Democracy and Political Instability In CrossCountry Economic Growth

Democracy and Political Instability In Cross-Country Economic Growth Analysis Mehdee Araee University of Wollongong ACE 2015

BACKGROUND Economic Growth (EG) & Determinant Variables: Economic, Social and Political Factors. Two important Political Variables (PV) in Economic Growth: Democracy and Political Instability Most econometric studies are based on crosssection regression analysis

DEMOCRACY Study Specification & Method Data & Democ Measurement Finding Barro & Lee 1993 G=f( GDP, male SEC, female 1973 -1985, 84 -94 SEC, life exp, revol …. , countries; Gastil democ); IV No Relationship Tavares and Wacziarg (2001) Growth= f (human capital, invest rate, trade share, … poli. instab. , democ); 3 SLS 1902 -1989, 65 countries; Gastil Negative Relationship Plumper and Martin (2003) Growth= f (GDP per. cap, inv/GDP, pop. , human capital, instit. openess, democ. , sq. democ); OLS 1975 -1997, 83 countries; Polity IV 1. Negative with democ. 2. Positive with sq. democ Acemoglu et al. (2014) Growth= f (democracy); OLS and GMM 1960 -2010, 175 countries; Freedom House and Polity IV Significant and robust positive effect

POLITCAL INSTABILITY Study Specification & Method Data Finding Barro 1991 G=f( GDP, … revol +coups); OLS 1960 -1985, 98 countries; Banks Negative Relationship Fosu (2001) Growth= (PI, l, k, PIk) ; OLS 1960 -1985, 31 1. Positive with PI countries; Mc. Gowan 2. Negative with PIk Cebula (2011) Growth= f(FREEDOM, POLSTAB, ECON); OLS and Fixed Effects 2003 -2007, OECD countries; World Bank (WGI, 2009) Positive Impact Aisen and Veiga (2013) 1990 -2004, 196 countries; CNTS (Banks, 2009), Polity IV, State Failure Task Force (SFTF) Negative Relationship Growth= f (economic variables, prim. schl. enroll, Regime Instability Index, Violence Index)

LITERATUR REVIEW Two major issues: 1. Conceptual (Definition & data sources) 2. Empirical( Econometrics Problems)

CONCEPTUAL ISSUES PV Concept Databases Democracy 1. Political Liberties & Popular Sovereignty (Bollen) 2. Political Rights & Civil Rights (Gastil) 3. Competition & Participation 1. Gastil (Freedom House) 2. Polity IV 3. Vanhanen Dataset Political Instability Quantitative indices: 1. Predictive-based 2. Current Based 1. World Handbook of Political and Social Indicators (Taylor/Judice) 2. Cross-National Time Series Data Archive (Banks)

CONCEPTUAL ISSUES • Dominant characteristic of democracy is freedom of choice. • Three dimensions of Democracy in terms of Freedom: 1. Political: Executive selection, Legislative selection, Freedom of organization. 2. Economical: Property rights, freedom from corruption, fiscal freedom, business freedom, labor freedom, monetary freedom, trade freedom, investment freedom, financial freedom. 3. Social: Freedom of expression and belief, press freedom, Voice and accountability.

CONCEPTUAL ISSUES Comprehensive Democracy Index (CDI) • Freedom In the World (Political, Freedom House): Index of Political Rights and Civil Rights scaling from 1 (most free) to 7 (least free). • Index of Economic Freedom (Economical, Heritage Foundation): Ranges from 80 -100 (free), 70. 0 -79. 9 (mostly free), 60. 0 -69. 9 (moderately free), 50. 0 -59. 9 (mostly unfree), and 0 -49. 9 (repressed). • Voice and Accountability (Social & Political, WGI): This index ranges from -2. 5 (weak) to 2. 5 (strong) revealing the governance performance.

CONCEPTUAL ISSUES • VA rescaled from 1 (lowest) to 6 (highest) so as to avoid the negative sign effect. • All indicators normalized between 0 and 100. • Computed for 154 countries from 2002 to 2012. • Out of 1661 observations, the lowest democracy level was 19. 17 (Iraq in 2002) and the highest level of democracy was 90. 07 (New Zealand in 2005).

CONCEPTUAL ISSUES Political Instability Index (CPI) • Three main components in political Instability: 1. coercive behaviors: assassinations, terrorism, armed attacks, civil wars, civil strife conflict, domestic violence and strikes; 1. government change: whether regular or irregular such as illegal election, revolutions, coups; 1. political protests: mass arrests, fractionalization, anti-foreign demonstration.

CONCEPTUAL ISSUES • Weighted Average of Coups d’état Event (WACE): ranges from 0 (lowest level of instability) to 1 (highest level of instability) • Major Episodes of Political Violence (MEPV): ranging from 1 (lowest) to 10 (highest) • Political Stability and Absence of Violence/Terrorism (PSAV): scales from -2. 5 (weak) to 2. 5 (strong) • State Fragility Index (SFI): ranges from 0 (no fragility) to 24 (extreme fragility)

CONCEPTUAL ISSUES • PSVA rescaled from 1 (lowest) to 6 (highest) so as to avoid the negative sign effect. • All indicators normalized between 0 and 100. • WACE and MEPV measure the size impact of political instability on economic growth. • PSAV and SFI deal with the longevity impact on growth. • CPI calculated for 154 countries from 2002 to 2012. • The calculation shows that out of 1692 observations, the most stabilized country was Finland (0. 00 in 2002) and the most destabilized nation was Iraq (77. 88 in 2004).

EMPERICAL ISSUES 1. Data Variation (due to concept variation) 1. Simultaneity (Causality Direction) • Most studies reveal the existence of causality not the causality direction • It may be affected by number of observations, selected variables and model specifications. 3. Robustness of the Econometric Results: This has been neglected in most empirical works in this area.