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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?"
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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
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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
Democracy, institutions and growth
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Exploring existing literature (2)
• Institutions and growth relationship explored
– Theorically (North, 1990; Olson, 1993)
– Empirically (Acemoglu, 2005; Rodrik, 2003)
Democracy, institutions and growth
Wide academic consensus about positive institutions effect on long-run growth
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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)
Democracy, institutions and growth
DemocracyPolitical
Institutions
Economic Institutions
Environmental Conditions
Economic Growth
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A simple classification
A simple classification offered: • Environmental Conditions
– Rule of Law– Political Stability
• Economic Institutions– Property Rights– Economic Freedom
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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
Democracy, institutions and growth
Hypothesis: democracy is positively correlated with growth-enhancing institutions. Thus, it indirectly affects economic growth
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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
Democracy, institutions and growth
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Democracy, institutions and growth
(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.
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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.
Democracy, institutions and growth
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Democracy, institutions and growth
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
OLS, robust standard errors in parenthesis. Significance level:**= 5 per cent ***= 1 per cent.
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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, institutions and growth
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.
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Democracy, institutions and growth
Democracy and economic institutions relationship is not significant
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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
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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)
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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).
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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
OLS, robust standard errors in parenthesis. Significance level:**= 5 per cent ***= 1 per cent.
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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.
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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.
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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.
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Thank you for your attention!