Political credibility and economic growth in less developed countries

While the mainstream of economic development theory focuses on the efficiency of policy measures, the role of the credibility of these measures is rarely analyzed. In this paper we argue that in less developed countries the problem of establishing the credibility of policy measures is at least as important as the problem of choosing the efficient policy solution. We claim that many of the difficulties less developed countries face can be understood in terms of lack of effective control on the discretionary power of governments, which ultimately leads to policies that are not credible. The private sector anticipates large swings in policies and reacts by withholding its resources. Symptoms of these credibility problems in less developed countries include the size of the informal sector, capital flight, and the reluctance of investors to commit capital. All of these reactions contribute to the slow economic growth in these countries. This paper concludes that establishing strategies for the control of state discretionary power is a crucial precondition for overcoming these problems and generating long term economic growth.     

Political democratization, economic liberalization, and growth volatility

This study empirically investigates the effects of political and economic liberalization on growth volatility using a difference-in-difference method for a sample of 158 countries over the 1970-2005 period. The results show that, when examined separately, economic liberalization leads to a significant reduction in volatility while democratization is not followed by a decrease in growth volatility. For countries that undertake only one liberalization, opening up the economy to international trade reduces volatility in growth; becoming a democracy, on the other hand, seems to increase macroeconomic instability. For countries that implement both political and economic liberalizations, no statistically significant effect on volatility is detected. These results serve to provide additional support for the policy recommendation that developing countries should liberalize their economy first and then consider political liberalization.     

Political versus economic institutions in the growth process

After a decade of research on the relationship between institutions and growth, there is no consensus about the exact way in which these two variables interact. In this paper we re-examine the role that institutions play in the growth process using data for developed and developing economies over the period 1975–2005. Our results indicate that the data is best described by an econometric model with two growth regimes. Political institutions are the key determinant of which regime an economy belongs to, while economic institutions have a direct impact on growth rates within each regime. These findings support the hypothesis that political institutions are one of the deep causes of growth, setting the stage in which economic institutions and standard covariates operate.     

Nonlinear economic growth: Some theory and cross-country evidence

This paper aims to test the existence of different growth regimes, that is of different relationships between growth rate and income level. We propose a simple nonlinear growth model and test its empirical implications by estimating Markov transition matrices and stochastic kernels. We show that growth is indeed nonlinear: a first phase of slow or zero growth is followed by a take-off and, finally, by a phase of deceleration. We discuss the relevance of these results with respect to the issue of convergence and reversibility of development, in the light of models of structural change and technological diffusion.     

Estimates of the steady state growth rates for some European countries

This paper estimates the steady state growth rates for the main European countries with an extended version of the Solow (1956) growth model. Total factor productivity is assumed a function of human capital, trade openness and investment ratio. We show that these factors, with some differences, have played an important role to improve the long run growth rates of Italy, Spain, France, UK, and Ireland. A few policies to improve the long-run growth rates for these countries are suggested.     

A century of economic growth in Latin America

This paper makes a contribution to the study of economic growth in developing countries by analyzing the six largest Latin American economies over 105 years within a two-equation framework. Confirming previous findings, physical and human capital prove to be key determinants of GDP per head growth. However, a more controversial result is an overall negative conditional correlation between trade openness and GDP per head growth — though openness has a positive link via investment. The evidence also shows that macroeconomic instability has been a drag on long-term growth in the region.     

Experiencing change and the evolution of adaptive skills: Implications for economic growth

We distinguish learning in a static environment from that in a dynamic environment to show the existence of an important interaction between the development of new technologies and human capital accumulation. Because technological progress creates a more dynamic environment, it complements education in the production of human capital by enhancing adaptive skills. Higher levels of adaptability and human capital in turn determine the profitability of new inventions and the incentive to invest in new R&D. Differences in the history of technological progress produce different levels of adaptability and our results suggest why countries that have comparable levels of education and per capita incomes may differ significantly in their growth performance.     

Swedish economic growth and education since 1800

Abstract.  The contribution of this paper is twofold. First, it builds and makes use of long-run data from Sweden on formal education that have never been used to date. Second, it provides a quantitative application of recent theoretical work on the link between demographic changes and economic growth through their effect on education. It concludes that changes in longevity may account for as much as 20% of the observed rise in education over the period from 1800–2000 via a horizon effect, but have little impact on income growth over the period. On the contrary, changes in population density and composition are central, mainly thanks to their effect on productivity. Most income growth over this period would not have materialized if demographic variables had stayed constant since 1800.     

Population heterogeneity and growth

I investigate the robustness of the link between growth and heterogeneity in a population along ethnic, linguistic, religious, and socio-economic class lines using cross-country data covering the period 1960–92 and 72 countries. In addition to 21 distinct explanatory variables extensively used in the empirical growth literature, I consider several fragmentation and polarization indices capturing the heterogeneity in a population to deal with measurement uncertainty, and utilize Bayesian Model Averaging techniques to address uncertainty issues regarding model specification. My results indicate that while substantial data evidence favors the inclusion of population heterogeneity as a theory when proxied by fragmentation indices, it does not support the inclusion of this theory when proxied by polarization indices. Furthermore, the religious fragmentation index has the strongest evidence in favor of its inclusion as opposed to ethnic and linguistic fragmentation indices and income inequality.     

Entry and growth in a perfectly competitive vintage model

A perfectly competitive vintage-knowledge model of Schumpeterian growth is introduced to study the relation between growth, technology-lifetime, entry, and productivity-dispersion. The incentive to innovate is generated by the productivity-dispersion (latent in traditional vintage models) between new and old plants, rather than by monopoly rents. The model has a unique steady-state REE with endogenous growth. The endogenous extent of entry constitutes a buffer, dampening the effect of research-efficiency and completely neutralizing the effect of population size or population growth rates on per-capita income levels and growth rates. Variations of research-efficiency lead to a negative relation between growth and vintage-lifetime and a non-monotonic relation between growth and productivity-dispersion.     

Political instability: Effects on financial development, roots in the severity of economic inequality

We here bring forward strong evidence that political instability impedes financial development, with its variation a primary determinant of differences in financial development around the world. As such, it needs to be added to the short list of major determinants of financial development. First, structural conditions first postulated by Engerman and Sokoloff (2002) as generating long-term inequality are shown here to have strong empirical support as exogenous determinants of political instability. Second, that exogenously-determined political instability in turn holds back financial development, even when we control for factors prominent in the last decade’s cross-country studies of financial development. The findings indicate that inequality-perpetuating conditions that result in political instability and weak democracy are fundamental roadblocks for international organizations like the World Bank that seek to promote financial development. The evidence here includes country fixed effect regressions and an instrumental model inspired by Engerman and Sokoloff’s (2002) work, which to our knowledge has not yet been used in finance and which is consistent with current tests as valid instruments. Four conventional measures of national political instability – Alesina and Perotti’s (1996) well-known index of instability, a subsequent index derived from Banks’ (2005) work, and two indices of managerial perceptions of nation-by-nation political instability – persistently predict a wide range of national financial development outcomes. Political instability’s significance is time consistent in cross-sectional regressions back to the 1960s, the period when the key data becomes available, robust in both country fixed effects and instrumental variable regressions, and consistent across multiple measures of instability and of financial development. Overall, the results indicate the existence of an important channel running from structural inequality to political instability, principally in nondemocratic settings, and then to financial backwardness. The robust significance of that channel extends existing work demonstrating the importance of political economy explanations for financial development and financial backwardness. It should help to better understand which policies will work for financial development, because political instability has causes, cures, and effects quite distinct from those of many of the key institutions most studied in the past decade as explaining financial backwardness.     

Growth miracles and failures in a Markov switching classification model of growth

In this paper economic growth is interpreted as a sequence of transitions between distinct growth regimes that countries visit with different frequencies. Countries featuring similar growth dynamics are endogenously grouped into three different clusters. The first cluster comprises successful countries that are characterized by lengthy periods of high or very high growth. Moderately successful countries in the second cluster experience both periods of reasonable growth and periods of stagnation, whereas failing countries in the third cluster suffer from highly volatile growth rates with frequent episodes of crisis. Successful countries are characterized by better initial conditions, policies and institutions compared to the other countries. Neither initial conditions nor institutions distinguish moderately successful from failing countries; what makes them different is policy in the form of investments into infrastructure and human capital, trade liberalization and limited policy volatility.     

Estimates of the steady state growth rates for selected Asian countries with an extended Solow model

This paper develops an extended version of the Solow (1956) growth model in which total factor productivity is assumed a function of two important externalities viz., learning by doing and openness to trade. Using this framework we show that these externalities have played an important role to improve the long run growth rates of six Asian countries viz., Singapore, Malaysia, Thailand, Hong Kong, Korea and the Philippines. A few broad policies to improve the long run growth rates of these countries are suggested.     

Unbundling democracy: Political rights and civil liberties

Much recent political economy and political science literature views democracy in terms of political rights. This view, often referred to as electoral democracy, is particularly pronounced in the empirical literature. We reincorporate the role of civil liberties, which are at the core of modern democracy, in two ways. We identify four fundamental sources of potential differences in the evolution of political rights and civil liberties. We present systematic, robust and varied empirical evidence on the direct impact of two of these potential sources of differences using cross-national panel data and accounting for the modernization hypothesis. We obtain two noteworthy empirical results: civil liberties exhibit greater persistence than political rights in affecting subsequent outcomes; and, our main result, civil liberties are complementary to political rights when affecting subsequent outcomes, while the reverse is not the case. Consequently, one must incorporate civil liberties as a determinant of electoral democracy. More generally, both dimensions must be considered to understand the setbacks recently experienced by many democracies, despite their holding of free and fair elections.     

Political instability and economic growth

This paper investigates the relationship between political instability and per capita GDP growth in a sample of 113 countries for the period 1950 through 1982. We define political instability as the propensity of a government collapse, and we estimate a model in which such a measure of political instability and economic growth are jointly determined. The main result of this paper is that in countries and time periods with a high propensity of government collapse, growth is significantly lower than otherwise. We also discuss the effects of different types of government changes on growth.     

Political persistence and economic growth

Using data for a panel of 62 partly to fully democratic countries in the period 1984–2008, we provide evidence that political persistence (measured as the longest tenure in office of main political entities) is negatively associated with growth, after controlling for country and time fixed effects, and that this association is stronger in countries with low bureaucratic quality, where the cost of red tape is high. This evidence can be rationalized by means of a growth model with quality improvements where political connections with politicians can be exploited by low-quality producers to mitigate red tape costs, defend their monopoly position and prevent entry of higher-quality competitors. The model implies a negative relationship between persistence in office of politicians and economic growth in high red-tape countries, while no association is expected where red tape costs are low.     

Human capital and economic development

This paper develops a general equilibrium model of fertility and human capital investment with young adult mortality. Because young adult mortality is negatively related to average young adult human capital, human capital accumulation lowers mortality, inducing demographic transition and industrial revolution. Data confirm that young adult mortality is related negatively to schooling, and the rate of return to schooling, and positively to fertility. The data indicate a negative relationship between TFP growth and schooling accumulation. The model fits the data on country populations, per capita incomes, human capital, total fertility rates, infant mortality, life expectancy and conditional life expectancy.     

Effective property rights, conflict and growth

This paper shows how the interaction between conflict and growth can give rise to a nonmonotone relationship between property rights and social welfare. This interaction is illustrated in a model of endogenous growth in which equilibrium diversion of resources is the cost of securing effective property rights. A symmetric equilibrium allocation associated with more secure property rights and faster growth can be Pareto dominated by one associated with poorer property rights and slower growth. Faster growth can exacerbate the problem of diversion whenever property rights are sufficiently poor. These results call for caution before a society decides to pursue economic growth independently of the institutional structure of property rights. Furthermore, if this structure is inappropriate piecemeal reform might not be in the interest of society, and a substantial reform might be necessary if it is to be welfare-improving.     

Human capital, economic growth, and regional inequality in China

We show how regional growth patterns in China depend on regional differences in physical, human, and infrastructure capital as well as on differences in foreign direct investment (FDI) flows. We also evaluate the impact of market reforms, especially the reforms that followed Deng Xiaoping's “South Trip” in 1992 those that resulted from serious hardening of budget constraints of state enterprises around 1997. We find that FDI had a much larger effect on TFP growth before 1994 than after, and we attribute this to the encouragement of and increasing success of private and quasi-private enterprises. We find that human capital positively affects output and productivity growth in our cross-provincial study. Moreover, we find both direct and indirect effects of human capital on TFP growth. These impacts of education are more consistent than those found in cross-national studies. The direct effect is hypothesized to come from domestic innovation activities, while the indirect impact is a spillover effect of human capital on TFP growth. We conduct cost-benefit analysis of hypothetical investments in human capital and infrastructure. We find that, while investment in infrastructure generates higher returns in the developed, eastern regions than in the interior, investing in human capital generates slightly higher or comparable returns in the interior regions. We conclude that human capital investment in less-developed areas is justified on efficiency grounds and because it contributes to a reduction in regional inequality.