political regimes and economic performance sergei guriev, new economic school, moscow esnie, may 22,...

Political regimes and economic performance

Sergei Guriev, New Economic School, Moscow

ESNIE, May 22, 2008

ESNIE May 22, 2008 Sergei Guriev 2

Economic case for democracy?

We all like democracy per se …… but can we also make an economic case for democracy?

How about “Democracy is good for economy”? There are no rich non-democratic countries …

(except for Singapore and Gulf countries)… but which way is causality? May be “democracy is only sustainable in a rich country”?

What about “Democracy causes faster economic growth”? This result does not emerge clearly from the standard growth regressions But cross-country growth regressions are themselves methodologically

vulnerable

New methods? Panel, difference-in-difference, matching Heterogeneity: go beyond democracy/dictatorship dichotomy


Outline

Arguments for and against democracy Basic facts on democracy and development Cross-country regressions New methodological approaches:

Fixed effects: Rodrik and Wacziarg Difference-in-difference, matching (Persson and Tabellini 2007) Microeconomic difference-in-difference-in-difference (Durnev and

Guriev) Go beyond democracy-autocracy dichotomy:

Heterogeneity within democracies: effect of political institutions within democracies on growth

Heterogeneity within autocracies: effect of political institutions within autocracies (Besley and Kudamatsu), role of leaders in autocracies


Democracy and growth

The main dilemma (North, North-Weingast, New Comparative Economics):

which regime can best protect the property rights? Democracy rent-seeking by private agents (e.g. interest

groups) Democracy redistribution by the poor (Alesina-Rodrik,

Acemoglu-Robinson) Non-democracy expropriation by the ruler


Data

Economic variables – same as in the growth regressions (Penn World Tables, World Development Indicators etc.)

Data start from 1960, higher quality from 1975

Democracy: Polity IV (Democ, Autoc, Polity=Democ-

Autoc)Freedom House: voting rights, civil liberties


Correlation between FH’s political rights and Polity IV’s democ (averaged over 1975-2005)

R2=0.74

SYRVNM

BHR

RWA

GAB

IRQ

KWT

BTN

LBYCHN

SWZ

CUBMRTAFGPRK

UZB

GNQ

MAR

SAU

QAT

ERI

MMR

OMN

TKM

SOMZAR

ARE

LAO

EGY

GIN

CIV

AZE

TUN

BDITCDTGOCMRAGO

DZA

UGA

DJI

BFA

KAZ

SDN

LBRTZA

TJK

SLEJOR

YEM

IRNCOG

KGZ

KENGNBIDN

CAF

HTI

SGP

ZWE

BLR

KHM

ZMB

MWICOMMOZNGAGHA

NER

YUG

LSO

NPLBGD

MLI

SEN

BEN

ALB

ETH

MEX

PAK

GUY

PRYMDG

ROM

HRV

GTMNICBGR

KOR

GMB

MNG

CHLMYS

POLPAN

PHL

ARM

HNDHUNPER

GEO

THAARGSLV

RUS

BRA

TMPNAM

DOM

LKA

UKR

URY

FJI

BOL

MKD

EST

MDA

ECU

SLB

TUR

COL

ZAF

BWA

LVA

LBN

VEN

SVK

IND

FRA

TTOISRGRC

JAMMUSPRTESP

LTUCANFINNLDAUSCRIJPNCYP

AUT

DEU

NORIRLITASWENZLBELCHE

SVNCZE

GBR

PNG

USADNK

-4-2

02

4e

( p

r_m

ean

| X

)

-4 -2 0 2 4 6e( democ_mean | X )

coef = .47393413, se = .02218531, t = 21.36


Basic fact: there are no rich non-democratic countries (2005)

AGO

ALB

ARE

ARG

ARM

AUSAUT

AZE

BDI

BEL

BENBFA BGD

BGR

BHR

BLR

BOL

BRA

BWA

CAF

CAN

CHE

CHL

CHN

CMRCOG

COL

COM

CRI

CZE

DEU

DJI

DNK

DOMDZA

ECUEGY

ERI

ESP

EST

ETH

FIN

FJI

FRA

GAB

GBR

GEOGHAGINGMB

GNB

GRC

GTMGUYHND

HRV

HUN

IDN IND

IRL

IRN

ISR

ITA

JAMJOR

JPN

KAZ

KENKGZKHM

KOR

KWT

LAO

LBNLKA

LSO

LTULVA

MAR

MDAMDG

MEX

MKD

MLIMNGMOZ

MRT

MUS

MWI

MYS

NAM

NERNGA

NIC

NLD

NOR

NPL

NZL

PAK

PANPER

PHL

PNG

POL

PRT

PRY

ROMRUS

RWA

SAU

SDN SEN

SGP

SLBSLE

SLV

SVK

SVN

SWE

SWZSYR

TCDTGO

THA

TJK

TTO

TUN TUR

TZAUGA

UKR

URY

USA

UZB

VEN

VNMYEM

ZAF

ZMBZWE

01

0000

200

003

0000

400

00G

DP

pe

r ca

pita

, pu

rch

asin

g p

ower

pa

rity,

200

0 in

tern

atio

nal

US

D

0 2 4 6 8 10Democracy, Polity IV


The slope is large: 1 point increase in democracy 15% in GDP pc level

KWT

SWZ

MRT

ARE

RWA

SAU

SDN

BLR

BHR

IRNGAB

ERI

KAZ

SYR

GMB

AZE

LAO

CHN

VNM

UZB

COG

PAK

MAR EGY

UGANPLTCDTGOTJK

TUN

CAF

YEM

ZWEGINCMR AGO

SGP

JOR

BFA

KGZ

ETH

KHM

DZA

DJI

TZA

MYS

NGAZMB

ARM

SLE

COM

MLI

NAM

ECU

VEN

BGD

GNB

LKA

MWI

BEN

UKR

GUY

MOZ

RUS

NER

COL

GEO

BDI

SLV

HND

FJI

MDG

EST

MEX

SEN

GHA

KEN

NIC

MDA

LSO

BRATURDOM

LVA

PHL

IDNGTMPRY

SLB

BOL

ARG

LBN

KOR

BWA

PER

CHL

ROM

ALB

SVK

PAN

ZAFBGR

MKD

IND

JAM

HRV

FRA

THA

PNG

AUTCHE

LTU

DEU

URY

DNK

ESP

PRT

POL

SWEITA

MUS

IRLUSA

CAN

SVN

NLD

CRI

JPN

NOR

ISR

MNG

GRC

AUSGBR

CZE

FINBEL

NZL

HUNTTO

-2-1

01

2e

( lo

ggd

ppcp

pp

| X )

-6 -4 -2 0 2 4e( democ | X )

coef = .15230767, se = .02270864, t = 6.71


Which way is causality?

Lipset 1959 “Some Social Requisites for Democracy”(plus Lipset 1994)

Democracy is not limited to Judeo-Christianic countries – there are social prerequisites GDP per capita and education Political legitimacy

Lipset credis Aristotle for the argument: Poor cannot responsibly participate in politics, populism

prevails The argument is modeled in Acemoglu-Robinson 2006


Is it important?

Understanding democracy-growth relationship: crucial policy implications “Democracy growth”:

start with democratization delaying democratization would eventually slow down growth

If all the correlation is explained by “High income democracy”:

delay democratization, do other things first:establish rule of law, fight corruption, invest in education etc.

resulting growth will bring democracy anyway

Let’s check the democracy-growth correlations …


Growth is higher in democratic and non-democratic countries (1975-2005)

ARE

ARG

AUSAUT

BDI

BEL

BENBFA

BGD

BOL

BRA

BWA

CAF

CAN

CHE

CHL

CHN

CIV

CMRCOG

COL CRIDEUDNK

DOM

DZA ECU

EGY

ESPFIN

FJI

FRA

GAB

GBR

GEO

GHA GMB

GNB

GRC

GTMGUYHND

HTI

HUN

IDNIND

IRL

IRN

ISRITA

JAM

JOR JPN

KEN

KOR

KWT

LKALSO

LVAMAR

MDG

MEXMLI

MRT MWI

MYS

NER

NGA

NIC

NLD

NOR

NPLNZL

PAK

PAN

PER

PHL

PNG

PRT

PRYRWA

SAU

SDN

SEN

SGP

SLB

SLE

SLV

SWESWZSYRTCD

TGO

THA

TTOTUN

TUR

URY

USA

VEN

ZAF

ZAR

ZMBZWE

-.05

0.0

5.1

An

nual

gro

wth

ra

te o

f GD

Pp

cPP

P in

19

75-2

005

0 2 4 6 8 10Average democracy in 1975-2005


The correlation between democracy and growth: is statistically and economically significant

SYR

CHN

MRT

MAR

ARE

ZAR

SWZ

GAB

RWA

SAU

KWT

EGY

CIV

TUN

BDI

TCD

TGO

CMRDZABFASDN

SLE

IRN

JOR

COGKEN

GNB

IDN

CAFHTI

SGP

ZWEZMB

MWINGAGHA

NER

LSO

NPLBGD

MLISENBEN

MEX

PAK

GUYPRY

MDG

GTM

NIC

KOR

GMB

MYSCHL

PANPHLHND

HUN

PER

GEO

THA

ARGSLV

BRA

DOM

LKA

URYFJI

BOL

ECUSLB

TURCOL

ZAF

BWA

LVA

VEN

IND

FRATTOISRGRC

JAM

PRTESPITA

IRL

USANOR

CHE

JPNSWEDNKDEUCRIFINAUSGBR

PNG

BELAUT

NZLNLDCAN

-.05

0.0

5.1

e(

gro

wth

7505

| X

)

-5 0 5e( democ_mean | X )

coef = .00158786, (robust) se = .00045341, t = 3.5


… virtually linear …-.

050

.05

.1A

nnu

al g

row

th r

ate

of G

DP

pcP

PP

in 1

975

-200

5

0 2 4 6 8 10Average democracy in 1975-2005

bandwidth = .8

Lowess smoother


Similar correlation with Freedom House’s index of political rights

CHN

SAU

ZAR

BDI

SYR

MRT

TCDRWACMR

TGO

SDN

HTI

DZACOG

CIV

SWZ

TUN

IRN

NER

ARE

CAFGAB

EGY

KENBFA

ZWEGNBSLE

PAK

MWI

IDN

JOR

NGA

KWT

MLIGHABEN

SGP

ZMB

MAR

LSO

PRY

NIC

BGD

MDG

MYSCHL

GTMGMB

PANNPL

SENFJIGUYZAFPER

HUNMEXPHL

TUR

HND

THA

LKA

KOR

SLV

COLECUBRAARGURY

BOL

IND

DOM

PNGJAM

GEOVEN

BWA

SLBISRTTOESPFIN

PRTGRCJPNITA

SWENLDBELAUSCRI

IRL

DNKAUTNORUSA

CHE

FRANZLCANGBRLVADEU

-.05

0.0

5.1

e(

gro

wth

7505

| X

)

-4 -2 0 2 4e( pr_mean | X )

coef = .00337142, (robust) se = .00095875, t = 3.52


… and Freedom House’s civil liberties

SYR

SAU

CHN

SDN

ZAR

BDIIRNMRT

RWACMRTCD

HTI

DZA

TGOGNB

MWI

CAF

COG

NER

ARE

ZWE

SWZKEN

EGY

SLE

IDN

GABCIV

JORTUNPAK

SGP

KWT

MAR

MDGZMB

MLIBEN

MYS

BFA

NGA

LSO

GTMGHA

BGDTURNPL

ZAF

NIC

PRY

LKA

SENSLV

PHL

THA

GMBPER

KOR

MEXCOLPAN

HUN

GUYBRA

INDCHL

BOLHNDARG

ECU

VEN

FJIURY

PNGJAM

DOM

BWA

ISRGRC

GEO

SLBESPTTOFRAITA

PRTJPNFINGBRCRI

BEL

IRL

LVAAUTDNKAUS

CHENLD

NOR

NZL

USASWECANDEU

-.05

0.0

5.1

e(

gro

wth

7505

| X

)

-4 -2 0 2 4e( cl_mean | X )

coef = .00356985, (robust) se = .00108613, t = 3.29


Beyond pairwise correlations: cross-country regressions

Need to control for initial GDP per capita … The result remains the same

… and all other standard determinants of growth in growth regressions

Since early 1990s economists have included democracy scores in cross-country growth regressions.

The results have been inconclusive: Different results for different samples and time periods There is no significant difference in economic performance between

democratic and non-democratic regimes In some specifications, democracy has a non-linear effect on growth

One robust finding: democracy lower volatility of growth Both across and within countries All greatest successes and greatest disasters have been observed in

non-democracies


Many dictatorships that start well then end up growth failures

Many dictatorships are overrated:Castro (despite huge achievements in

healthcare): zero growth in 50 yearsMao: economic disaster “Uzbek growth puzzle”: no puzzlePinochet: bad performance overallGulf countries: almost no growth of GDP per

capita in 30 years


Democracy and volatility of growth (% p.a.) in 1975-2005

IRQ

SOM

MARMMR

CUB

TKM

LAO

ERI

SYR

GNQ

BHR

QAT

OMN

LBY

MRTSWZBTN

GAB

SAU

ARE

UZB

VNMCHN

ZAR

RWA

KWT

EGY

GIN

CIV

AZE

TUN

BDI

TCD

TGOCMR

AGO

DZAUGADJIBFA

KAZ

SDN

LBR

TZA

TJK

SLECOGIRN

YEM

JOR

KGZ

KEN

GNB

IDNCAFHTISGP

ZWE

BLR

KHMZMB

MWI

COM

MOZ

NGAGHA

NER

YUG

LSO

NPLBGD

MLI

SEN

ALB

BEN

ETH

MEX

PAK

GUYPRYMDGROM

HRV

GTM

NIC

BGR

KORGMB

CHL

MYS

MNG

POLPAN

PHL

ARM

HNDHUN

PER

GEO

THA

ARG

SLV

RUS

BRANAM

TMP

DOMLKA

UKR

URYFJI

BOL

MKD

EST

MDA

ECU

SLB

TUR

COLZAFBWA

LBN

LVA

VENSVK

IND

FRA

TTO

ISRGRCJAM

MUS

PRT

ESPBELAUS

CYP

USA

SVN

AUTNORCANCHEIRLCZE

NLD

CRI

PNG

GBRDEUITASWEDNKNZLFINJPN

LTU

-50

510

1520

e( g

dppc

gr_v

ar |

X )

-4 -2 0 2 4 6e( democ_mean | X )

coef = -.31788085, (robust) se = .06735342, t = -4.72


Democracy and volatility of economic growth

Besley-Kudamatsu (2007): distribution of growth rates for democratic and autocratic regimes


An early survey of growth regressions: Przeworski and Limongi 1993


Przeworski and Limongi 1993 Table 1 continued


Barro “Democracy and Growth” 1996

Sample: 81-96 countries 1960-1990 Runs regressions for growth in 65-75, 75-85,

85-90 (using pre-65 as an instrument) Democracy data: Freedom House Democracy is not significant

or has a non-linear effect in the worst dictatorships, increase in democracy

improves growth “too much” democracy results in redistribution to

the majority


Growth democracy

Same authors ran regressions of democracy on GDP per capita

Barro “Determinants of Democracy”, JPE 1999 Sample: 100 countries, 1960-1995 Democracy data: electoral rights and civil liberties, Freedom House Democracy increases with per capita GDP

Book by Przeworski et al. 2000 “Democracy and development” Use binary variable democracy/dictatorship Study all transitions between democracies and dictatorships No significant relationships except

No rich country (richer than Argentina in 1976, about $13K in current dollars) has ever exited democracy


New work: panel data

Rodrik Wacziarg 2005 Control for fixed effects Consider major democratization episodes in 154 countries 1950-

2000 Democratization: Polity IV regime change (3 point increase in

Democ-Autoc) Estimate coefficient on dummies:

NewDemocracy: within 5 years after a democratization (unless there is another regime change)

EstablishedDemocracy: after 5 years DemocraticTransition= NewDemocracy+ EstablishedDemocracy

No evidence on democratization causing short-term slowdown If anything, positive short-term effect


Results


Subsample of 24 countries with one-way democratic transition


Heterogeneity in democracies

Great survey: Besley-Persson in PalgraveProportional vs majoritarian

Higher welfare spending (by 2% GDP!)Via more fragmented party system

Lower accountability, higher corruptionPresidential vs parliamentary

Smaller government (5% GDP!)Effect in established democracies

Term limits


Heterogeneity in non-democracies

Much less is known for non-democracies: data availability constrain empirical work

Besley Kudamatsu: Detailed case studies Successful autocracies have institutionalized selectorate (e.g.

parties), less personalistic, hence more accountable Egorov-Sonin theoretical work

Choice of incompetent viziers Multiple equilibria in the succession game

Egorov-Guriev-Sonin A theory of partial media freedom in non-democratic

economies Evidence: natural resources lower media freedom


Leadership change in autocracies vs. democracies

Effect of leadership change on the economy is hard to study because of reverse causality

Only recently, innovative empirical work Following corporate finance literature

Effect of an unexpected death of CEO on the stock price Fisman et al.:

Suharto’s health problemsmarket downgrades stock of Suharto-connected firms

No such effect for Cheney Jones, Olken:

Unexpected death of leader in dictatorial regimes causes positive growth (1.5%!)

But no such effect in the democracies Besley-Kudamatsu:

Leadership turnover is higher in successful autocracies Unexpected death exposes the degree of institutionalization of

selectorate


Persson-Tabellini 2007

Basic idea: correct counterfactual! Apply diff-in-diff+matching (widely used in

applied microeconomics) Estimate the regime change propensity score

(probability of leaving democracy as a function of observable variables)

Compare growth experiences of countries with similar propensity scores

Data: 1960-2000, democracy from Polity IV Why has it not been done before?

Unlike labor economics, small dataset, hence loss of efficiency is important!


Results

[first stage: consistent with Przeworski, autocratic transitions less likely in rich countries]

Democratic transitions raise growth by 1 percentage point per year

Autocratic transitions decrease growth by 2 percentage points per year

Taking into account the length of transition period, democracy should be richer than autocracy by 45%!


Democratic transitions would increase growth


Autocratic transitions would slow down growth


Durnev-Guriev

Institutions affect aggregate growth Weak property rights low investment, low growth

This paper: microeconomics of the effect of weak property rights on growth

The channel: weak property rights lower corporate transparency low growth

Methodology: difference-in-difference Consider industries that are more vulnerable to expropriation In countries with weaker property rights …

… and in periods when expropriation is more likely … firms in these industries (controlling for industry, country, year fixed effects) are less transparent …

… and these industries have lower growth


Empirical design

Profits in oil and gas industries depend on oil prices (which is exogenous)

When oil price is high, profit is a rent that is easier to expropriate Corporations face a trade-off: high transparency is good for

business but may result in expropriation Result: when oil price is high, corporations in oil and gas industry

– in countries with weaker property rights – are less transparent (controlling for fixed effects for industry, country, year) This results in lower investment and growth

Same for industries “similar to oil industries” Same results when measure “weak property rights” by Polity IV’s

Autocracy


Differential opacity of oil and gas extraction industries relative to other industries plotted against country predation index

UK

New Zealand

Sweden

Singapore

Australia

Canada

Hong Kong

Norway

US

Japan

Germany

Chile

France

Belgium

Taiwan

Korea

Spain

Israel

Greece

ThailandMalaysia

Italy

Argentina

Turkey

South Africa

PhilippinesIndia

China

Pakistan

Indonesia

Russia

-.05

0.0

5.1

diff

ere

ntia

l opa

city

of o

il a

nd g

as e

xtra

ctio

n in

dus

trie

s

0 2 4 6 8country predation index


Conclusions

The “democracy-growth” debate is far from over In particular, no clear results emerge from

cross-country regressionsRecent research is using new methods

Results are more consistent with “democracy is good for growth”

political regimes and economic performance sergei guriev, new economic school, moscow esnie, may 22,...

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