Download the presentation

Political regimes and
economic performance
Sergei Guriev,
New Economic School, Moscow
ESNIE, May 22, 2008
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
ESNIE May 22, 2008
Sergei Guriev
2
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
ESNIE May 22, 2008
Sergei Guriev
3
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
ESNIE May 22, 2008
Sergei Guriev
4
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=DemocAutoc)
 Freedom House: voting rights, civil liberties

ESNIE May 22, 2008
Sergei Guriev
5
4
Correlation between FH’s political rights and
Polity IV’s democ (averaged over 1975-2005)
R2=0.74
YUG
TMP
NAM
2
HRV
CZE
DEU
SVN
LTU
CAN
CRI
AUS
NLD
AUT
IRL
NOR
CHE
BEL
NZL
GBR
DNK
USA
SWE
ITA
JPN
GRCPRT
ESP
FIN
CYP
TTO
ISR MUS
JAM
PNG
SVK
LVA
FRA
MDASLB
UKRMKD
BWA
GEO
VEN
RUS
ARM
DOM
IND
BOL
ARG
BRA URY
ECU COL
SLVLKA
KOR HNDTHA
TUR
PHL
MEX
PER
POL HUN
ZAF
GUY
FJI
SEN
NPL
PAN
GMB
GTM
CHL
MDG
MYS
BGD
PRY NIC
BGR
LSO
MAR DJI
MNG
SGP
ZMB
GHA MLI
BEN
COM
KWT
NGA
JOR IDN MWI
PAKROM
SLE
MOZ
GNB ZWE
BFA
ALB
UGA
KEN
LBN
EGY
GAB
TZA CAF
ARE
LBR
BHR
TUN IRN
NER
BTN
SWZ
CIV
QAT
COG
ETH
OMN DZA
SDN
HTI
CMR
TGO
RWA
MRT
TCD
SYR
BDI
KHM
ZAR
GIN
AGO
SAU
CHN
LBY
CUB
VNM
AFG
SOM
IRQ
LAO
GNQ
MMR
PRK
BLR
-4
-2
0
KGZ
YEM
ERIAZE
KAZ
TJK
UZB
TKM
EST
-4
-2
0
2
e( democ_mean | X )
4
6
coef = .47393413, se = .02218531, t = 21.36
ESNIE May 22, 2008
Sergei Guriev
6
40000
Basic fact: there are no rich
non-democratic countries (2005)
USA
NOR
30000
IRL
FRA
SGP
20000
KWT
ARE
KOR
BHR
CHE
DNK
AUT
CAN
GBR
NLD
SWE
BEL
FIN
AUS
JPN
DEU
ITA
ESP
ISR
NZL
GRC
SVN
CZE
PRT
HUN
10000
SAU
EST
MYS
0
IRN
BLR
KAZ
GAB
CHN
AZE
SWZ
MAR
SYR
VNM
PAK
MRT
SDN
LAO
UZB
GMB
COG
RWA
ERI
SVK
TUN
EGY
GIN
CMR
ZWE
NPL
TGO
UGA
TCD
TJK
CAF
YEM
0
ESNIE May 22, 2008
RUS
DZA
JOR
AGO
BFA
2
ARM
KHM
DJI
KGZ
ETH
TZA
NGA
ARG
LVA
ZMB
SLE
NAM
UKR
VEN
LKA
GUY
ECU
BGD
COM
MOZ
BEN
MLI
GNB
MWI
MEX
BRA
TUR
DOM
COL
FJI
SLV
HND
GEO
LBN
PHL
PRY
GTM
IDN
NIC
LSO
BOL
GHA
MDA
SLB
SEN
KEN
MDG
NER
BDI
4
6
Democracy, Polity IV
Sergei Guriev
8
HRV
BWA
CHL
ZAF
ROM
BGR
THA
PAN
MKD
PER
ALB
JAM
IND
TTO
LTU
POL
MUS
CRI
URY
PNG
MNG
10
7
2
The slope is large:
1 point increase in democracy  15% in GDP pc level
FRA
SGP
KWT
ARE
BHR
KOR
1
SAU
EST
MYS
AZE
SWZ
MAR
SYR
VNM
-1
PAK
MRT
SDN
UZB
LAO
GMB
COG
RWA
ERI
NAM
UKR
VEN
DZA
JOR
ARM
EGY
ARG
LVA
RUS
TUN
0
IRN
BLR
KAZ
GAB
CHN
USA
NOR
IRL
CHE
DNK
AUT
CAN
GBR
NLD
SWE
BEL
FIN
AUS
JPN
DEU
ITA
ESP
ISR
NZL
GRC
SVN
CZE
PRT
HUN
TTO
LTU
POL
MUS
CRI
URY
LKA
GUY
ECU
MEX
TUR
BRA
DOM
COL
FJI
SLV
LBN
PHL
PRY
GTM
IDN
NIC
LSO
BOL
GHA
MDA
SLB
SEN
HND
GEO
AGO
GIN
CMR
ZWE
NPL
TGO
UGA
TCD
TJK
CAF
BFA
-2
YEM
KHM
DJI
KGZ
ETH
BGD
COM
NGA
SLE
TZA
-6
-4
MOZ
BEN
MLI
GNB
MWI
ZMB
SVK
HRV
BWA
CHL
ZAF
ROM
BGR
THA
PAN
MKD
PER
ALB
JAM
IND
PNG
MNG
KEN
MDG
NER
BDI
-2
0
e( democ | X )
2
4
coef = .15230767, se = .02270864, t = 6.71
ESNIE May 22, 2008
Sergei Guriev
8
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
ESNIE May 22, 2008
Sergei Guriev
9
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 …
ESNIE May 22, 2008
Sergei Guriev
10
.1
Growth is higher in democratic and nondemocratic countries (1975-2005)
CHN
BWA
.05
KOR
SGP
THA
MYS
CHL
IDN
EGY
TUN
LSO
IRL
IND
LKA
0
NOR
PAK
PRT
JPN
BGD
GBR
FIN
USA
LVA
AUT
JOR
HUN DOM
ESP
TUR
DEU
ITA
TTO
AUS
BEL
FRA ISR
CAN
DNK
NPL
GRC
NLD
MAR SDN
SWE
CRI
SLB
COL
MEX
PAN
URY
BFA
NZL
SWZ
BRA
FJI
CHE
SYR
PHL
TCD
DZA
PRY
RWA
ECU
HND
GTM
CMR COG
BEN
GHA MLI
KEN
ARG
GUY
JAM
SEN
GMB
NGA
ZAF
MWI
MRT
PER
SLV
PNG
IRN
BOL
BDI
VEN
KWTTGOSLE
GEO
GNB ZMB
NER
GAB
CAF
ZWE
MDG
HTI
SAUCIV
NIC
ARE
-.05
ZAR
0
ESNIE May 22, 2008
2
4
6
Average democracy in 1975-2005
Sergei Guriev
8
10
11
.1
The correlation between democracy and growth: is
statistically and economically significant
.05
CHN
BWA
KOR
SGP
IDN
EGY
TUN
THA
IND
LKA
NOR
PAK
PRT
JPN
BGD
GBR
USA
FIN
HUN DOM
LVA FRA
AUT
ESP
TUR
ITA
DEU
TTO
AUS
BEL
DNK
NPL
GRC CAN
NLD
SWE
ISR
CRI
SLB
COL
MEX
PAN
URY
NZL
BRA FJI ECU
CHE
PHL
PRY
HND ARG
GTM
BEN
GHA MLI
GUY
JAM
SEN
GMB
NGA
ZAF
MWI
PER
SLV
PNG
BOL
LSO
0
JOR
MAR SDN
BFA
SWZ
SYR
TCD
DZA
RWA
CMR
KEN
COG
MRT
IRN
KWTBDI
TGOSLE GNB
NER
ZMB
GAB
CAF
HTIZWE
SAUCIV
ARE
-.05
IRL
MYS
CHL
GEO
MDG
VEN
NIC
ZAR
-5
0
e( democ_mean | X )
5
coef = .00158786, (robust) se = .00045341, t = 3.5
ESNIE May 22, 2008
Sergei Guriev
12
… virtually linear …
-.05
0
.05
.1
Lowess smoother
0
2
4
6
Average democracy in 1975-2005
8
10
bandwidth = .8
ESNIE May 22, 2008
Sergei Guriev
13
.1
Similar correlation with Freedom
House’s index of political rights
.05
CHN
KOR
SGP
BWA
THA
-.05
0
IRL
MYS
IDN
CHL
IND
LKA
EGY
LSO
NOR
TUN
PAK
PRT
DOM
JPN
BGD HUN
GBR
FIN
USA
JOR
AUT
LVA
ESP
TUR
ITA
DEU
TTO
AUS
BEL
FRA
CAN
DNK
NPL
GRC
NLD
MAR
SWE
ISR
SDN
CRI
SLB
COL
MEX
PAN
URY
SWZ BFA
NZL
SYR
FJIPHL BRA
CHE
TCD
DZA
PRY GTM
RWA
MLI
HNDECU
CMR
BEN
ARG
COG KENNGAGHA
GUY
JAM
SEN
GMB
ZAF
MWI
PER SLVBOL PNG
MRT IRN
BDI
VEN
KWT
TGO
GEO
SLE
GNB
NER
ZMB MDG
GAB
CAF
ZWE
HTI
SAU
CIV
NIC
ARE
ZAR
-4
-2
0
e( pr_mean | X )
2
4
coef = .00337142, (robust) se = .00095875, t = 3.52
ESNIE May 22, 2008
Sergei Guriev
14
.1
… and Freedom House’s civil liberties
.05
CHN
KOR
BWA
-.05
0
SGP
THA
IRL
MYS
IDN
CHL
IND
EGY LSO LKA
NOR
TUN
PAK
DOM ESPPRT
JPN
BGD
GBR
FIN
USA
JOR
HUN
LVA
AUT
TUR
ITA
DEU
TTO
AUS
BEL
FRA
DNK
GRC
NLD
MAR NPL COL
SWE
ISR
SDN
CRI CAN
SLB
MEX
PAN
URY
BFA PRY PHLBRA FJI
NZL
SYR
CHE
TCD
DZA SWZ MLI
RWA
ECU
HND
GTM
CMR
GHA SEN
KEN BEN
ARG
COG
GUY
JAM
GMB
NGA
ZAF SLV
PERBOL PNG
MRT MWI
IRN
BDI TGO
VEN
KWT
GEO
SLE
GNB
NER
ZMB
GAB
CAF
ZWE
MDG
HTI
SAU
CIV
NIC
ARE
ZAR
-4
-2
0
e( cl_mean | X )
2
4
coef = .00356985, (robust) se = .00108613, t = 3.29
ESNIE May 22, 2008
Sergei Guriev
15
Beyond pairwise correlations:
cross-country regressions

Need to control for initial GDP per capita …



… 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:




The result remains the same
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
ESNIE May 22, 2008
Sergei Guriev
16
Many dictatorships that start well then end up
growth failures

Many dictatorships are overrated:
Castro (despite huge achievements in
healthcare): zero growth in 50 years
 Mao: economic disaster
 “Uzbek growth puzzle”: no puzzle
 Pinochet: bad performance overall
 Gulf countries: almost no growth of GDP per
capita in 30 years

ESNIE May 22, 2008
Sergei Guriev
17
20
Democracy and
volatility of growth (% p.a.) in 1975-2005
15
LBR
-5
0
5
10
GNQ
LBN
AZE
ARM
GEO
RWA TJK
YUG
TMP
TKM
MDA
KWT
GABTCD
LTU
UKR
ERI
LBY
ALB
MNG
SOMAGO
KAZKGZ
SLB LVA
ARE
SLE GNB BLR
HRV
RUS
QAT
IRN
MOZ ETH
JOR
IRQ CMRCOG
NIC
EST
ARG
LSO
TGO
OMN
VEN TTO
SYR SDN
ZWE
PER
SAU
MLI
ROM
URY
NER
MWI
NGA
BGR
CHL
SVK
UZB
ZAR
PNG
GUY
BHR
MMR
BTN
FJI
MAR
GHA
MDG
BDI
TUR
CIV
CYP
PAN
MKD
CAF
SLV
HTI ZMB SEN PRY
THA
CZE
SVN
IDN
SWZ
MYS
HUN
KOR
MRT
JAM
MEX
SGP
DOM
PHL
POL
BRA
CHN
CRI
BWA
BEN
GMB
LAO
BFA
COM
ECU
DJI
UGA
PRT
HND
IRL
LKA
IND
DZA
NAM
EGYTUN
KHM NPL
BOL
TZA
YEM
GRC FIN
GTM
ZAF
KEN
NZL
ISR
CHE
COL
CUB
VNM
BGD
CAN
PAK
USA
ITA
DNK
SWE
JPN
AUS
ESP
NOR
GBR
DEU
MUS
AUT
BEL
GIN
NLD
FRA
-4
-2
0
2
e( democ_mean | X )
4
6
coef = -.31788085, (robust) se = .06735342, t = -4.72
ESNIE May 22, 2008
Sergei Guriev
18
Democracy and volatility of
economic growth
Besley-Kudamatsu (2007): distribution of growth
rates for democratic and autocratic regimes
ESNIE May 22, 2008
Sergei Guriev
19
An early survey of growth regressions:
Przeworski and Limongi 1993
ESNIE May 22, 2008
Sergei Guriev
20
Przeworski and Limongi 1993
Table 1 continued
ESNIE May 22, 2008
Sergei Guriev
21
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
ESNIE May 22, 2008
Sergei Guriev
22
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
ESNIE May 22, 2008
Sergei Guriev
23
New work: panel data
Rodrik Wacziarg 2005
 Control for fixed effects
 Consider major democratization episodes in 154 countries 19502000
 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
ESNIE May 22, 2008
Sergei Guriev
24
Results
ESNIE May 22, 2008
Sergei Guriev
25
Subsample of 24 countries with one-way
democratic transition
ESNIE May 22, 2008
Sergei Guriev
26
Heterogeneity in democracies
Great survey: Besley-Persson in Palgrave
 Proportional vs majoritarian

Higher welfare spending (by 2% GDP!)



Via more fragmented party system
Lower accountability, higher corruption
Presidential vs parliamentary
Smaller government (5% GDP!)
 Effect in established democracies


Term limits
ESNIE May 22, 2008
Sergei Guriev
27
Heterogeneity in non-democracies
Much less is known for non-democracies: data
availability constrain empirical work
 Besley Kudamatsu:



Egorov-Sonin theoretical work



Detailed case studies
Successful autocracies have institutionalized selectorate (e.g.
parties), less personalistic, hence more accountable
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
ESNIE May 22, 2008
Sergei Guriev
28
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


Fisman et al.:



Suharto’s health problemsmarket downgrades stock of Suhartoconnected firms
No such effect for Cheney
Jones, Olken:



Effect of an unexpected death of CEO on the stock price
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
ESNIE May 22, 2008
Sergei Guriev
29
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!
ESNIE May 22, 2008
Sergei Guriev
30
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%!
ESNIE May 22, 2008
Sergei Guriev
31
Democratic transitions would increase growth
ESNIE May 22, 2008
Sergei Guriev
32
Autocratic transitions would slow down growth
ESNIE May 22, 2008
Sergei Guriev
33
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
ESNIE May 22, 2008
Sergei Guriev
34
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
ESNIE May 22, 2008
Sergei Guriev
35
.1
Differential opacity of oil and gas extraction industries relative
to other industries plotted against country predation index
Argentina
Malaysia
Thailand
Greece
.05
Spain
Singapore
Korea
Japan
New Zealand
Hong Kong
Sweden
Norway
0
UK
US
Canada
China
TurkeyPhilippines
India
Israel
South Africa
Pakistan
Indonesia
Russia
ChileTaiwan
Belgium
Australia
Italy
France
-.05
Germany
0
2
4
6
8
country predation index
ESNIE May 22, 2008
Sergei Guriev
36
Conclusions

The “democracy-growth” debate is far
from over


In particular, no clear results emerge from
cross-country regressions
Recent research is using new methods

Results are more consistent with
“democracy is good for growth”
ESNIE May 22, 2008
Sergei Guriev
37