Transcript Slide - Editorial Express

Democracy and Political
Instability
In Cross-Country Economic
Growth Analysis
Mehdee Araee
University of Wollongong
ACE 2015
BACKGROUND
Economic Growth (EG) & Determinant Variables:
Economic,
Social
and
Political
Factors.
Two important Political Variables (PV) in Economic
Growth: Democracy and Political Instability
Most econometric studies are based on crosssection regression analysis
DEMOCRACY
Study
Specification &
Method
Data & Democ
Measurement
Finding
Barro & Lee
1993
G=f( GDP, male SEC, female
SEC, life exp, revol ….,
democ); IV
1973-1985, 84-94
countries; Gastil
No
Relationship
Tavares and
Wacziarg (2001)
Growth= f (human capital,
invest rate, trade share,…
poli.instab., democ); 3SLS
1902-1989,
65 countries; Gastil
Negative
Relationship
Plumper and
Martin (2003)
Growth= f (GDP per.cap,
inv/GDP, pop., human
capital, instit.openess,
democ., sq.democ); OLS
1975-1997, 83
countries; Polity IV
1. Negative
with democ.
2. Positive with
sq.democ
Acemoglu et al.
(2014)
Growth= f (democracy);
OLS and GMM
1960-2010, 175
countries; Freedom
House and Polity IV
Significant and
robust positive
effect
POLITCAL INSTABILITY
Study
Specification &
Method
Data
Finding
Barro 1991
G=f( GDP, … revol +coups);
OLS
1960-1985, 98
countries; Banks
Negative
Relationship
Fosu (2001)
Growth= (PI, l, k, PIk) ; OLS
1960-1985, 31
countries; McGowan
1. Positive with PI
2. Negative with
PIk
Cebula
(2011)
Growth= f(FREEDOM,
POLSTAB, ECON); OLS and
Fixed Effects
2003-2007, OECD
countries; World
Bank (WGI, 2009)
Positive Impact
Aisen and
Veiga (2013)
Growth= f (economic
variables, prim.schl. enroll,
Regime Instability Index,
Violence Index)
1990-2004,
196 countries; CNTS
(Banks, 2009), Polity
IV,State Failure Task
Force (SFTF)
Negative
Relationship
LITERATUR REVIEW
Two major issues:
1. Conceptual (Definition & data sources)
2. Empirical( Econometrics Problems)
CONCEPTUAL ISSUES
PV
Concept
Databases
Democracy
1. Political Liberties & Popular
Sovereignty (Bollen)
2. Political Rights & Civil Rights
(Gastil)
3. Competition & Participation
1. Gastil (Freedom House)
2.Polity IV
3. Vanhanen Dataset
Quantitative indices:
Political
Instability
1. Predictive-based
2. Current Based
1. World Handbook of Political
and Social Indicators
(Taylor/Judice)
2. Cross-National Time Series
Data Archive (Banks)
CONCEPTUAL ISSUES
• Dominant characteristic of democracy is
freedom of choice.
• Three dimensions of Democracy in terms of Freedom:
1. Political: Executive selection, Legislative selection,
Freedom of organization.
2. Economical: Property rights, freedom from corruption,
fiscal freedom, business freedom, labor freedom,
monetary freedom, trade freedom, investment freedom,
financial freedom.
3. Social: Freedom of expression and belief, press freedom,
Voice and accountability.
CONCEPTUAL ISSUES
Comprehensive Democracy Index (CDI)
• Freedom In the World (Political, Freedom House): Index of
Political Rights and Civil Rights scaling from 1 (most free) to 7 (least
free).
• Index of Economic Freedom (Economical, Heritage
Foundation): Ranges from 80-100 (free), 70.0-79.9 (mostly free),
60.0-69.9 (moderately free), 50.0-59.9 (mostly unfree), and 0-49.9
(repressed).
• Voice and Accountability (Social & Political, WGI): This
index ranges from -2.5 (weak) to 2.5 (strong) revealing the
governance performance.
CONCEPTUAL ISSUES
• VA rescaled from 1 (lowest) to 6 (highest) so as to avoid
the negative sign effect.
• All indicators normalized between 0 and 100.
• Computed for 154 countries from 2002 to 2012.
• Out of 1661 observations, the lowest democracy level was
19.17 (Iraq in 2002) and the highest level of democracy
was 90.07 (New Zealand in 2005).
CONCEPTUAL ISSUES
Political Instability Index (CPI)
• Three main components in political Instability:
1. coercive behaviors: assassinations, terrorism, armed
attacks, civil wars, civil strife conflict, domestic violence
and strikes;
1. government change: whether regular or irregular such
as illegal election, revolutions, coups;
1. political protests: mass arrests, fractionalization,
anti-foreign demonstration.
CONCEPTUAL ISSUES
• Weighted Average of Coups d’état Event (WACE): ranges
from 0 (lowest level of instability) to 1 (highest level of instability)
• Major Episodes of Political Violence (MEPV): ranging from 1
(lowest) to 10 (highest)
• Political Stability and Absence of Violence/Terrorism
(PSAV): scales from -2.5 (weak) to 2.5 (strong)
• State Fragility Index (SFI): ranges from 0 (no fragility) to 24
(extreme fragility)
CONCEPTUAL ISSUES
• PSVA rescaled from 1 (lowest) to 6 (highest) so as to avoid the
negative sign effect.
• All indicators normalized between 0 and 100.
• WACE and MEPV measure the size impact of political
instability on economic growth.
• PSAV and SFI deal with the longevity impact on growth.
• CPI calculated for for 154 countries from 2002 to 2012.
• The calculation shows that out of 1692 observations, the
most stabilized country was Finland (0.00 in 2002) and the
most destabilized nation was Iraq (77.88 in 2004).
EMPERICAL ISSUES
1. Data Variation (due to concept variation)
1. Simultaneity (Causality Direction)
• Most studies reveal the existence of causality not the causality
direction
• It may be affected by number of observations, selected
variables and model specifications.
3. Robustness of the Econometric Results: This has
been neglected in most empirical works in this area.