Download Liberalization, Resource Endowments and Private Capital Flows in

Survey
yes no Was this document useful for you?
   Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Document related concepts
no text concepts found
Transcript
Tyson Roberts
Democracy, Development, and the International Political Economy
Introduction to Empirical Section
In Chapter One, I model the interaction between the government of a sub-Saharan
African country and foreign providers of financial flows as follows:
1. The government chooses an economic development strategy and a political regime
type
2. The providers of foreign finance decide
a. how much investment to allocate to the private and public sector, and
b. how much aid to allocate to the private and public sector
My argument in this project is that government leaders in Africa make decisions about
economic policy and changes in political institutions based (in part) on expectations of how those
decisions will affect foreign capital flows. In chapters two and three, therefore, I predict
expected financial inflows conditional on economic and political choices of African
governments. In chapter four the predictions generated in chapters two and three enter the utility
function of the government in a random utility model, along with control variables and an error
term, to predict the decision of the government regarding economic policy and political
institutions. For example, as the expected capital inflows resulting from economic or political
liberalization rise, the probability of the government liberalizing increases. In chapter two I
address investment flows from private investors who send finance to Africa in order to make a
profit. In chapter three I address aid (concessional loans and grants) provided by governments
and multilateral institutions in order to alleviate poverty and to influence African governments to
pursue favored policies.
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two:
Liberalization, Resource Endowments, and Private Capital Flows in Sub-Saharan Africa
Introduction
A driving force behind the colonization of sub-Saharan Africa was the search for natural
resources, both to feed the industrialization of Europe and to produce armament to fight wars
throughout the world. For example, Cecil Rhodes’ British South African Company was founded
in 1889 to exploit and colonize south-Central Africa as part of the “scramble for Africa,” with a
particular emphasis on mineral extraction. It directly administered Rhodesia (modern-day
Zambia and Zimbabwe) until 1923 and only gave up its mineral rights in Zambia in 1964.
Following independence, African states continued to rely heavily on foreign private
capital to develop their economies. The volume and nature of these flows varied over time,
however (see Figure 1). In the 1960s, the same multinational corporations that played such a
prominent role under colonization continued to play an important role. However, the citizens of
these newly independent states were not content to let foreigners control their economies. The
Father of Ghanaian independence, Dr. Kwame Nkrumah, had said, “Seek ye first the political
kingdom and all else shall be added unto you.” Having achieved political independence,
Africans expected to control their economies as well.1 Because there were few indigenous
private corporations, many governments undertook “Africanization” policies by imposing hiring
requirements on private firms, nationalizing foreign enterprises and foreign-controlled mineral
A typical example: The three goals of Cote d’Ivoire’s Five Year Plan in 1971 were: “i. Strong economic growth; ii.
Greater participation by Ivory Coast citizens in the economy; iii. An improvement in the standard of living of the
rural population” (EIU 1971). Note that Cote d’Ivoire was among the most market-friendly regimes in Africa at that
time.
1
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
and oil reserves, and establishing new state-owned enterprises. But they still relied on foreign
finance. Commercial banks, flush with petrodollars from OPEC countries, played a particularly
prominent role in the 1970s financing state investment.
Most state-owned enterprises weren’t profitable (Nellis 1994) and by the early 1980s
governments were unable to repay their loans. Restricted by government policy from Africa’s
private sector and lacking profitable opportunities in its public sector, foreign investors largely
left Africa alone from the mid-1980s until the early 1990s. By then, investors were looking for
profitable opportunities throughout the developing world. Again, multinational firms returned to
Africa, as did investors in new (for Africa) financial opportunities such as portfolio equity and
bonds. Although international crises led to a fall in investment for certain years, generally there
has been a rise in equity investment (FDI and portfolio) since 1990.
Figure 1: Net inflows of private investment to Sub-Saharan A frica,
constant 2000 US$ Billion
180
160
140
120
Private sector: FDI
100
80
Private sector: debt (bonds and commercial
bank)
60
Private sector: Portfolio equity
40
Public sector: Private creditors (bonds,
commercial bank loans, and other)
20
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
0
-20
-40
This brief summary of Africa’s economic history vis-à-vis the world economy explains
the broad pattern of investment flows to sub-Saharan Africa as a region. But foreign private
investors are faced with the decision of which country to invest in, and in what form. Economic
3
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
factors at the domestic level – such as market size, exploitable natural resources, productivity
levels, and the cost of doing business – play an important part in these investors’ decisions.
However, domestic political factors also play an important role, in particular investment-related
economic policies and the nature of the political institutions. In this chapter, I focus on how
these two political factors influence private investment flows to sub-Saharan Africa, including
flows to the private sector (including foreign direct investment, portfolio equity, commercial
loans, and bonds) and flows to the public sector (commercial loans and bonds).
I find that investors are motivated by both economic indicators of future profit
opportunities (such as natural resource wealth and economic growth) and by political factors
such as investment-related economic policies and political institutions, which also affect profit
opportunities. Furthermore, the effect of these political factors depends on the nature of the
economy. Capitalist policies attracts investment to the private sector, particularly foreign direct
investment, and the yield from a shift to capitalist policies is particularly high for countries that
are highly dependent on natural resources. On the other hand, capitalist policies reduce
investment (or, statist policies increase investment) in the public sector inn countries that are
natural resource-dependent countries. As for regime type, democracy attracts investment to the
private sector, particularly foreign direct investment, but this is only the case for countries that
are not dependent on natural resource endowments. In natural resource-dependent countries,
democracy appears to have a negative effect on equity investment.
4
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Theory
Most theories of the determinants of capital flows focus on economic factors. My theory
builds on these fundamental insights but focuses on two political factors: political institutions
and investment-related economic policies. I highlight how these factors affect investment, how
they interact with each other, and how they interact with economic factors .
The motivation of private investors is to maximize expected returns on capital invested.
Foreign finance has a certain amount of capital available for investment, F. In addition to
sending capital k to a given host country in Africa, the foreign investor has the option of utilizing
its capital elsewhere, where it will receive some fixed returns = Ro. R0 is thus the opportunity
cost, or the reserve value, for the foreign investor, which is external to each recipient nation. This
can be termed the “push” factor. There are also factors within each recipient nation that the host
country government can control, such as regime type , economic strategy s, and domestic
economic factors x. These can be termed the “pull” factors. The economic strategy s determines
what percentage of each economic sector j is reserved for state-owned enterprises. The balance,
1   s , is open to foreign investors in the private sectors. Foreign investors may also invest in
the public sector, and the public sector has a productivity discount , since public enterprises
tend to be less efficient than private enterprises (Boardman and Vining 1989).2 The share of
investment k that goes into the public sector for economic sector j is j.
The utility of foreign finance is therefore
2
Africa is full of examples of state enterprises that were unproductive until they were bought by foreign private
capital, such as the Bonagui soft drinks factory in Guinea, which was installed under Sekou Toure with an annual
capacity of 2 million cartons of soft drinks but never entered production until it was bought by Coca Cola
Corporation of the USA and Stella Artois of Belgium in 1986 (EIU 1987).
5
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
 J

E(U F )    1   j j  R j (k j ,  )   Ro  (  k)
 j 1



Each return function R is positive with diminishing returns, (R() > 0, R() < 0).
Therefore, the optimal strategy for foreign finance, if the host country government is pursuing a
capitalist strategy, is to invest k such that Rj (k j )  Ro . If the government is pursuing a statist
strategy, foreign finance will choose  *j   s in sectors where  > 0. That is, in any sector where
public enterprises are less efficient than private enterprises, the government will invest the
minimal amount required in the public sector and the rest in the private sector. Investors will
invest k such that Rj (k j )  Ro in sectors where there is no minimum level reserved for the state,
and such that (1   j j )Rj (k j )  Ro where there is a minimum level reserved for the state.
This analysis yields the following propositions:

Foreign investors will invest less in host countries when there are attractive
investment opportunities in the home country relative to those in the host country.

Foreign investors will invest more in countries pursuing capitalist policies than
those pursuing statist policies.

Foreign investors will be less deterred by statist policies in economies where the
public sector’s disadvantage is small relative to the private sector. In such cases,
statist policies will divert investment from the private sector to the public sector.

To the extent that democracy increases expected returns for foreign investors, it
will have a positive effect on foreign investment.
6
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Both external push factors and domestic pull factors have been included as explanations
for the rise in private capital flows to the developing world over the past 20 years or so (Calvo,
Leiderman and Reinhart 1996, Fernandez-Arias and Montiel 1996), and it has been found
empirically that both play a significant role (Taylor and Sarno 1997, Jeanneau and Micu 2002).
According to these studies, the most significant push factors are interest rates and economic
growth in developed countries. As interest rates fall in developed countries, capital seeks
opportunities for higher rates of return in developing countries. Low interest rates in developed
countries also encourage governments and private firms in developing countries to borrow from
developed countries. Another important push factor is the rate of economic growth in developed
countries; when economic growth is low in developed countries, profit opportunities in the
developed world are low, and so investors are more likely to seek profit opportunities in
developing countries. Other push factors that are mentioned in the literature include excess
liquidity in the developed world, increased risk appetite, trends toward diversification, and
improvements in communication technology which make it easier to manage international
business operations. In this project, the focus is on pull factors, and so the net effect of push
factors will be proxied with the total flow of each form of capital into sub-Saharan Africa.
After being motivated to send their investment dollars out of the developed world to earn
a higher return, the providers of foreign finance must decide where to allocate their finance. This
decision is determined by “pull” factors, some exogenous and others controlled by the
government.
Foreign direct investment generally has one of three goals. Market-seeking FDI
establishes productive enterprises to serve a group of customers in a foreign country. Although
trade can also be used by firms to serve customers abroad, FDI is necessary or more profitable in
7
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
the service and retail industries and for some types of manufacturing (e.g., when transport costs
are high relative to sales price or when tariffs on the finished good is high). Efficiency-seeking
FDI establishes operations in a foreign country to manufacture products at lower cost for export.
Resource-seeking FDI exploits minerals, oil, or other location-specific resources. In each case,
FDI generates profits by applying proprietary knowledge capital (technology, managerial
practices, or business networks) to the host country’s physical or human capital. FDI, therefore,
is an investment substantial enough to provide the investor with some managerial influence or
control over the enterprise (10% is the common threshold between FDI and portfolio equity).
While foreign direct investors play an active role in the management of their investments,
other investors are passive. Portfolio equity investors, like foreign direct investors, share in the
up- or downside of profitable operations. Although they exert no managerial control over the
enterprise, they can generally withdraw their investment on short notice (FDI is less liquid and
therefore more long-term). Thus, such investors are motivated by both profit opportunities and
short-term risks. Buyers of debt, whether commercial lenders or bondholders, receive regular
repayment plus interest. They therefore lend where they are confident they will be repaid.
Indicators of creditworthiness include growth, the presence of money generating resources such
as oil, and low levels of debt.
An important political factor to investors is the economic policies of the host country
government. Specific policies are difficult to analyze since they are diverse, complicated, and
include many exceptions when applied. Even obvious candidates can have surprising results; for
example, the tax rate on income and profits doesn’t seem to matter to FDI (Markusen 1995,
Chakrabarti 2001). However, the overall economic stance of the government should have a
significant effect on the government. I simplify matters by categorizing the economic strategy
8
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
into two categories: a “statist” approach, where the government is the primary investor in
productive enterprises, and a “capitalist” approach, where it lets private enterprises play the
primary role. A statist strategy has two components: (1) international flows of finance are
restricted by the government, and (2) the government establishes and expands state-owned
enterprises.
In Africa, private finance is often restricted but never banned completely. Restrictions
may take the form of a requirement for approval from the Ministry of Finance for investments
and divestments, exchange control requirements, restrictions on repatriation of profits, or
banning foreign equity investment in “strategic” sectors such as real estate, utilities,
communication, or transportation. State-owned enterprises can be fully state-owned or majority
state-owned and can be established by purchasing or seizing the majority of shares (and thereby
control) of private (often foreign-owned) firms, or by creating new firms (sometimes with
foreign investors as minority shareholders).
Unlike the communist governments of Asia and Eastern Europe, no African government
has had a pure socialist system. Instead, African states pursue a “mixed economy” strategy, in
which the both the state and private (including foreign) investors have some ownership in
productive enterprises. A public or state-owned enterprise is “an organization (1) whose primary
function is the production and sale of goods and/or services, and (2) in which the government or
other government-controlled agencies have an ownership stake that is sufficient to ensure them
control over the enterprise, regardless of how actively that control is exercised” (Tanzi 1984).
Thus, “nationalization” occurs when the government increases its ownership share above 50%,
sufficient to achieve control.
9
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Even governments with Communist single-party rule, such as Mattheiu Kerekou’s regime
in the People’s Republic of Benin, allowed foreign direct investment. Although Kerekou’s
government nationalized foreign-owned banking, oil supply, insurance, and communications
companies in 1974, foreign firms continued to play an important role in other parts of the
economy. In 1976, for example, Benin’s most important industrial complex opened: a textile
plant majority owned by foreign firms (and 48% owned by the state) (EIU 1976). In Guinea,
Sekou Toure’s government pursued a massive state enterprise program,3 but the state generally
owned “just” 49%-51% of mining companies, with the balance owned by foreigners (who
contributed the lion’s share of cash and know-how). In Ghana, Nkrumah nationalized five of the
country’s six producing gold mines, but not the largest, Ashanti Goldfields,4 and invited the
foreign firms Kaiser and Reynolds to build the aluminum smelter in his most ambitious
development project, the Volta River project.
Although some foreign firms have profited to some extent under statist policies, and no
African countries governments completely nationalized or banned all foreign investment, statist
policies have a negative impact on foreign investment as a whole in the private sector. Stateowned enterprises crowd-out and/or compete with private enterprises, and the playing field is
sloped against private firms. Furthermore, when foreign firms are nationalized, investors are
rarely paid full market value.5
Statist policies will thus reduce investment to the private sector, both because there are
fewer private firms (i.e. firms in which private investors are majority shareholders), and because
3
Guinea had 181 public enterprises in 1980 (Nellis 1994).
It was eventually nationalized in 1973 by Colonel Acheampong.
5
For example, in 1974-75, the government of Benin nationalized petrol stations, insurance firms, banks,
telecommunications firms, transport companies, the brewery, and one hotel; for all this, compensation was a mere
$8m (Allen 1989, p. 80).
4
10
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
these private firms have reduced profit opportunities. On the other hand, statist policies should
have a positive effect on foreign investment to the public sector. Although five-year
development plans often proclaim an intention to rely heavily on domestic funding, the
implementation of statist policies consistently relies on borrowing heavily from abroad to finance
investments. Because the state undertakes the profit opportunities that are denied to private
capital, there are an increased number of high-return lending opportunities in the public sector.
For example, if the state nationalized a private mining company, foreign lenders who would have
bought debt from the private firm will now buy debt from the publicly owned firm directly, or
will lend money to the government that will in turn invest in or subsidize the mining concern.
The response of foreign investors in the private sector to statist versus capitalist policies
by the host country government depends in large part on the industry. The value of resourceseeking FDI is largely derived from the control of the location of the natural resources, and so
foreign investors are relatively unlikely to be deterred by statist policies. If the host country
government is willing to give foreign firms a minority share in an enterprise to extract oil or
precious minerals, many foreign investors are willing to provide the majority of the necessary
capital. The value of efficiency-seeking, on the other hand, to a larger extent derives from the
proprietary knowledge of the multinational firm, so investors in such industries are generally less
interested in investing in public firms in which they lack managerial control. Furthermore, cheap
labor is more readily available throughout the world than oil and precious minerals, and so when
faced with nationalization – full, partial, or threatened – investors in such industries will
withdraw and invest elsewhere. Thus, it is expected that industries where public firms are not
heavily disadvantaged relative to private firms, such as natural resource extraction, it can be
expected that investors will respond to statist policies by shifting some investment from the
11
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
private to the public sector, while in other industries investors will respond to statist policies by
withdrawing.
Another political factor that will affect foreign investment is political institution, or
regime type. The response of foreign private investors to regime type also depends upon the
endowments of the host country and whether the FDI is market-, efficiency-, or resourceseeking. A stable democracy should carry a number of benefits for investors. The long time
horizons resulting from orderly succession via elections should encourage the protection of
property rights (Olson 1993). Free elections and a free press imply transparency and the free
flow of information, which enables investors to make efficient decisions (Przeworski et al 2001,
p. 144). The accountability of the government to voters should reduce corruption and increase
investment in public services favorable to investors such as human capital (Lake and Baum
2001, Boix 2003, Stasavage 2005). However, the presence of oil and mineral wealth can
undermine many of the investment-enhancing features of democracy. Resource wealth
encourages vote-buying and other corrupt practices, which undermine the rule of law and support
for democratic regime, thus making democracies in such environments short-lived.6 Most
resource-abundant countries spend most of their history as dictatorships. The presence of natural
resources such as oil encourages autocracy by providing the government with the means to buy
support and repress opposition without needing to invest in its citizens (Ross 2001). The flow of
FDI into such countries multiplies this dynamic because it doesn’t require human capital and
provides the government with foreign capital to supplement export revenues for political
purposes. Resource-seeking FDI is motivated by the presence of oil or mineral reserves and so is
The short-lived democratic government in Nigeria from 1979-1983 quickly became a “colossus of corruption”
(Othman 1984) whose overthrow by the military was welcome. Corruption is a common excuse for militaries to
overthrow democratic regimes in Africa (Decalo 1990). Politicians in Nigeria’s current democracy are also
succumbing to the temptation to buy votes to win elections (Collier 2009, p. 39).
6
12
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
relatively indifferent to the level of human capital or transparency. Furthermore, some argue that
FDI prefers authoritarian rule because of increased stability and the ability to suppress demands
among the populace (or a large support coalition) for benefits such as higher wages, the creation
of additional jobs, investment in schools or healthcare, or compensation to residents for
displacement or environmental degradation.
Governments in countries without heavy endowments of resource wealth rely more
heavily on their populace to generate income to tax, or to attract foreign investment. Whereas
resource-seeking FDI is location specific and thus relatively indifferent to any potential benefits
of democracy, market- and efficiency-seeking can be located anywhere there are customers or
workers. These types of investors are therefore more likely to be influenced by the advantages of
democracy, including rule of law and transparency.
Although results vary, studies covering earlier years (Olson 1994, Li and Resnick 2004,
Resnick 2001) are less likely to find a positive relationship between democracy and FDI than
those covering later years (Li and Reuveny 2004, Jensen 2004, Leblang and Eichengreen 2006).
When periods of time are looked at separately, it appears that democracy begins to attract FDI in
the 1990s (Busse 2004), lending support to the argument (Spar 1999) that the shift from
resource-seeking FDI in the primary sector to efficiency- and market-seeking FDI in
manufacturing and services has created a positive relationship between democracy and FDI in
regions such as Latin America and Asia, where the share primary sector FDI declined in the late
1980s. In Africa, however, where the share of primary sector FDI was highest, this share
actually increased (UNCTAD 1999).
Statist policies from popularly elected governments might be expected to be particularly
threatening to foreign-owned firms. While governments led by small coalitions might be bought
13
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
off with some bribes or other favors, a government that relies on a broad coalition will need more
to be more satisfied, ranging from jobs to high taxes to nationalization. For example, in 1974 the
foreign-owned phosphate mining company in Togo, COTOMIB, allegedly offered President
Eyadema a bribe of 1.5 million francs CFA to maintain the tax and investment privileges (EIU
1974). Although Eyadema was an autocratic ruler throughout his reign, in the early 1970s he
was pursuing a large coalition strategy in which state jobs and other benefits were distributed
throughout the population.7 By nationalizing the phosphate mining company, he was able to
increase state revenues to finance a large share of 400 billion francs CFA worth of state
enterprise investments (the country also ran up debts of 5.6 billion francs CFA) (Decalo 1990,
pp. 229-30).
To summarize, I have the following expectations with regard to political institutions,
economic policies, and private capital flows in Africa:

Countries with high natural resource endowments will receive high levels of capital
inflows, including those with authoritarian regimes, to exploit location-specific resources.

In countries with high natural resource endowments, investors will respond to capitalist
policies by investing heavily in the private sector, and to statist policies by shifting
investment to the public sector.

In countries lacking natural resource endowments, investors will respond to statist
policies by withholding investment.
“Through patronage, popular economic policies, and astute cabinet appointments, attention to the demands of all
segments of the population, … Eyadema adroitly nibbled at Ewe opposition to his rule…” (Decalo 1990, p. 223).
7
14
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two

In countries lacking high natural resource endowments (and therefore striving to attract
market-seeking and efficiency-seeking FDI), there will be a positive relationship between
democracy and capital inflows, while investors in natural resource-rich countries will be
indifferent or prefer authoritarianism.
Data and Methodology
Dependent variables
There are four dependent variables, three flows to the private sector and one to the public
(and publicly guaranteed) sector (see Table 1 for descriptive statistics):

Foreign direct investment net inflows per capita - equity ownership of a substantial share
(10% or more) of an enterprise.

Portfolio equity net inflows per capita - equity ownership of an insubstantial share (less
than 10%) of an enterprise

Total net inflows per capita from private creditors to nonguaranteed private enterprises –
includes bonds, loans from commercial banks, and other

Total net inflows per capita from private creditors to public or publicly guaranteed
institutions – includes bonds, loans from commercial banks, and other
In order to compare across years, I use per capita constant US$ for all measures. 8 I use
net inflows to capture both investment and divestment decisions. In order to compare across
countries, I use inflows per capita, which is common (Chakrabarti 2001) although not universal
and seems most appropriate for the goals of this project. A primary motive for domestic
governments to attract capital is to create jobs and other benefits for supporters in order to
continue to hold office. Even in countries where the ruler does not rely on popular support,
8
An alternative would be to measure capital inflows as a percentage of GDP. Since government policies affect
GDP, I chose to use a denominator (population) that depends less on government choices.
15
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
population matters in the sense that more soldiers will be required to repress any potential
uprisings. An exception that is common in Africa is “enclave economies” (Leonard and Strauss
2003), in which the government survives by controlling some natural resources that have low
labor or infrastructure requirements. I deal with this in two ways. First, I drop countries whose
populations average below one million during the period studied – these include some of the
most extreme enclave economies such as Gabon, Equatorial Guinea, and Guinea-Bissau.9
Second, I interact the two explanatory variables of interest, regime type and economic strategy,
with a measure of the prominence of natural resource extraction in the economy (see below).
The largest flow over the entire period is FDI per capita, which averaged over $11 per
capita per year for the entire period for countries with average populations over one million and
peaked in the late 1990s. The second largest is credit to the public sector per capita, which
averaged over $3 per capita per year over the entire period and peaked in the 1970s. Portfolio
equity and credit to the private sector totaled less than $1 per capita annually over the entire
period, although portfolio equity rose to high levels in the late 1990s (mostly to South Africa).
Explanatory variables
The domestic explanatory variables of interest are the level of democracy and economic
policies. For democracy, I use the measure developed by Przeworski et al 2001 (and updated by
9
The nine countries that are thereby excluded are Cape Verde, the Comoros, Djibouti, Equatorial Guinea, Gabon,
the Gambia, Guinea Bissau, Sao Tome and Principe, and Swaziland. Most of these countries (all but Gabon, the
Gambia, and Swaziland) are missing many data for many years. They also tend to have extreme outliers for many of
the data. For example, while the average FDI inflows per capita for sub-Saharan African states was $11 for
countries with average populations over one million, it was $105 per year for smaller countries. Equatorial Guinea
had FDI inflows per capita as high as $2,897 per year, while Gabon had inflows as high as $502 per year and as low
as -$411 per year. Similarly, the average level of public investment for countries with average populations below
one million was 15.3% of GDP, almost double the average level of public investment for countries with larger
populations, 8.6% of GDP. See the descriptive statistics in Table 1 for more evidence of outliers.
16
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Cheibub and Gandhi 2004). This indicator is a dummy, which in its reversed form is 1 for
democracies and 0 for non-democracies. The decisive factor for this measure is the institutional
factor of primary interest for this overall project, i.e., in democracies the government leader risks
electoral overthrow, whereas in non-democracies he doesn’t. Because a leader may win free and
fair elections, the ACLP democracy measure is coded retroactively for democratization – when a
leader who was a dictator loses an election, the regime is coded as a democracy back to the date
when the new electoral rules were established. For example, J.J. Rawlings of Ghana ruled
without elections until the end of 1992, and then allowed for multi-party elections, which he won
in late 1992 and 1996. In 2000, however, his chosen successor, Atta Mills, was defeated in an
election. Ghana is therefore coded as a democracy beginning in 1993, when multiparty elections
started. Although the coding in such cases depends on future events, many observers considered
the election in Ghana to be free and fair in 1992 and 1996, and democracy measures that rely on
expert opinion such as FreedomHouse and Polity also date Ghana’s democratization to 1992.
The correlation among the three measures of democracy ranges from 82-86%.
Because no single measure is ideal to differentiate between “capitalist” and “statist”
investment policies,10 I have created a summary measure, similar to the approach of Sachs and
Warner (1995) in creating a trade openness dummy. There are two policy areas of importance in
investment policies when comparing statist to capitalist policies. First, statist policies restrict
international capital flows, including foreign investment in private enterprises. Second, statist
One rejected candidate, for example, is Kornai’s (1992) list of socialist countries. Most of Kornai’s socialist
countries are in Asia and Eastern Europe. Those in Africa (as of 1987) are limited to Congo-Brazzaville, Somalia,
Benin, Ethiopia, Angola, Mozambique, and Zimbabwe (Kornai 1992, pp. 6-7). The reason why Kornai’s list is so
restricted is because of his operationalization: “The undivided power of the Communist party is the sole criterion for
inclusion in this table. From now on those included will be referred to in this book as socialist countries” (Kornai
1992, p. 5). The problematic nature, for my purposes, of this operationalization is highlighted by the fact that China,
the developing world’s largest recipient of FDI, continues to be coded as socialist.
10
17
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
policies invest in state-owned enterprises and nationalize existing foreign-owned enterprises.
Capitalist policies, on the other hand, allow for the free flow capital, do not invest in new stateowned enterprises, and divest existing state-owned enterprises.
I therefore code economic policy as statist if they follow any of the following criteria:
1) The Financial Openness Index (Brune 2004) index is 0, meaning all forms of capital
inflows and outflows are restricted (FOI).
2) Public Investment (which includes state enterprise investment and government fixed
investment, Pfefferman et al 1999) is greater than 10% of GDP (SPI).
3) Major state enterprise investment or private enterprise nationalization occurs in more
sectors than does state enterprise privatization or liquidation (SEI). 11
Otherwise, economic policy is coded as capitalist. See Appendix 1 for a further
explanation of each component in the economic policy variable.
Most countries in sub-Saharan Africa pursued statist economic policies in the 1970s until
the debt crisis. The debt crisis also coincided with some democratization, but these democracies
were short-lived. The share of countries pursuing capitalist polices increased in the 1980s,
leveled off for several years, then rose dramatically again at the end of the 1990s. The number of
democracies increased during the early part of the 1990s, stalled for a few years, then rose again
into the turn of the century.
I haven’t finished coding all country-years for the SEI measure. I’ve done about 800 and have about 400 left to
do.
11
18
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Figure 2: Percentage of Countries Capitalist and
Democratic in Sub-Saharan Africa
100%
90%
80%
70%
60%
Democracy
Capitalist
50%
40%
30%
20%
10%
02
00
20
98
20
19
96
94
19
19
92
90
19
88
19
19
86
84
19
19
82
80
19
78
19
19
76
74
19
19
19
72
0%
In addition to the explanatory variables of interest, I also include the following control
variables:
The total volume of net inflows (in millions of US 2000 dollars) to sub-Saharan Africa
for each category in a given year proxies for the various push factors such as interest rates,
economic growth, and herd behavior in the developed world.
Domestic control variables come from the capital flows literature. (All economic data
come from the World Bank’s World Development Indicators unless indicated otherwise.) I begin
with four of the determinants found to be the most robust in predicting FDI inflows in an
Extreme Bound Analysis (Chakrabarti 2001): 12
12
Other relatively robust variables are tariff rates and wage rates are not included because of lack of data. The most
complete wage data set (Freeman and Oostendorp 2001) has 95% of the country-years missing data, and 75%
continue to be missing data after using linear interpolation to impute for missing values. Inclusion of the data
including imputations indicates that wage levels have an insignificant (negative) effect, which may reflect the fact
19
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Income level (GDP per capita) has the most robust, and positive, effect on FDI, since a
more developed economy can absorb more FDI, and wealthier consumers can purchase more
products from market-seeking FDI. (Since much of the FDI to Africa is resource-seeking,
however, the effect of this factor might be attenuated.) Furthermore, low income levels are
correlated with capital scarcity, and standard economic models expect capital to flow from
capital abundant to capital scarce economies.13
Trade Openness (exports plus imports as a percentage of GDP) has the second most
robust, and positive, effect on FDI. Although FDI can serve as a substitute for trade, and the
literature discusses “tariff-jumping FDI,” trade openness generally has a positive effect on FDI.
Easy access to imports lowers the cost of doing business for foreign subsidiaries, and the ability
to export is attractive to efficiency-seeking FDI.
Economic growth (percentage change in GDP) is an indicator of high productivity and
future profit opportunities, and therefore should attract FDI.
Net exports (exports minus imports as a percentage of GDP) is a proxy for the current
account balance. Negative net exports (or a current account deficit) tend to be correlated with
positive capital inflows. When imports exceed exports, an excess of currency will be held in
foreigners’ hands, and one use for that currency is to send it back as capital flows.
Where FDI inflows are the dependent variable, I also include the stock of FDI per capita,
whose expected effects are ambiguous.14 On the one hand, accumulated FDI should decrease the
that Africa does not tend to be a destination for efficiency-seeking FDI. Inclusion of wage data eliminates some of
the findings, but it is unclear whether this is due to 75% of the cases dropping out
13
However, this economic prediction rarely plays out in practice. According to Lucas (1990), this can be explained
with levels of productivity via human capital, but Markusen (1995) argues that this is because most FDI is marketseeking rather than efficiency seeking.
14
The FDI stock data from UNCTAD begins in 1980, while the flow data begins in 1970. I used the net inflow data
to calculate stock data, and replaced negative values with zeroes.
20
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
need for additional FDI (and higher levels of FDI stock enable higher levels of reversed flows).
On the other hand, there may be agglomeration effects, whereby existing FDI makes new inflows
of FDI more productive. Agglomeration effects, however, generally occur in knowledgeintensive industries, which are less prevalent in Africa.
Since much of the capital flowing to sub-Saharan Africa is resource-seeking, I also
include a measure of natural resource endowment. I use the sum of the value of mineral and ore
production and energy production (oil, natural gas, and coal).
When portfolio equity flows are the dependent variable, I also include a dummy
indicating the presence of a stock market.15 Although FDI is long-term, portfolio equity is shortterm, and therefore more likely to consider short-term risks such as volatility. I use the standard
deviation of (official) exchange rates over the previous ten years to measure exchange rate risk. I
also include a dummy for South Africa, which received the lion’s share of portfolio investment.16
Lenders are influenced by the perceived ability of the borrower to repay loans. African
governments and firms must repay loans in foreign currency, which is earned with exports. I
therefore measure the perceived ability to repay loans with the total debt service (TDS) as a
percentage of exports. (The need for foreign currency to repay loans is also a reason that natural
resource endowments are important to lenders).
Data permitting, the analysis includes observations from 34 countries covering the years
1972-2003. I use ordinary least squares (OLS) with panel-corrected standard errors (PCSE), as
recommended by Beck and Katz (1995). Because the number of years is roughly equal to the
Until recently, twelve African countries had stock markets: Botswana (opened 1989), Cote d’Ivoire (1976), Ghana
(1989), Kenya (1954), Malawi (1996), Mauritius (1989), Namibia (1992), Nigeria (1961), South Africa (1887),
Swaziland (1990), Zambia (1994), Zimbabwe (1946) (Kenny and Moss 1998).
16
The mean portfolio equity inflows per capita for all SSA countries is $1 per year; for South Africa it is $28. Most
of this took place in 1997-2000.
15
21
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
number of countries, techniques such as FGLS are inappropriate. 17 I include the lagged
dependent variable, which also serves as a proxy for any omitted variables. All explanatory
variables are lagged one year to address endogeneity concerns unless otherwise noted.
Results and Discussion
The coefficients of the control variables are generally in the expected direction, although
not always at statistically significant levels (see Table 2; coefficients in bold are statistically
significant at the 90% confidence level). The lack of consistent statistical significance is not
surprising. Very few determinants of FDI inflows are robust; statistical significance often
depends upon model specification (Chakrabarti 2001). Furthermore, the inclusion of the lagged
dependent variable, which is always positive with high levels of statistical significance, is likely
soaking up the explanatory of some of the other variables. Since the primary goal for this
exercise is to generate accurate predictions using the best estimate for the effect of the two
political factors of interest, this is not problematic.
The proxy for push factors, total Africa inflows, is generally positive although not always
statistically significant. The exception is portfolio equity and debt to the private sector, which
due to volatility have a negative coefficient. I also ran these regressions with current year total
equity inflows; the resulting regressions are in the expected direction and statistically
significant.18 Thus one determinant of capital flows to a given sub-Saharan African country is
the total flows of foreign capital into sub-Saharan Africa as a region. For example, if net debt
17
Running the regression using a GLS model with random effects returns the same coefficients but with much
smaller standard errors. For example, the interaction terms using the variables of interest that are significant at the
90% level using OLS with PCSE are significant at the 99% level using the random effects model.
18
There is a 76% correlation between total portfolio flows into Africa and its lag, and so I will use the lag to
generate predictions for chapter four.
22
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
flows to the public sector in Africa as a region rise by $1 billion, the flows to a typical African
country will rise by $1.40 per capita. Net flows to the public sector ranged from over $80 billion
per year in the 1970s to less than zero.
Capitalist policies generally have a positive (but not statistically significant) effect on
capital flows. Substantively, the greatest effects of capitalist policies are on FDI. Compared to
statist policies, capitalist policies are associated with an additional $1.84 per capita in FDI net
inflows. Reflecting the fact that most FDI to Africa is resource seeking, capitalist policies yield
higher FDI inflows if a country is well endowed with natural resources. For every percentage
point of GNI of production in oil or minerals, capitalist policies will yield an additional $0.80 in
FDI inflows.
Capitalist policies interacted with debt flows to the public sector, on the other hand, have
a negative effect when interacted with natural resource endowments. This finding can be
interepreted as follows: while investors in extractive industries prefer to invest in the form of
FDI under capitalist policies, they will lend to the public sector under statist policies. Although
statist policies reserve a majority share for the government in critical industries, African
governments generally have insufficient capital to fund their share of the investments, thus
creating new profit opportunities for foreign capital in the public sector. A typical example: in
1976 the Mauritanian government borrowed $40 million to finance the state’s share in a new
copper and steel processing plant, while foreign equity made up the balance (EIU 1976).
Democracy is also generally positive, but only statistically significant for foreign direct
investment: democratic countries attract an additional $3.57 relative to nondemocracies.
However, the positive effect of democracy on FDI is reduced as natural endowments become
more important in the economy.
23
These findings lend support to the argument that the benefits
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
of democracy, such as transparency, rule of law, and more education and income for the average
citizen, is less important to investors in the extractive industries than those in other industries
To summarize these results, I calculated expected values for a typical country, both with
and without abundant natural resources, conditional on changes in economic policy and political
regime type (see Table 3). I define a country with abundant natural resources as one where the
value of energy and mineral extraction exceeds one third of gross national income.19 The average
value of production in the extractive sector (energy and minerals) for these cases is 45% of GNI
(for countries with average populations over one million). The average value of production for
the other countries is just under 3% of GNI. I used the mean values for all other variables (using
data from countries with an average population of over one million).
According to Table 3, in a typical year, the highest level of investment in the private
sector (over $50 per capita) can be expected to flow to countries with high natural endowments
with an authoritarian regime (note, however, that the level of flows also depends on the level of
flows in a given year). Flows to the private sector in natural endowment-rich countries is
expected to be lower if statist policies are applied, or if the regime is democratic. It is rare for
natural endowment rich countries to be democratic, however, and the only case of an
endowment-rich country with both democracy and statist policies (among the cases coded so far)
is Nigeria, 1979-1982, under President Shehu Shagari, whose government became a “colossus of
corruption” (Othman 1984). For example, state governments were issued licenses to import rice
19
This is an adaptation of the rule used by Fearon and Laitin (2003). I use the value of fuel and mineral and ore
production as a percentage of gross national income (GNI) rather that fuel primary commodity exports as a
percentage of GDP because of superior data availability. Five oil-producing countries in Africa are heavily
endowed by this criterion, two with small populations (Gabon and Equatorial Guinea) and three with populations
above one million (Angola, Nigeria, and the Republic of Congo). Two countries met this criterion with mining
activity from 1970-1976: Liberia (primarily iron) and Zambia (primarily copper). Namibia also met the criterion
from 1984-1989 but is missing data for all four dependent variables for all years. Chad meets the criterion after
2003.
24
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
and then sold these contracts to the highest bidder. Such practices bankrupted the country and
soon led to a coup. It is little wonder that foreign investors found these circumstances of
corruption and instability unappealing. In the public sector, however, statist policies are
associated with a high level of investment flows (over $18 per capita for nondemocracies) for
countries heavily endowed with natural resources, while such countries receive virtually no
flows to the public sector under capitalist policies
In non-resource abundant cases, investment in the private sector is highest under
democratic capitalist regimes (over $12 per capita) and lowest under authoritarian statist regimes
($7 per capita). This suggests that democratic capitalist regimes are likely the most hospitable to
market-seeking FDI, and, to the extent that Africa attracts such FDI, efficiency-seeking FDI.
(The greatest recipient of efficiency seeking FDI is probably Mauritius, known as the “African
tiger,” which has no extractive resources, a stable democracy, scores high on the financial
openness index and has almost no state-owned enterprises). Flows to the public sector, on the
other hand, tend to be low (less than $3 per capita) no matter what the regime type or economic
strategy.
Conclusion
As do economic variables, political variables such as political institutions and economic
policies have an important effect on capital inflows per capita. Capitalist policies and
democratic political institutions tend to attract investment, particularly FDI.
Investor response to economic strategy and political regime type depends on the
economy’s dependence on natural resources, however. Since mineral and oil extraction are the
25
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
major profit opportunities in Africa, countries with such resources receive the highest levels of
capital inflows per capita, and since these investment opportunities rely on location rather than
the benefits of private ownership, investors respond to economic policies by shifting their
investments, to the private sector under capitalist policies and to the public sector under statist
policies. In countries lacking natural resource endowments, however, statist policies deter
investment. Such economies, however, attract investment in the private sector with both
capitalist policies and democratic institutions, each of which can be expected to increase the
profit opportunities of knowledge-dependent industries. Investor decisions do not depend solely
on the decisions of governments in host countries, however. They are also influenced by
external factors such as the profit opportunities in their home country relative to the profit
opportunities in Africa, proxied here by the total flow of capital to Africa, as well as factors such
as openness to trade, income level, and economic growth.
Based on these coefficients and annual data for each country, I have generated predicted
values of public and private sector investment for each country-year, conditional on economic
policy and regime type. These predicted values will be used to predict government decisions in
each year. In years when funds for the public sector are particularly abundant, such as the 1970s,
governments are expected to be drawn toward statist policies. In years when predicted funds for
the public sector are scarce and/or funds for the private sector are abundant, governments are
expected to shift to capitalist policies. Furthermore, a rise in the availability of capital for the
private sector relative to the public sector is expected to motivate governments of economies that
are not resource abundant to democratize, but not governments of resource-abundant economies.
Instead, authoritarian governments of such regimes are expected to be more motivated than ever
26
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
to retain hegemonic power, both to ensure the continuing inflow of private investment and to
enjoy the benefits of holding office under such conditions.
27
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Appendix 1
I code economic policy as statist if they follow any of the following criteria:
1) If the Financial Openness Index (Brune 2004) index is 0, meaning all forms of capital
inflows and outflows are restricted (FOI).
2) If Public Investment (which includes state enterprise investment and government
fixed investment, Pfefferman et al 1999) is greater than 10% of GDP (SPI).
3) If there is major investment in state enterprises or nationalization of private
enterprises in more sectors than there are privatization or liquidation of state
enterprises (SEI).
Because I haven’t finished coding all country years for the SEI measure, I also code
economic policy as capitalist if they have initiated a privatization program post-1988 and have a
FOI greater than zero.
An ideal operationalization of policies regarding international private investment flows
(such as FDI) would capture nuances such as how restrictive policies are, or, if incentives are
offered, how attractive these policies are. Unfortuntately, operationalizing policies addressing
foreign direct investment specifically is difficult. One data set that attempts to do this is the
investment freedom variable in the Heritage Foundation’s Index of Economic Freedom. For this
variable,
“Questions examined include whether there is a foreign investment code that defines the
country’s investment laws and procedures; whether the government encourages foreign
investment through fair and equitable treatment of investors; whether there are restrictions
on access to foreign exchange; whether foreign firms are treated the same as domestic
firms under the law; whether the government imposes restrictions on payments, transfers,
and capital transactions; and whether specific industries are closed to foreign investment.”
(Beach and Kane 2008, p. 48).
28
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
However, data only go as far back as 1995, and it is difficult to code for earlier years –
descriptions for different levels of freedom use measures such as “very few,” “few,” and
“significant;” and the description of actual policies in sources such as the IMF’s AREAER are
often vague, incomplete, difficult to compare, or missing altogether for early years, particularly
for African countries.
For the foreign investments constraint I therefore use Brune’s Financial Openness Index
(FOI), which is blunt regarding FDI (0 for restrictions, 1 for no restriction), but at least the
measures are comparable. In order to capture finer gradations, Brune includes other types of
international transactions that are likely to influence the decisions of foreign investors.
“The FOI is available for 187 countries over the period 1965-2004… it includes twelve
categories of current and capital account transactions: (1) exchange rate arrangements
(multiple/dual v. unified); (2) payments from invisible transactions (referring to payments
for services such as financial or legal advice, royalties, transfers to overseas residents);
(3) proceeds from invisible transactions; (4) proceeds from exports; (5) inward controls
on money market transactions; (6) outward controls on money market transactions; (7)
inward controls on credit operations; (8) outward controls on credit operations; (9)
inward controls on foreign direct investment; (10) outward controls on foreign direct
investment; (11) real estate transactions; and (12) controls on provisions and operations
of commercial and credit institutions. Each category is coded as either having significant
restrictions (“closed”=0) or not (“open”=1)” (Brune and Guisinger 2007).
The most common measure of the prominence of state enterprises comes from the
Economic Freedom of the World data set (Gwartney and Lawson 2008), which is a 1-10 index
that uses two types of data to categorize country-years - the sectors where state enterprises are
active, and government investment as a percentage of total investment. For example, when state
enterprises are limited to economy-of-scale industries such power utilities (and government
investment is 15-20% of total investment) the economy is given a rating of 8 out of 10; if SOEs
are present in energy, transportation, and communication sectors (and government investment is
29
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
25-30% of total) the economy is given a rating of 6, etc. I do not use this measure for two
reasons. First, the data is only available every five years until 2000. Second, government
investment as a percentage of total investment, which is appropriate for some purposes, is not
appropriate for this project since I am using the state enterprise policy as a determinant of private
investment.20
In the spirit of Gwartney and Lawson, however, I use investment dollars and sectors to
measure state enterprise activity. The first measure I use is public investment as a percentage of
GDP (SPI). Public investment is the sum of investment by the government and all state
enterprises. Using state enterprise data alone, such as the data from the Bureaucrats in Business
data set (World Bank 1995), is problematic because different countries categorize state
enterprises different ways. Some are considered individual entities, in which case separate
statistics are maintained, others are considered part of the government, in which case they are not
(see Pfefferman et al 1999 for a discussion). I use the public investment as percentage of GDP
data from Easterly 2001, which updates the Pfefferman et al (1999) data set.
The second approach is to count sector level state enterprise activity. Because of the lack
of annual data on how many sectors have active state enterprises (for example, the data set in
Short 1984 includes sector data for 21 sub-Saharan African countries in the “late 1970s”), I take
the approach of counting sectors in which governments are actively investing in or divesting
from state-owned enterprises to create a State Enterprise Activity Index (SEI). I utilize the
following definition: a public or state-owned enterprise is “an organization (1) whose primary
function is the production and sale of goods and/or services, and (2) in which the government or
20
The Gwartney measure is calculated using private investment (public investment divided by pulblic + private
investment).
30
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
other government-controlled agencies have an ownership stake that is sufficient to ensure them
control over the enterprise, regardless of how actively that control is exercised” (Tanzi 1984). I
use a 50% threshold to determine control. To operationalize investment I code the following
events: establishment of a new enterprise in which the government has majority control; major
expansion or rehabilitation of a state-owned enterprise; or nationalization, which I define as
increasing the government’s share or equity above 50%. In some cases nationalization is
achieved through market prices and in other cases compensation is significantly below market
prices. In this sense, the sector count approach is superior to the level of investment measured in
dollars. Divestment occurs when the state privatizes or liquidates the state-owned enterprise.
Following the definition I use, I do not consider contracts for private management as
privatization. I count the net number of investment activities (i.e. investment activities minus
divestment activities) by sector for 27 sectors. If a government has a positive net number,
meaning it is investing in state enterprise activities in more sectors than it is divesting, then it is
considered to be implementing a statist economic strategy.21
I use the Economist Intelligence Units quarterly reports and the World Bank’s Privatization Database to count
sector investment and divestment activities.
21
31
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Bibliography
Allen, Chris. 1989. Benin. In Benin, the Congo, Burkina Faso: Economics, politics, and society.
Edited by Chris Allen, C., M. S. Radu, K. Somerville, and J. Baxter. London and New York:
Pinter Publishers.
Banks, Arthur. 2007. Cross National Time Series Data Archive.
Beck, Nathaniel L. and Jonathan N. Katz. 1995. “What to Do (and Not to Do) with Time-SeriesCross-Section Data in Comparative Politics.” American Political Science Review 89(3):634–647.
Brune, N. 2004. Explaining Financial Liberalization Around the World. Ph.D. Dissertation. Yale
University.
Calvo, Guillermo, Leonardo Leiderman, and Carmen Reinhart. 1996. “Inflows of capital to
developing countries in the 1990s.” Journal of Economic Perspectives 2 (10): 123-139.
Chakrabarti, A. 2001. “The Determinants of Foreign Direct Investment: Sensitivity Analyses of
Cross-Country Regressions.” Kyklos 54 (1):89-113.
Cheibub, José Antonio, and Jennifer Gandhi. 2004. “Classifying political regimes: a six-fold
measure of democracies and dictatorships”. Prepared for the annual meeting of the American
Political Science Association, Chicago, September 2004.
Collier, Paul. 2009. Wars, Guns, and Votes. New York: HarperCollins.
Decalo, Samuel. 1990. Coups & Army Rule in Africa, Second Edition. New Haven and London:
Yale University Press.
Easterly, William. 2001. Global Development Network Growth Database, World Bank.
Available at http://go.worldbank.org/ZSQKYFU6J0
Economist Intelligence Unit (EIU). Various years. “Quarterly Economic Report” for various
countries, London: Economist Intelligence Unit.
Economist Intelligence Unit (EIU). Various years. “Country Report” for various countries,
London: Economist Intelligence Unit.
Fearon, James and David Laitin. 2003. “Ethnicity, Insurgency, and War.” Annual Political
Science Review, Vol. 97(1), pages 75-90.
Fernandez-Arias, Eduardo and Peter J. Montiel. 1996. “The Surge in Capital Inflows to
Developing Countries: An Analytical Overview,” The World Bank Economic Review, Vol. 10,
No. 1.
32
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Freeman, R. B., and R. H. Oostendorp. 2001. “The Occupational Wages around the World Data
File.” International Labour Review 140 (4):379-+.
Gwartney, James and Robert Lawson. 2008. Economic Freedom of the World 2008 Annual
Report. Vancouver, BC: Fraser Institute.
Jeanneau, Serge and Marian Micu. 2002. “Determinants of International Bank Lending to
Emerging Market Countries,” BIS Working Paper No. 112, Bank for International Settlements
Jensen, Nathan. 2006. Institutions, Information and International Capital: Political
Determinants of Foreign Direct Investment Flows. Princeton: Princeton Books.
Kenny, Charles J. and Todd J. Moss. 1998. “Stock Markets in Africa: Emerging Lions or White
Elephants?” World Development, Vol. 26, No. 5, 829-843.
Kornai, Janos. 1992. The Socialist System: The Political Economy of Communism. Princeton
University Press, Princeton, New Jersey.
Li, Q., and R. Reuveny. 2003. “Economic Globalization and Democracy: An Empirical
Analysis.” British Journal of Political Science 33:29-54.
Li, Quan, and Adam Resnick. 2003. “Reversal of Fortunes: Democratic Institutions and Foreign
Direct Investment Inflows to Developing Countries.” International Organization 57 (1):175-+.
Lucas, Robert. 1990. “Why Doesn't Capital Flow from Rich to Poor Countries?” American
Economic Review 80:2, pp. 92-96.
Markusen, J. R. 1995. “The Boundaries of Multinational-Enterprises and the Theory of
International-Trade.” Journal of Economic Perspectives 9 (2):169-189.
Nellis, John R. 1994. “Public Enterprises in Sub-Saharan Africa,” in State-Owned Enterprises in
Africa, edited by Barbara Grosh and Rwekaza Mukandala. Boulder and London: Lynne Rienner
Publishers.
Olson, Mancur. 1993. “Autocracy, Democracy, and Development,” American Political Science
Review 87 (3): 567-76.
Othman, Shehu. 1984. “Classes, Crises and Coup: The Demise of Shagari’s Regime,” African
Affairs Vol. 83(333): 441-61.
Pfeffermann, Guy P., Gregory V. Kisunko, and Mariusz A. Sumlinski. 1999. Trends in Private
Investment in Developing Countries:Statistics for 1970-97, World Bank Publications.
33
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Przeworski, Adam, Michael E. Alvarez, Jos'e Antonio Cheibub, and Fernando Limongi. 2000.
Democracy and Development: Political Institutions and Well-being in the World, 1950-1990.
New York: Cambridge University Press.
Reisen, Helmut & Soto, Marcelo, 2001. "Which Types of Capital Inflows Foster DevelopingCountry Growth?" International Finance, Blackwell Publishing, vol. 4(1), pages 1-14, Spring.
Ross, Michael L. 2001. “Does Oil Hinder Democracy?” World Politics 53 (3) 325-361.
Sachs, Jeffrey D. and Andrew Warner. 1995. “Economic Reform and the Process of Global
Integration,” Brookings Papers on Economic Activity, no. 1, pp. 1-118.
Sarno, Lucio and Mark P. Taylor. 1997. “Capital Flows to Developing Countries: Long- and
Short-Term Determinants,” World Bank Economic Review, 11 (3): 451-70.
Short, R. P. 1984. “The Role of Public Enterprises: An International Statistical Comparison.” In
Public Enterprises in Mixed Economies: Some Macroeconomic Aspects. Washington DC: IMF.
Tanzi, Vito. 1984. “Introduction” in Public Enterprises in Mixed Economies: Some
Macroeconomic Aspects. Washington DC: IMF.
Wacziarg, Romain and Karen Horn Welch. 2003. “Trade Liberalization and Growth: New
Evidence.” Available at SSRN: http://ssrn.com/abstract=471941
World Bank. 1995. Bureaucrats in Business: The Economics and Politics of Government
Ownership.
34
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Table 1
Descriptive Statistics
Variable
Obs
Mean
Std Dev.
Obs
Mean
Std. Dev.
Obs
Mean
Std. Dev.
FDI net in per capita
Portfolio inflows per capita
PNG debt net inflows per capita
PPG net inflows per capita
1390
1247
1215
1196
25.72
0.65
0.13
6.04
158.23
9.42
4.35
52.70
1176
1044
1012
1012
11.38
0.74
0.16
3.44
33.37
10.27
4.77
21.19
214
203
203
184
104.57
0.19
0.00
20.39
386.97
1.44
0.00
124.15
Capitalist Economic Policy
Democracy (ACLP)
FDI Net Inflows to Africa (M 2000 US$)
Portfolio Flows to Africa (M 2000 US$)
PNG Net Inflows to Africa (M 2000 US$)
PPG Net Inflows to Africa (M 2000 US$)
lnGDP per capita (2000 US$)
Trade (% GDP)
GDPgrowth
Net Exports
NR: Value of Mineral & Oil Production (% GNI)
NR: If heavily endowed (NR>33%)
NR: If not heavily endowed
FDI Stock per capita
Stock Market dummy
Exchange Rate SD (past 10 years)
Total Debt Service/Exports
Conflict
969
1365
1472
1472
1472
1472
1277
1294
1286
1294
1295
150
1145
1441
1472
1458
1000
1384
0.38
0.16
3610.00
19.80
-1.16
22.50
6.03
68.54
3.28
-11.10
7.22
42.92
2.54
215.26
0.10
75.59
16.79
1611.888
0.48
0.37
3870.00
53.60
16.50
31.20
0.92
37.07
7.98
19.15
16.93
27.97
5.78
595.26
0.30
283.43
13.80
4518.834
866
1102
1184
1184
1184
1184
1069
1086
1080
1086
1079
93
986
1217
1184
1170
822
1115
0.39
0.17
3610.00
19.80
-1.16
22.50
5.91
62.78
2.99
-10.23
6.53
45.04
2.89
161.14
0.12
68.21
17.62
1836.248
0.49
0.37
3870.00
53.60
16.50
31.20
0.83
32.67
7.56
18.91
14.53
20.80
6.12
349.57
0.32
224.18
13.70
4927.496
103
263
288
288
288
288
208
208
206
208
216
57
151
224
288
288
178
269
0.22
0.12
3610.00
19.80
-1.16
22.50
6.60
98.58
4.81
-15.63
10.68
39.45
0.39
509.33
0.03
105.61
12.92
681.9182
0.42
0.33
3880.00
53.70
16.50
31.20
1.09
43.68
9.78
19.80
25.53
36.76
1.61
1232.419
0.18
449.41
13.62
1836.339
35
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Table 2
Determinants of Private Investment to sub-Saharan Africa
FDI
Coeff
Lag DV
Capitalist policy dummy
Democracy (ACLP)
Cap * NR
Dem * NR
Total inflows to Africa
lnGDP per capita
Trade (% GDP)
GDP Growth
Net Exports (% GDP)
Natural Resources
Conflict
FDI Stock per capita
Stock Martket dummy
Exchange Rate SD
South Africa dummy
Debt Service/Exports
Constant
Observations
R squared
36
0.252
1.844
3.572
0.808
-0.654
0.0001
2.177
0.109
0.207
-0.102
0.189
-0.0002
0.010
-18.559
716
0.39
Std. Error
0.099
1.946
2.130
0.271
0.194
0.0003
2.474
0.055
0.260
0.093
0.177
0.0003
0.010
12.797
Portfolio Equity
Coeff
Std. Error
0.725
0.125
0.510
0.460
0.835
0.672
0.009
0.009
-0.037
0.015
-0.0001
0.0001
0.021
0.177
-0.012
0.009
-0.015
0.018
-0.013
0.010
0.009
0.011
-0.0002
0.0002
Portfolio Equity (w/current year
Africa inflows)
Coeff
Std. Error
0.712
0.125
-0.155
0.428
0.619
0.637
0.015
0.009
-0.018
0.014
0.0004
0.0001
0.224
0.174
-0.011
0.008
-0.033
0.019
-0.012
0.010
0.002
0.010
-0.0002
0.0002
1.762
0.000
9.744
1.230
0.000
8.560
1.283
-0.001
9.850
1.133
0.000
8.520
0.349
1.052
-0.859
1.041
724
0.66
724
0.66
Debt to PNG
Coeff
Std. Error
0.342
0.157
-1.212
0.485
0.335
0.670
0.008
0.010
0.010
0.018
-0.0003
0.0003
0.059
1.279
0.025
0.019
0.054
0.029
0.030
0.017
-0.050
0.020
0.0001
0.0000
-0.001
-0.923
594
0.14
0.010
6.571
Debt to PPG
Coeff
Std. Error
0.355
0.128
1.277
1.440
-0.526
1.583
-0.420
0.269
-0.126
0.231
0.0014
0.0006
3.563
1.595
-0.021
0.039
0.313
0.122
-0.031
0.047
0.385
0.134
-0.0001
0.0002
-0.015
-20.806
594
0.35
0.058
9.208
Tyson Roberts
Democracy, Development, and the International Political Economy
Chapter Two
Table 3
Predicted Investment Inflows Per Capita (2000 US$)
É to the public sector
É to the private sector
Resource
Abundant
Economies
Statist
Capitalist
Authoritarian
18.51
0.85
Democratic
12.32
(5.34)
Statist
Capitalist
Authoritarian
12.95
50.89
Democratic
(12.37)
25.57
Non-Resource
Abundant
Economies
Statist
Capitalist
Authoritarian
2.30
2.36
Democratic
1.40
1.47
Statist
Capitalist
Authoritarian
7.00
9.88
Democratic
9.61
12.49
37