Fertility
Investment rate (log) Inflation distortionCountries 164 125 113 99
Adjusted R2 0.14 0.18 0.18 0.56
Model 1 Model 2 Model 3 Model 4 Model 5
Initial income
-0.74(5.2)
-0.49(3.1)
-0.77(3.8)
-1.66(9.5)
-1.85(10.5)
Natural capital
-0.04(5.3)
-0.03(3.1)
-0.01(2.8)
-0.01(1.6)
Democracy 0.10(3.0)
0.09(3.6)
0.07(2.7)
School life expectancy (log)
3.86(8.8)
2.91(5.7)
Fertility -0.40(3.3)
Investment rate (log) Inflation distortionCountries 164 125 113 99 99
Adjusted R2 0.14 0.18 0.18 0.56 0.61
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Initial income
-0.74(5.2)
-0.49(3.1)
-0.77(3.8)
-1.66(9.5)
-1.85(10.5)
-1.79(10.2)
Natural capital
-0.04(5.3)
-0.03(3.1)
-0.01(2.8)
-0.01(1.6)
-0.01(2.0)
Democracy 0.10(3.0)
0.09(3.6)
0.07(2.7)
0.08(3.0)
School life expectancy (log)
3.86(8.8)
2.91(5.7)
2.69(5.3)
Fertility -0.40(3.3)
-0.30(2.4)
Investment rate (log)
0.97(2.0)
Inflation distortionCountries 164 125 113 99 99 99
Adjusted R2 0.14 0.18 0.18 0.56 0.61 0.62
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
Initial income
-0.74(5.2)
-0.49(3.1)
-0.77(3.8)
-1.66(9.5)
-1.85(10.5)
-1.79(10.2)
-1.71(11.5)
Natural capital
-0.04(5.3)
-0.03(3.1)
-0.01(2.8)
-0.01(1.6)
-0.01(2.0)
-0.01(1.4)
Democracy 0.10(3.0)
0.09(3.6)
0.07(2.7)
0.08(3.0)
0.04(2.1)
School life expectancy (log)
3.86(8.8)
2.91(5.7)
2.69(5.3)
2.83(6.5)
Fertility -0.40(3.3)
-0.30(2.4)
-0.42(3.8)
Investment rate (log)
0.97(2.0)
0.61(1.4)
Inflation distortion
-2.71(6.2)
Countries 164 125 113 99 99 99 99
Adjusted R2 0.14 0.18 0.18 0.56 0.61 0.62 0.73
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
Initial income
-0.74(5.2)
-0.49(3.1)
-0.77(3.8)
-1.66(9.5)
-1.85(10.5)
-1.72(10.2)
-1.71(11.5)
Natural capital
-0.04(5.3)
-0.03(3.1)
-0.01(2.8)
-0.01(1.6)
-0.02(3.2)
-0.01(1.4)
Democracy 0.10(3.0)
0.09(3.6)
0.07(2.7)
0.04(2.2)
0.04(2.1)
School life expectancy (log)
3.86(8.8)
2.91(5.7)
0.08(3.2)
2.83(6.5)
Fertility -0.40(3.3)
1.39(3.0)
-0.42(3.8)
Investment rate (log)
3.01(6.4)
0.61(1.4)
Inflation distortion
-2.71(6.2)
Countries 164 125 113 99 99 99 99
Adjusted R2 0.14 0.18 0.18 0.56 0.61 0.61 0.73
Since the second world war it has become quite clear that rapid economic growth is available to those countries with adequate with adequate natural resources natural resources which make the effort to achieve it. W. Arthur Lewis
(Accra, 1968)
Since the second world war it has become quite clear that rapid economic growth is available to those countries with sound with sound democratic institutions democratic institutions which make the effort to achieve it. W. Arthur Lewis
(Accra, 1968)
Diversification is good for growth Economic diversification Economic diversification away from excessive
reliance on natural resources Political diversification Political diversification away from narrowly based
political elites toward full-fledged democracy Social and human capital are good for growth
Democracy seems to make a difference Social insurance also makes a difference, as well
as education and health care Judicious use of natural resources requires
good institutions, including democracyKey to Norway’s successful oil management
The development effort required around the world includes a double diversification
Economic diversification Economic diversification Away from agriculture and other natural-
resource intensive activity into manufacturing (as in China) and services (as in India)
PPolitical diversification olitical diversification From dictatorship to democracy (as in
Korea and Taiwan)
These slides – and more! – can be
viewed on my website:
www.hi.is/~gylfason