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Determinants of Growth

Determinants of Growth. Does a Change in Political Institutions cause Economic Growth?. Introduction. Polity IV Project Center for Systemic Peace www.systemicpeace.org. Introduction. Broad discussion of which came first: Democracy or Economic Growth?

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Determinants of Growth

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  1. Determinants of Growth Does a Change in Political Institutions cause Economic Growth?

  2. Introduction Polity IV Project Center for Systemic Peace www.systemicpeace.org

  3. Introduction • Broad discussion of which came first: Democracy or Economic Growth? • Economic research has identified two approaches: The Institutional View Democracy Human and Physical Capital Economic Growth The Development View Human and Physical Capital Economic Growth Democracy

  4. Introduction • The Institutional View: • Political institutions promote economic growth, which can be shown by a strong correlation of political institutions and economic performance • the current economic performance of former European colonies depends on existing political institutions , once established by European settlers (Acemoglu, Johnson, Robinson, 2001) • Indirect Effects of Democracy on growth: • indirect effects through increased expected life in poor countries and through increased secondary education in nonpoor countries (Baum,Lake, 2003)

  5. Introduction • The Development View: • Lipset Hypothesis: educated people are more likely to resolve differences through negotiation and voting than through violent disputes  growth leads to better education and therefore to better political institutions • poor countries accumulate human and physical capital under dictatorship and are then increasingly likely to improve their institutions • but existing research shows conceptual problems and limitations of econometric techniques to explore the causal link between democracy and growth (Glaeser,LaPorta, Lopez-de-Silanes,Shleifer , 2004)

  6. Introduction • Time Series Regression for 5 countries: • UK • reference country without a political change in the last decades • Romania and Poland: • European countries of the former Soviet Union • regime change in 1989/1990 • Brazil and Uruguay: • former military regimes in South America • change towards a democratic system in 1985 Is there any evidence for the hypothesis that a change into a democratic system increases GDP growth rate?

  7. Structure • Data Set • Model • Basic regression: GDP growth rate before and after a change in the political system • Using political indices measuring institutions • Results • Conclusion

  8. Data • Basic regression equation refers to • In terms of per capita GDP • Main variables in the data set: • pcgdp: GDP per Capita at 2005 constant prices • Source: Penn World Table (rgdpl) • invgr: Investment share of GDP per Capita at 2005 constant prices • Source: Penn World Table (ki) • pop: total Population • Source: Penn World Table (POP) • Variables

  9. Data • Polity IV Index (source: Polity IV Project Data Set) • Widely used index coding the characteristics of state’s regimes in world system • Scale from -10 to +10 (autocracy to anocracy to democracy) • EFW – Economic Freedom of the World (source: 2011 Economic Freedom Dataset) • Countries ranked according to their level of economic freedom measured with several indicators • Scale from 0 to 10 • Correlation between economic freedom and polity index =0.43 (Spearman correlation = 0.63) • Variables

  10. Data • Sample of 5 countries: • UK (reference country, no change) • Poland (political change in 1989) • Romania (political change in 1990) • Brazil (political change in 1985) • Uruguay (political change in 1985) • Time horizon: 1970 to 2007 • 190 observations, 38 for each country

  11. Data • Political institutions

  12. Data • Average growth rates

  13. Model dlog_gdp(t) = growth rate of log per capita real GDP (constant prices 2005) inv(t) = investment share of gdp(t) dlog_pop(t) = growth rate of log population Dummies: change=0 before the political change change=1 after the political change and one Dummy for each country (except UK) • Baseline regression

  14. Model • Polity Index • Index of Economic Freedom • Specifications

  15. Results • Baseline regression

  16. Results • Baseline regression with Dummy “change”

  17. Results • Specification: Polity Index

  18. Results • Specification: Economic Freedom

  19. Results

  20. Conclusion • The model shows a positive effect of regime changes on per Capita GDP growth • Coefficients of change-Dummy, Polity- and Economic Freedom-Index are positive • Population is positive correlated with polity and efw coefficient of population increases when taking these indices into the regression • Explanatory power of all regressions is not that high, even in the baseline model

  21. Conclusion • Democracy influences GDP growth through other channels than the fact of the change itself? • Reverse causality of democracy and GDP growth? • Polity-Index does not measureinstitutions properly? • No effect of a political change in these particular countries? • Democracy only affects GDP growth rates in the long run? • Potential Problems

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