Rule of law, democracy, openness, and income

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross‐national dataset into two sub‐samples: (i) colonies versus non‐colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub‐samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.     

Temporal causality and the dynamics of democracy,emigration and real income in Fiji

This study is the first to explore temporal causality between democracy, emigration and real income in Fiji within a multivariate cointegration model. We find three long run relationships between democracy, emigration and real income. In the long run there is evidence that migration and democracy Granger cause real GDP in Fiji; real GDP and democracy Granger cause migration from Fiji and that real GDP and migration Granger cause democracy in Fiji. In the short run we find unidirectional Granger causality running from migration to real GDP and from democracy to real GDP, but neutrality between democracy and migration in the short run. We also extend the analysis to examine the degree of exogeneity of the variables beyond the sample period through considering the decomposition of variance and impulse response functions.     

The democratic transition

Over the last two centuries, many countries experienced regime transitions toward democracy. We document this democratic transition over a long time horizon. We use historical time series of income, education and democracy levels from 1870 to 2000 to explore the economic factors associated with rising levels of democracy. We find that primary schooling, and to a weaker extent per capita income levels, are strong determinants of the quality of political institutions. We find little evidence of causality running the other way, from democracy to income or education.     

Does democracy facilitate economic growth or does economic growth facilitate democracy? An empirical study of Sub-Saharan Africa

This paper examines the relationship between democracy and economic growth in 30 Sub-Saharan African countries. As our proxy for democracy we first use the democracy index constructed by Freedom House and then check the sensitivity of our findings using, as an alternative proxy for democracy, the Legislative Index of Electoral Competitiveness (LIEC). We find support for the Lipset hypothesis - in the long run, real GDP Granger causes democracy and an increase in GDP results in an improvement in democracy - in Botswana and Niger with both datasets, for Chad with the Freedom House data only and for Cote d'Ivoire and Gabon with the LIEC data only. Support for the compatibility hypothesis - in the long run democracy Granger causes real income and an increase in democracy has a positive effect on real income - is found for Botswana with the Freedom House data and for Madagascar, Rwanda, South Africa and Swaziland with the LIEC data. Support for the conflict hypothesis - in the long run democracy Granger causes real income and an increase in democracy has a negative effect on real income - is found for Gabon with the Freedom House data and Sierra Leone with the LIEC data.     

Baltic Dry Index and the democratic window of opportunity

In their seminal paper, Brückner and Ciccone (2011) document that a significant effect of democratic change may be triggered by negative transitory economic shocks, and that rainfall can open a democratic window of opportunity in sub-Saharan Africa (SSA). As a complement, this paper uses within-country variation in the Baltic Dry Index (BDI) as a source of transitory negative income shocks to SSA countries. The BDI reflects the cost of utilizing dry bulk carriers, which are specially designed vessels for transporting primary goods internationally, where these goods dominate the output and export sectors of the SSA economies. We find that positive BDI cost shocks are followed by significant contraction in income through trade channel and significant improvement in democratic institutions, where BDI can open a window of opportunity for democratic improvement. Instrumental variables estimates indicate that following a negative income shock of one percentage point, democracy scores improve by around 4–5 percentage points on average.     

How Does Fiscal Consolidation Impact on Income Inequality?

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoil. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a non‐linear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.     

Trade, democracy, and the gravity equation

Does democracy affect trade? There are several channels by which democracy may affect trade, with differing implications. First, democratization in the exporting country can improve product quality and reduce trade costs, increasing bilateral trade. Second, democratization in the importing country may increase trade barriers and thus reduce imports. In this paper, I analyze the effect of democracy on trade by augmenting the gravity equation with democracy. Using a rich panel data set and controlling for the endogeneity of democracy, I find empirical evidence consistent with the hypothesis that democracy fosters trade. This finding is robust to various econometric methods and to the use of disaggregated specifications.     

Democracy,Geography and Model Uncertainty

We analyse the nature of robust determinants of differences in democracy levels across countries taking explicitly into account uncertainty in the choice of covariates and spatial spillovers. We make use of recent developments in Bayesian model averaging to assess the effect of a large number of potential factors affecting democratisation processes and account for several specifications of spatial linkages. Our results indicate that spatial spillovers are present in the data even after controlling for a large number of geographical covariates. Addressing the determinants of democracy without modelling such spillovers may lead to flawed inference about the nature of the determinants of democratisation processes. In particular, our results emphasise the role played by Muslim religion, population size, trade volumes, English language, natural resource rents, GDP per capita, being a MENA country and the incidence of armed conflicts as factors affecting democracy robustly.     

Political capitalism: The interaction between income inequality,economic freedom and democracy

We study the relationship between income inequality and economic freedom for a panel of 100 countries for the 1971–2010 period. Using a panel Granger non-causality approach, we reject the null hypothesis of Granger non-causality running from income inequality to economic freedom, but not vice versa. From a series of dynamic panel estimations we show that the effect of income inequality on economic freedom is negative and robust to the inclusion of additional controls. In particular, inequality is negatively associated with those components of economic freedom related to international trade, domestic market regulation as well as the rule of law and property rights protection. We argue that the negative effect of inequality on economic freedom is due to the economic elite converting its economic power into de facto political power to defend its economic interests; these interests run counter to economic freedom, discouraging innovation and competition as well as protecting the elite's rents. Finally, we show that economic freedom decreases with income inequality even in democratic countries, suggesting that democratic institutions do not prevent economic freedom from eroding. We argue that the latter finding corresponds to a system of political capitalism or captured democracy, where a powerful economic elite can nevertheless exercise de facto political power by cooperating with politicians and other decision-makers for their mutual benefit.     

The initiative,referendum, and distribution of income: An empirical analysis of Swiss cantons

This study examines how direct democratic institutions affect income distribution before and after taxes. Based on a panel of Swiss cantons from 1945 to 2014, we test the effects of the constitutional reforms of direct democratic instruments. Our findings show that better voter access to the initiative induces policy shifts that significantly decrease top incomes and benefit the upper middle class. For the popular referendum we do not find such effects. The income effects of direct democracy are not a consequence of shifts in fiscal redistribution, but rather result from policy changes affecting pre-tax incomes.     

Trade,income and the Baltic Dry Index

Does trade improve the income levels of the poor and less developed nations? Focusing on the Least Developed Countries (LDCs) designated by the United Nations, we construct a new measure of trade cost, based on the Baltic Dry Index (BDI), as an instrument for trade. The BDI reflects the cost of utilizing dry bulk carriers, which are specially designed vessels for transporting primary goods internationally, where these goods dominate the output and export sectors of the LDCs. We find that a 1% expansion in trade raises GDP per capita by approximately 0.5% on average. This estimate is much larger than previously found in the literature and its quantitative significance emphasizes the importance of trade towards the economic development of low income countries.     

Does Democracy Lead to a Better Environment? Deforestation and the Democratic Transition Peak

The relationship between democracy and environment is subject to controversy. Some scientists find that democracy has a positive impact in reducing environmental disruption. Other scholars claim that democracy tends to accelerate environmental degradation. By using deforestation rates as a proxy for environmental disruption, we suggest that both sides might be right. Our quantitative analysis has three important outcomes. First, there is evidence of an inverted U-shaped relationship between deforestation and democracy. Second, countries in democratic transition experience the highest deforestation rates, compared to non-democracies and mature democracies. Third, in explaining deforestation rates democracy has larger explanatory power than income. This last result implies that in reducing deforestation rates the emphasis should not only be on economic development but even more on democratization.     

An empirical investigation of the balance of embodied emission in trade: Industry structure and emission abatement

By constructing the world panel dataset for the pollution emission embedded in international trade of 132 countries for the period between 1988 and 2008, we investigate whether the balance of embodied emission in trade (BEET) is consistent with the implication of pollution haven hypothesis (PHH). By using two differently constructed datasets, we are able to distinguish between the composition (i.e., changes in industry structure of international trade) effect and the technique (i.e., improvement in emission abatement) effect. We find that the composition effect is neither related with the income level nor the democracy level of countries. However, the empirical evidence, with consideration for the technique effect, provides a partial support that income level is negatively related with the BEET. Therefore, the BEET in fact has worsened for developing countries, but not by the composition effect assumed in the PHH.     

Inclusive institutions,unequal outcomes: Democracy,state capacity,and income inequality

Although the relationship between democratic rule and income inequality has received important attention in recent literature, the evidence has been far from conclusive. In this paper, we explore whether the redistributive effect of democratic rule is conditional on state capacity. Previous literature has outlined that pre-existing state capacity may be necessary for inequality-reducing policies under democratic rule. In contrast to that intuitive view, this study argues that democratic rule and high state capacity combined produce higher levels of income inequality over time. This relationship operates through the positive effect of high-capacity democratic context on foreign direct investment and financial development. By making use of a novel measure of state capacity based on cumulative census administration, we find empirical support for these claims using fixed-effects panel regressions with the data from 126 industrial and developing countries between 1970 and 2013.     

Political institutions and economic volatility

We examine the effect of political ‘institutions’ on economic growth volatility, using data from more than 100 countries over the period 1960 to 2005, taking into account various control variables as suggested in previous studies. Our indicator of volatility is the relative standard deviation of the growth rate of GDP per capita. The results of a dynamic panel model indicate that democracy reduces economic volatility. We also find that some dimensions of political instability and policy uncertainty increase economic volatility.     

Shaken,Not Stirred: The Impact of Disasters on International Trade

This paper examines the impact of major disasters on import and export flows using a gravity model (170 countries, 1962–2004). As a conservative estimate, an additional disaster reduces imports on average by 0.2% and exports by 0.1%. Despite the apparent persistence of bilateral trade volumes, we find that the driving forces determining the impact of disastrous events are the level of democracy and the geographical size of the affected country. The less democratic and the smaller a country the greater is its loss due to a catastrophe. In autocracies, exports and imports are significantly reduced. Had Togo been struck by a major disaster in 2000, it would have lost 6.2% of its imports and 3.7% of its exports. While democratic countries' exports suffer identical decreases, imports increase.     

Political Institutions, Capital Flows, and Developing Country Growth: An Empirical Investigation

The paper examines the real per-capita growth effects of the quality of democracy, the rule of law, and capital flows in developing countries. The direct growth effects of democracy are positive and often statistically significant. Moreover, the estimates from a three-stage least-squares regression offer evidence that democracy has indirect growth effects that work by encouraging schooling and that the rule of law influences growth indirectly by encouraging foreign direct investment. A higher FDI to GDP ratio is associated with a faster growth rate. The estimated growth effect of the FDI to GDP ratio is several times higher than the estimated growth effect of the domestic investment to GDP ratio. By contrast, this study does not find a clear asso-ciation between other types of capital flows and growth.     

Democracy,regulation and competition in emerging banking systems

This paper develops a political economy framework to analyse the relations among democracy, financial regulation and banking competition in the emerging banking systems of Central and Eastern Europe. We develop extensive new yearly non-structural indices of bank competition instead of concentration indices as in the previous literature that show its evolution over time with the level of democracy. In addition, we directly test for linkages between democracy, financial regulation and banking competition. Using an unbalanced panel data set over the period 1994–2016 for 617 banks, we show that more democratic countries with better regulatory framework lead to the enhancement of competition. We also find significant support for the core hypothesis that financial regulatory framework in a “partially” democratic environment is inadequate. Given that financial regulatory framework in a “partially” democratic environment can be inadequate we find a U-shaped relation in the sense that there is a threshold level of democracy beyond which banking systems in those countries are more competitive.     

Economic Growth, Inequality, Democratization, and the Environment

We augment the Stokey (1998) model by allowingagents to differ with respect to environmentalquality and income in order to analyze theimpact of income and environmental inequality,and of democratization on aggregate pollution.We find that the impact of a more equal incomedistribution depends on the degree ofdemocracy. In a complete democracy a more equalincome distribution generates, ceterisparibus, less pollution, which is consistentwith indirect empirical evidence, whereas theopposite is the case if democratic rights arehighly restricted. Furthermore, ademocratization is argued to typically lowerboth the income and the environmental qualityof the median voter. In this case, if, inutility terms, the fall in environmentalquality is worse than the fall in consumptionthe median voter decides to tightenenvironmental legislation so that aggregatepollution decreases.     

The effect of FDI on child labor

This paper examines the effect of FDI on child labor. Using 1995 data for 145 countries, we find that, contrary to common fears, FDI is negatively correlated with child labor. This effect disappears when controlling for per capita income. After doing so, we find no robust effect of either FDI or international trade on child labor. This result is robust to corrections for the endogeneity of FDI, trade, and income. Furthermore, this result is confirmed using data from earlier years. This suggests that the impact of FDI and trade on child labor, if any, is the increases in income they generate.