New Evidence on the Relationship between Democracy and Economic Growth Author(s): Jakob de Haan and Clemens L. J.

Siermann Source: Public Choice, Vol. 86, No. 1/2 (Jan., 1996), pp. 175-198 Published by: Springer Stable URL: http://www.jstor.org/stable/30027075 . Accessed: 01/06/2011 05:51
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Public Choice 86: 175-198, 1995. 1995 KluwerAcademicPublishers. Printed in TheNetherlands.

New evidence on the relationship between democracy and economic growth

JAKOBDE HAAN & CLEMENSL.J. SIERMANN
Departmentof Economics, Universityof Groningen,P.O. Box 800, 9700 AV Groningen Accepted 24 July 1995 Abstract. It is often maintainedthatdemocracyis a luxurywhich comes at a price in termsof However,variousrecentcross-section subsequentslowerincreasesin nationalliving standards. studies on economic growth have found evidence that lack of civil and political liberties is negatively correlatedwith economic growth. Using a new measureof democracy,which is based upon the numberof years thata countrycan be regardedas a democracy,the robustness of this relationshipis examined.Both directandindirecteffects of lack of democraticliberties are analysed.Our main conclusion is that the relationshipbetween democracyand economic growthis not rubust.

1. Introduction What connection, if any, is therebetween economic developmentand political and civil liberties?Althougheconomists have long been interestedin the factors that cause national economies to grow at differentrates and achieve variouslevels of wealth, thereis as yet no consensus on the impactof democraticfreedomon economic growth.Onepossibilityis thatfreepressandopen public debate might expose actions by the governmentor the private sector that might otherwise hold developmentback. However, it can also be said that political and civil freedommake it harderfor governmentto take tough but necessary decisions (WorldBank, 1991). The latter view is sometimes advanced to explain the economic success of countries like South Korea.1 on betweendemocraticfreedom Indeed,in the olderliterature the relationship and economic growth it is often maintainedthat the price of democracyis a slower improvementof living standards.However, recently various authors have arguedthat absence of libertiesis negatively correlatedwith economic growth. In his review of empirical growth studies, Leving (1991: 26) concludes that "politicalfreedoms appearto be somewhatpositively relatedto growth. These findings would be consistent with the theoreticalview that increaseduncertaintyaffects the accumulationof capitaland growth."
* We would like to thankthe refereefor his comments.The usual disclaimerapplies.

176 Recent years have seen a flood of studies examiningwhetherdemocratic institutionsfosteror hampereconomic growth.In theirreview of these studies De Haan and Siermann(1995b) point out various weaknesses.2In the first place, most authorsdo not carefully check the robustnessof their findings, both with respect to the measure of democracyused and the specification of the model. With respect to this last issue, the basic problemhere is that economic theory generally does not generatea complete specificationas to which variablesare to be held constantwhen statisticaltests areperformedon variable the relationshipbetween the dependentvariableandthe independent of interest (in our case: democracy). For example, to test the relationship between democracy and growth, Barro (1989) has included nine economic explanatoryvariablesnext to his indicatorof the level of democracy,whereas Scully (1988) only has included one. Still, Barro(1989) left out many variables which may also explain cross-countrygrowthdifferentialsand which are includedby otherauthors.The extremeboundanalysisof Learner (1983) and Levine and Renelt (1992) may shed some light on this issue. A second problemis thatmost previousstudieshave used Gastil'sranking The survey's regular of countries with respect to their democraticcharacter. useful and consistent time series.3 Gastil has created publication provides two measures of liberty: political liberty and civil liberty. Political (civil) rights are rankedfrom 1 (the highest degree of liberty)to 7 (the lowest). The political rights rankings are based on the degree to which individuals in a state have control over those who govern. The civil rights rankingspurport to measure the rights of the individual(e.g., independenceof the judiciary, freedom of freedom of the press, freedom of assembly and demonstration, Thereare, free tradeunions,free religiousinstitutions). political organization, however,two basic problemswith this measure.First,it is only availablefrom 1973 onwards,while the growthperiodunderconsideration usually startsin the 1960s. Given a likely positive relationshipbetween income levels and democracy,using a measureof democracyfrom the middle or the end of the sample period runs the risk that a possible effect of democracyon growthis masked by the reverse effect of income level on democracy.Second, most of character a nation studiesusing Gastil'sindexes neglect thatthe democratic may change over time. Focusing on period averages of the Gastil rankings, of as most authorsdo, may yield biased estimates.For the characterization a has a constantranking regime it makes quite a differencewhethera country over a number of years, say a rankingof 4, or whether its position varies greatlyending up with the same averageof 4. in In this paperwe extendpreviousresearch variousdirections.First,we use an alternativemeasure of democracy,which is available for a much longer period than the Gastil rankings. This measure is based upon the number

177 of years that a country can be regardedas a democracy.Second, we take regime changes into account.Finally,we applythe extremeboundanalysis of Leamer(1983) and Levine and Renelt (1992) to check the sensitivity of our findings. The paper is organizedas follows. In Section 2 we first review the theoreticalperspectives,followed by a brief discussionof previousempirical research. Section 4 presents our alternativemeasure of democracy, while Section 5 containsourestimationresults.Finally,Section 6 presentsourmain conclusions.

2. Theoretical perspectives Severalviews on the relationship betweendemocraticfreedomandeconomic developmenthave been advanced.Following Sirowy and Inkeles (1990) we label the various theoreticalpositions as the "conflict,"the "comparability" and the "skeptical" perspective,respectively. Essential to the conflictperspective is the claim that economic growth is hinderedby the democraticorganization the polity.In otherwords,democof and economic growth are seen as competing concerns. As Bhagwati racy (1966: 203-204) puts it: "thepoliticaleconomy of developmentposes a cruel choice between rapid(self-sustained)expansionanddemocraticprocess."In this view, rapideconomic growth requiresan authoritarian regime that suppresses basic civil andpolitical rights.Argumentsthathave been put forward in supportof this view include the following: - Huntington(1968) argues that the political institutionsof developing countries are weak and fragile. Add to that the enormouspressureon government created by a democratic system and existing sources of instability are magnified. Due to the greater availability of channels throughwhich pressuregroupscan express their demandsand because politicians must cater to these demandsto remainin power,democratic Demands regimes, so the argument goes, quicklybecome overburdened. for redistributivepolicies may be resolved by increasing the size of the government,in particular, level of income transfersratherthan the productiveexpenditures(Alesina andPerotti,1994). Furthermore, many societies are besieged by internalconflict stemming from developing heterogeneity of region, religion, ethnicity,and class which will burst into the open in democracies. Authoritarian regimes are better able to dissentandconflict.Authoritarianism often has been suppressdisruptive seen as a useful, if regrettableexpedient for effective policymakingin the face of political instability(WorldBank, 1991). - Only authoritarian regimes are able to implementthe kinds of policies that are necessary for rapideconomic growth,notablythe accumulation

178 of capital.No democraticgovernmentcan toleratethe degreeof restraint in consumptionandrealwage increasesnecessaryto maximizeeconomic growth. Huntington(1968) argues, for instance, that democracyleads to an increased demand for currentconsumptionthat in turn reduces investmentand retardseconomic growth.Democracyis thus inimicalto economic development.As is stated in the WorldDevelopmentReport 1991 of the WorldBank: "A stronglyheld view fromthe 1950s through the 1970s was that development policies took time to bear fruit, and thatthis was inconsistentwith the politics of short-term electoralcycles were regimes (led by philosopher-despots) ... Benevolent authoritarian reformsand tame an needed, it was argued,to push throughunpopular unrulyor otherwiseineffectiveadministration" 132-133). Although (pp. morepopularin the past,this view still has its adherents. 1992, In perhaps for instance,the leaderof SingaporeLee KuanYew arguedthat"Ibelieve what a countryneeds to develop is disciplinemorethandemocracy.The exuberanceof democracy leads to indiscipline and disorderlyconduct which are inimical to development"(The Economist,27 August 1994: 15). - The demandfor comprehensivestateactionin orderto promotedevelopmenthas increaseddramatically over time, becausethe odds areincreasingly being stacked against a successful promotion of development. Indeed, there has been no case of successful economic development during this century without comprehensivepolitical action, involving massive state interventionin the economy. Such concerted action is, so the argumentgoes, difficult,if not impossible, to be achieved under democraticconditions (Sorensen, 1993).

The first argumentis not really directed against democraticfreedom, but is merely a plea for political stability. Indeed, there are good reasons for believing that political instability may hampereconomic growth (see, for instance,Alesina and Perotti, 1994). Only if it can be shown thatdemocratic countriesare politically more unstable,the argument makes sense. The otherargumentsagainstdemocracyare also not necessarilyconclusive (Alesina et al., 1992). First of all, dictatorsmay also be forced to follow As opportunistic policies if their survivalin office is threatened. pointedout by Przeworski and Limongi (1993), it is not clear why dictatorswould be more future-oriented thandemocraticgovernments. Second, notably with respect to the third argument,it can be countered that an oppressive state is not necessarily a strong state. So if it is true that the demand for government involvement has increased over time, a view

179 to which probablynot all economists would subscribe,this does not imply authoritarianism. Third, authoritarian regimes are not homogeneous. While the apparent associationof high economic growthwith authoritarian regimes is suggested "technocratic" by the experienceof several non-democratic regimes (such as those in South KoreaandTaiwan),it is at the same time evidentthatthereare and/orinept authoritarian many counterexamples of "kleptocratic" regimes whose ruleshas led to low economic growthrates.Authoritarianism mean can rule arbitrary and undue interference,which may hindereconomic growth. Some proponents of the compatibilityview do not stop at simply taking issue with insights of adherents the conflictperspective,but to the contrary to that democracy is just as efficient as competitive markets.The most argue forceful argumentshave been provided by Wittmann(1989). This author contests the view put forwardby Becker (1983) that in a democracyinterest groups compete for rents, each maximizing the net difference between benefits from policy measurestaken and the costs of lobbying, which leads to an inefficient equilibriumboth because lobbying is wasteful and because transfersof income thatresultform grouppressurescause deadweightlosses. to Accordingto Wittman(1989) democraticpolitical marketsare structured reduce the divergencebetween privateand social costs. Furthermore, the to extentthatrentseeking exists, rentswill be shiftedefficientlyandthe seeking of these rentswill involve minimal social costs. Some adherents the compatabilityview arguethata democraticgovernto ment is best suited to foster sustainedand equitableeconomic development. In their view, democraticprocesses and the existence of civil liberties and political rightsgeneratethe conditionsmost conduciveto economic development. Democratic institutionsprovide a check on governmentalpower and therebylimit the potentialof public officials to amasspersonalwealth and to carryout unpopularpolicies. Economic pluralismis essential for economic growth and political pluralismis critical to the survivaland viability of economic pluralism.Although (some) proponentsof the compatibilityview feel thatauthoritarian may, on some occasions, generatea more rapidrateof rule economic growthin the shortrun,democraticrule is seen as more conducive to sustainedand equitablegrowthin the long run(Sirowy andInkeles, 1990). Indeed, in a leading article The Economist even claimed that "Democracy works best" (27 August 1994: 9). Various argumentshave been put forwardin supportof this view. First, democratic government may be more effective in reformingthe economy than authoritarian ones. The evidence for this point of view is, however, mixed. In a recentsurveyby Williamson(1994) thirteencases of bold reform

180 are analyzed. In four cases the governmentwould be classified as authoritarianwhen reformsbegan, while six were unambiguouslydemocratic.The basic conclusion from this study is that there is no supportfor the view that democraticgovernmentsare worse than non-democraticones at carrying out reform. This is, of course, not the same as arguingthat democratic governmentsare better.The WorldBank (1991: 133-134) carefully puts is as follows: "Democraticgovernmentshave a better recordthan authoritarian governments in countries that are not politically polarized;the reverse seems to be true in polarizedsocieties. On the whole, the evidence suggests distinctionitself fails to explain adequately thatthe democratic-authoritarian whetheror not countriesinitiate reform,implementit effectively, or survive its political fallout." Second, democracies may do a betterjob with respect to the security of property(protectionfrom theft) which has been known to be the foundation hereis thatdictatorscannotpromise for materialprogress.The basic argument credibly that currentpolicies to secure rights will last. According to Olson (1993) security of propertyis more firmly anchoredunderdemocracy than underautocraticrule. In his view regardfor individualrightsis necessaryfor democracyto last andthatregardfor exactly the same rightsis also needed to secure propertyand enforce contracts.As Olson (1993: 572) puts it: "Obviously, a democracy is not viable if individuals,including the leading rivals of the administration power,lack the rightsto free speech and the security in for their propertyand contracts or if the rule of law is not followed even to when it calls for currentadministration leave office. Thus the same court and respectfor law and individualrights that system, independent judiciary, are needed for a lasting democracyare also requiredfor securityof property
and contract rights .... In an autocracy, the autocrat will often have a short time

horizon,and the absence of any independent powerto assurean orderlylegal aboutwhat will means thatthereis always substantial succession uncertainty happenwhen the currentautocratis gone."However,one may doubtwhether this reasoningis adequate.PrzeworskiandLimongi (1993: 53-54) arguethat "democracyoffers those who arepoor,oppressedor otherwisemiserableas a to consequence of the initial endowmentsan opportunity find redressvia the state. Endowed with political power in the form of universalsuffrage,those will attempt use this power to who sufferas a consequenceof privateproperty
to expropriate the riches .... The widespread usage of democracy as a 'proxy' for guarantees of property rights ... is thus unjustifiable."

Finally,variousauthorsclaim to have founda positive associationbetween economic freedom and rates of growth (see, e.g., De Vanssayand Spindler, 1994; andBarro, 1994). If this associationis robust- which is not clear yet and if economic freedomandcivil/politicalfreedomarepositively correlated

181 democracywill also be positively correlatedwith economic growth. This is the view put forwardby The Economist:"Believersin the 'Asian Way' argue thatdemocracyundermines economic development.They arewrong.Democentrencheseconomic freedoms,and in doing so underpinsgrowth"(The racy Economist,27 August 1994: 15). Finally, authors who subscribe to, what may be called the skeptical view, doubt whether any systematic relationshipexists between democracy and economic development.In otherwords,politics alone mattervery little. More importantare, perhaps,the kind of policies pursuedand other institutional like arrangements the natureof the political party-system(two-partyversus multi-party)and political stability. 3. Previous empirical studies Table 1 summarizesrecent studies. For a review of older studies we referto Sirowy and Inkeles (1990).4 It follows from Table 1 that various criticisms can be raised against previous studies. First, most authors do not check whetherconclusions are sensitive with respectto theirdefinitionsof (lack of) democracy.As follows from Table 1 - and discussed in more detail in De Haan and Siermann(1995b) - the authorswho have used Gastil's ranking as the basis for their index for democracy use a wide array of different measures, without some sensitivity analysis. Most studies do not take into accountthatthe Gastil rankingis only availablefrom 1973 onwards,whereas the estimation period generally starts in 1960. A furtherissue is that most studies neglect that the democraticcharacterof a nation may change over time. In their study covering twenty countriesin Latin America, Sloan and Tedin (1987) distinguish between five groups of regimes. They found that between 1960 and 1980 ten countries changed regime and ten remained stable. Also, from the Gastil rankingsbetween 1973 and 1991 it follows that the position of many countries is not stable. This implies that focusing on period averages of the Gastil rankings,as most authorsdo, may yield biased estimates, since basically the same problemremainsas with point estimates. For the characterization a regime it makes quite a difference whether a of countryhas a constantrankingover a numberof years, say a rankingof 4, or whetherits position varies greatly ending up with the same averageranking of 4. An importantproblemis also that most authorsdo not carefullycheck the robustnessof their findings with respect to the specificationof the model.5 Finally,the channelsthroughwhich democracymay affect economic growth may be included as explanatoryvariables in the regression, in which case

182 the coefficient of the democracymeasuredoes not representthe total effect of democracy on economic growth. Some authors present evidence that theirdemocracymeasureindirectlyaffects economic growth.Kormendiand Meguire (1985) conclude, for instance, that their measureof civil liberty is very importantin explaining the investment-incomeratio.Many authorsdo not take these indirecteffects into account.

4. Democracy measure Insteadof using Gastil's rankingswe have constructedalternativemeasures on the basis of Gasiorowski's(1993) dataseton politicalregimechange.This countrieson an annualbasis. Fourcategoriesare distindatasetcharacterizes or regimes. guished: democratic,semi-democratic,authoritarian transitional A countryis classified as a democracyif thereis a regime in which (i) meaningful and extensive competition exists among individuals and organized groups for all effective positions of governmentpower, at regularintervals and excluding the use of force; (ii) no major(adult)social groupis excluded from this competitionand (iii) a sufficientlevel of civil andpolitical liberties exists to ensure the integrity of political competition and participation.A countryis called a semi-democracyif it has a regime in which a substantial degree of political competitionand freedom exists, but where the effective power of elected officials is so limited, or political partycompetitionis so restricted;or the freedom and fairnessof elections are so compromisedthat electoral outcomes deviate significantly from popular preferences;and/or civil and political libertiesare so limited that some political orientationsand interestare unable to organizeand express themselves. A countryis labeled if authoritarian there is little or no meaningfulpolitical competitionor freedom. Finally, Gasiorowski(1993) defines a transitional regime as: A period in which deliberateand ultimately successful effects are being made by, or with the clear acquiescenceof, top governmentofficialsto engineera change from one of the above regime types to another. Based on these definitions, historical sources were used by Gasiorowski to classify 97 non-OECD countries for their entire post-independenceor period. For the OECD countrieswe have followed the same modemrn-state procedureas Gasiorowski(1993) using the informationof McColm (1992). On the basis of this datasetwe have constructedfor all 110 countriesin our sample four variables, showing the relative numberof years that a country falls in one category since 1961 (or since independence).So Argentinahas a as score of 0.31 for the variable"democratic," the countryis categorizedas the period 1961-1992.6 As Argentinais a democracy during 10 years over consideredauthoritarian during13 years in the same period,the score for the

183

not many separated as included; not not analysis analysis; sensitivity notanalysis; multi-collinearity sensitivity control model on no indirect no indirect are effects effects poor enough separated sensitivity check sensitivity sensitivity analysis; No analysis; separated variables specification No problems; Notincluded; separated No indirect Very no indirect not effects variables effects

account observation; into analysis year analysis; taken one on of not on sensitivity sensitivity Critique Based change No measure no democracy

analysis

sensitivity No and

analysis; analysis; taken taken variable; not not account account sensitivity sensitivity Cardinal into No change no change into

rights civil Gastil's if 1 is otherwise democracy zero growthl and been has

authoritarian period including the over

2; <

5; <

2; <

5; >

bureaucratic which country independence if otherwise 1 0 distinguished, is since 2; variable are regimes or or democracy authoritarian, 1 of which is aemocracy 1950s or economic on Measure Impact mle on stuaies Dichotomous since rankingVariable categories 5 traditional transitional

rankings Gastil's of

ranking ranking ranking ranking rights rights rights rights pol. civil civil if Gastil) if 1 1 pol. if 1 = if 1 (source: =

otherwise otherwise otherwise otherwise 1973-1979 POLOPEN INDIVRIGHTS Sum 0 POLCLOSED 0 0 0 STATERIGHTS

on effect

on has of effect rate

andregimes highest regimes rate best

effect

effect recent Conclusion Positive Democracy Bureaucratic-autho- No investmentnegative growth GDP ritarian democratic achieved second growth or tevlew

Positive

1.
laoteStudy

Meguire Kormendi Landau and(1985) (1986) 1. 2.

and(1987) Sloan Tedin 3.

(1988) Marsh 4.

(1988) Scully 5.

184

included; many not andnotanalysis; analysis; not analysis effects effect income variables sensitivity sensitivity sensitive specification no indirectNo indirectNo separated separated Initial other

correlationcorrelation partial partial

Only Only coefficientscoefficients

no

change

on of

analysis; analysis; taken taken taken taken analysis; democratic into not variable variable; variable; variable; of not not not account account accounttaken sensitivityaccount; sensitivity

sensitivity not account Critique No changeinto democracy character No change Cardinal into Cardinal Cardinal cardinal into change change into measure is on ranking depending rights 1 to 5 human of from rights civil if 1 is which for rights ranking rights civil and rights civil and

political Gastil's of

political Gastil's of

political Gastil's of

varies violations democracy that of of violations) variable no 7 is variable or (5 6 Dummy Measure A frequency

1973-1985 Ranking Ranking Average

democracy association growth and Conclusion Positive between

effect

effect

effect effect No

Positive

Positive

Positive

Continued. 1. TableStudy (1988) Pourgerami 6.

(1989) (1989) and Grier TullockBarro 8. 7.

Bank (1991) World (1990) Dasgupta 10. 9.

185

outcomes of

not analysis; effects

analysis

not analysis; effects

not analysis; effects

reporting No specification

sensitivity robustness No indirect separated No

sensitivity sensitivity separated No indirect No indirect separated

no analysis; taken taken analysis; variable; not not account account sensitivity

no

no

no

on of

taken taken analysis; analyis; analysis variable; variable; variable; not not account account Cardinal into Cardinal into Cardinal sensitivity change sensitivity sensitivity change

Critique Cardinal into No change measure sensitivity democracy change into

limits; with political World) elected;and the notof (free) elections civil 1 of are to 0 form elections; Handbook leaders Gastil's from of freesome which is with in Political running with but rankings rights civil and rights civil and

liberties civil democracy of Gastil's of Measure Index

political

political Gastil's of

Gastil's of which Bank's transformation countries countries countries rankings for for for 1 2 Variable 3 (source: Linear rights Ranking on on and effect

1975-1986 Average

resultsa effect No

effect Conclusion No

effect No al. et Alesina (1992) 12. (1992) Helliwell 13. Positive investmentMixed schooling

Continued. 1. TableStudy

and (1992) Levine Renelt 11.

and (1993) Barro Lee 14.

(1993) Weede 15.

186

not analysis; effects sensitivity specification separated No indirect

Economics

Development on

on of

variable Conference

Critique Cardinal measure democracy

Annual Bank

fewest converted is to which

World the of

corresponds 0 rights, democracy Proceedings of) where the political 1, (lack in to included. of 0 1994 democracy Gastil's in longer of of from indices rights no scale is a Measure Ranking Various published to political was rankings which relation- relation- rights civil paper robust and this Conclusion Non-linearNo ship of ship political version (1995a) with the and in Haan that De Siermann regression Note 17. a the

Continued. 1. Table Study

(1994) Barro 16.

187 variable "authoritarian" 0.41. Similar procedureshave been followed for is the variables"semi-democratic" "transitional." and Finally,we have madea dichotomousvariableto distinguishbetweencountries that have been in the same category over the entire sample period (in which case the variable"stable" one) andthose thathave changedcategory is (in that case the variable"stable"is zero). The dataappendixprovidesfurther detailsfor all countriesin oursample. 5. Sensitivity analysis 5.1. Approach Most previous studies on the relationship between democracyand economic do not analysethe robustnessof theirfindings.Researchby Levine and growth Renelt (1992) has shed some light on the robustnessof conclusions reached in cross-section growthregressions.The basic problemhere is thateconomic theory generally does not generate a complete specificationas to which variablesare to be held constantwhen statisticaltests are performedon the relationshipbetween the dependentvariableand the independentvariableof interest.Leamer(1983) and Levine andRenelt (1992) suggest the following solution. First, select a numberof explanatoryvariables,which in the past have shown to be robust in explaining cross-countrygrowth differentials. This group of variablesis includedin the M vector.Second, add the variable of interest (P), in our case a measure of democracy,and estimate its coefficient in a regression in which M and P are used as explanatoryvariables. This is followed by regressions of the basic model augmentedwith linear combinationsof up to threeothereconomic variables,which accordingto the literaturemay have explanatoryvalue (the Z vector). According to Levine and Renelt (1992) the relationshipbetween, in this case, growthand democracy is robust,if independentof the choice of Z-variablesthe coefficientof P remainsstatisticallysignificantand of the theoretically predictedsign. Studying a largenumberof variablesthathave been the focus of attentionin a broad collection of growthstudies, these authorsconcludethatalmost all identified relationshipsare very sensitive to slight alterationsin the conditioningset of variables. Following this extreme bound analysis of Levine and Renelt (1992) and Leamer (1983) we analyse in this section the robustnessof the relationship between democracy and economic growth. For the period 1961-92 data is available for a group of 110 countries.For this sample of countriesgrowth equationsof the following generalform have been estimated: AYi= aMi +/3Pi + yZi + ui (1)

188 where the subscript refers to country i; AYi is the average growth of per capita GDP of country i; Mi is a vector of standard economic explanatory variables, which according to previous empirical studies have shown to be robustly linked with economic growth; Pi is an indicator of the level of (lack of) democracy in country i; Z is a vector of up to three possible additional economic explanatory variables, which according to the literature may be related to economic growth; and ui is an error term. 5.2. Data The data on the average growth rate of GDP per capita are taken from the Summers and Heston data file (version 5.6) as described in Summers and Heston (1991). The basic set of economic variables in the M vector consists of: initial income in US-dollars; average investment share to GDP - both from the Summers and Heston data file - and secondary-school enrollment in 1960, which is taken from the social indicators in the World Tables 1976 of the World Bank. These three variables were chosen on the basis of the findings of Levine and Renelt (1992). The additional economic variables in the Z vector are: average population growth (POP); the average ratio of real government consumption to GDP (GOV), both from the Summers and Heston data file; the average inflation rate (INF) and the average ratio of export to GDP (EXP). The latter variables are from the IMF's International Financial Statistics CD-rom 1994. Population growth is added to the regression as it has been suggested that this factor may enhance growth (see Baumol, Batey Blackman and Wolff, 1989). The ratio of government consumption to GDP is taken up because Barro (1991), among others, included this variable in his growth equations. Barro (1991) finds that government consumption has a significant negative effect. The inflation rate is added because Fischer (1993) finds it to be robustly correlated with growth. The share of export to GDP is taken up since some economists have claimed that open economics grow faster, because of higher efficiency gains (see e.g., Feder, 1982; and Romer, 1989). 5.3. Direct effects of democracy on economic growth Equation 2 presents the estimation results for the basic model for the period 1961-1992. The standard errors in the regression are based on White's (1980) heteroscedasticity-consistent covariance matrix. The dependent variable AY6192 is the average growth rate of GDP per capita over the period 1961-1992. In line with most previous research, the coefficients of initial income (Ycap60) and investment share (Inv6192)are significant. Note, however, that the coefficient of the secondary school enrollment rate (Sec60) is

189 not significantlydifferentfrom zero.

=~ AY6192 0.17- 0.0037Ycap60+ 0.16Inv6192+ 0.014Sec60 adj. R2 = 0.35 (0.65) (-4.64) (5.37) (1.10)

(2) Note: t-values are shown in parentheses. Table 2 shows the results of the sensitivity analysis, using the four variables outlined in th previous section. For each indicatorthe outcomes using the three 'basic' variables and adding the regime measure are given in the row labelled "base."As therearefourpoliticalindicatorsemployed,thereare four base regressions. In the rows labelled "high"and "low" the maximum spread of the coefficients of the regime indicatorsis shown if some vector Z is added as a set of additionalexplanatoryvariable(s).As explained in the previoussection, this vector is constructed using a combinationof up to three of the following variables: average populationgrowth (POP); the average ratio of real governmentconsumptionto GDP (GOV); the averageinflation rate (INF) and the averageratio of exportto GDP (EXP). It is also indicated which additionalvariablesin the regressionproducedthe highest and lowest values of the coefficient, respectively. A first thing to note is that none of the coefficients of the four regime indicatorsis statistically significant in the base regression.Furthermore, it should be noted that in all four cases the sign of the coefficients of the political variableschanges if additionalexplanatoryvariablesare introduced into the regression.Forinstance,the sign of the variable"democratic" changes from positive to negative if government consumption,population growth and inflation are included as additionalexplanatoryvariablesin the growth equation.In conclusion, we find no direct relationshipbetween the political regime system and economic growth. This result is in line with our earlier findings (De Haan and Siermann,1995a) that thereis no robustrelationship between democraticfreedomsand the growthperformance countries. of In the literatureit has been argued that with regard to the relationship between political system and economic growth, not so much the political system as such is important,but the stability of the system. To investigate this proposition we have examined whether our political system stability measure("stable")is relatedto economic growth.Table3 presentsthe results of this investigation. In contrastto the four regime variables,we find that the coefficient of "stable"is statistically significantwith the expected sign in the base regression. However, as follows from the last row of Table 3, this effect is not robust.The coefficient of the variable"stable"is no longer statisticallysignificantif governmentconsumptionandinflationare included as additionalvariablesin the growthregression.

190
Table2. Sensitivity results for Gasiorowski'spolitical regime index (dependentvariable: Growthrate of real per capitaGDP 1961-1992) b Democratic Semidemocratic High 0.28 Base 0.07 Low -0.19 1.73 High Base 1.14 Low -2.27 Stand. t error 0.65 0.54 0.45 0.92 1.06 1.38 0.75 0.59 0.49 1.92 2.51 2.48 0.42 0.13 -0.41 1.89 1.08 -1.64 0.55 -0.59 -1.18 0.75 -1.43 -1.80 Coun- adj.R2 tries 81 110 95 95 110 81 81 110 95 74 110 110 0.26 0.33 0.45 0.45 0.33 0.30 0.28 0.33 0.42 0.34 0.33 0.35 Other variables Pop,Exp Gov,Pop,Inf Inf,Pop Gov,Pop,Exp Gov,Exp Inf Inf,Pop,Exp Gov (0) Fragile (0) Fragile Robust/ fragile Fragile (0)

Autho- High 0.41 ritarian Base -0.35 Low -0.59 Transitional 1.45 High Base -3.60 Low -4.47

(0) Fragile

Table3. Sensitivityresultsfor Gasiorowski'spoliticalregimechangeindex (dependent variable:Growthrateof real per capitaGDP 1961-1992) b 0.89 0.84 0.36 Stand. t error 0.37 0.36 0.29 2.38 2.35 1.22 Coun- adj.R2 tries 81 110 95 0.31 0.36 0.46 Other Robust/ variables fragile Pop,Exp Gov,Inf (1) Fragile

High Stable Base Low

5.4. Indirecteffects of democracyon economicgrowth

Finally,we have examinedwhetherourpoliticalregimevariablesareperhaps relatedto the investmentrateandthe school enrollmentratewhich areincluded as explanatoryvariablesin our base regression.If so, this might explain why there is no robust relationshipbetween these variables and economic growth.In the M vector for the base model for investmentspendingtwo variables areincluded:the secondaryschool enrollmentratein 1960 (SEC60),and the average share of export to GDP over the period 1961-1992 (EXP6192). Levine andRenelt (1992) concludethatthe exportvariableis robustlyrelated with investment.For a sample of 81 countriesfor which all dataare available

191 we find the following resultsfor the base model:

Inv6192 = 8.23+

8.85EXP6192+

0.24SEC60

(6.78) (2.57)

(7.77)

(3)

with the t-values of the coefficients in parentheses. Table4 shows the outcomesof the sensitivityanalysis.The firstthingthatone shouldnotice is thatthe coefficientof the variables"democratic" "authorand itarian" statisticallysignificantin the base regression.In accordancewith are previous findingsby Kormendiand Meguire (1985), Pastorand Hilt (1993) and Pastor and Sung (1995), we find that democracyhas a positive effect on investment, while authoritarian rule has adverse effects on investment. as the last column of Table3 shows, neithereffect is robust. However, Table5 presentsthe resultsof the sensitivityanalysisfor secondaryschool enrollmentrate in 1985 (Sec85). Ourrule to select variablesin the M vector gives the following base regression: 2.95+ 0.50Prim6o+ 0.005Ycap60 (4) (1.19) (9.24) (5.78) with t-values in parentheses.Prim60is the primaryschool enrollmentrate in 1960. This variableis included as primaryschooling is a prerequisitefor secondaryschooling and hence it can be expected thatthe level of secondary school enrollmentis partlydetermined previousprimary school enrollment by figures.The readermay have noticed thatwe have used the secondaryschool enrollmentrate in 1985 instead of the rate in 1960 as dependentvariablein equation 4. The reason for using the 1985 figures is simple: there are not enough data available for the political, social and economic variablesused in the analysis for the period before 1960. Still, this is not as serious as it might seem at first glance, since the secondaryschool enrollmentfiguresare relatively rigid. For instance, the correlationcoefficient between secondary school enrollment levels in 1960 and 1985 is 0.83. Hence, if the level of secondary schooling in 1985 is correlatedwith the political system then includingthe secondaryschool enrollmentratein 1960 in the growthequation of might lead to underestimation the effect of the political system on growth. As Table 5 shows, however, we do not find a robust relationshipbetween secondaryschool enrollmentand the variouspolitical regime indicators. 6. Conclusions Often it is maintainedthat democracyis a luxurywhich comes at a price in terms of subsequentslower increases in living standards.However, various = Sec85ss

192
Table4. Sensitivity results for Gasiorowski'spolitical regime index (dependentvariable: Investmentshare, 1961-1992) b Democratic Semidemocratic 4.16 3.64 2.59 4.76 4.28 3.55 Stand. t error 1.73 1.71 1.87 5.16 4.78 4.59 1.99 1.75 1.79 9.41 9.60 10.6 2.40 2.13 1.38 0.92 0.90 0.77 -1.87 -2.60 -2.74 2.28 2.20 1.68 Coun- adj.R2 tries 81 81 74 74 81 81 74 81 81 81 81 74 0.51 0.52 0.51 0.48 0.50 0.51 0.52 0.53 0.53 0.51 0.52 0.51 Other variables Pop,Ycap Gov,Pop Robust/ fragile (1) Fragile

High Base Low High Base Low

Pop,Inf,Ycap (0) Fragile Gov,Pop Gov,Inf Pop,Ycap Pop Gov,Inf (1) Fragile (2) Fragile

Autho- High -3.72 ritarian Base -4.56 Low -4.92 Transitional High 21.5 Base 21.1 Low 17.9

Table 5. Sensitivity results for Gasiorowski's political regime index (dependentvariable: School enrollmentrate, 1985) b Democratic Semidemocratic Stand. t error 9.11 5.16 -0.86 -4.90 -11.1 1.56 -6.30 -6.72 -35.2 -41.5 -55.6 5.11 4.51 6.77 7.14 7.70 5.37 5.38 5.36 25.1 28.7 27.1 1.78 1.14 -0.13 -0.69 -1.45 0.29 -1.17 -1.25 -1.41 -1.45 -2.05 Coun- adj.R2 tries 100 100 100 100 88 88 100 100 100 100 88 0.74 0.75 0.75 0.73 0.73 0.74 0.74 0.73 0.77 0.74 0.73 Other variables Gov,Pop Gov,Pop Inv,Pop Pop,Inv,Inf Gov Robust/ fragile (0) Fragile

Higha Base Low High Base Low

(0) Fragile

Autho- High ritarian Base Low Transitional High Base Low

(0) Fragile

Gov,Pop,Inv (0) Fragile Inf,Pop

aThere is no entry in this line as the base regressionis the one with the highest coefficient.

recentcross-sectionstudieson economicgrowthclaimto havefoundevidence with economic thatlack of civil andpoliticallibertiesis negativelycorrelated growth.Following the extremeboundanalysisof Leamer(1983) and Levine and Renelt (1992), this paperperformsa sensitivity analysis to examine the

193 link between the political regime and economic growth. Both direct and indirect effects of a lack of democratic liberties are analysed. In contrast to most other recent research we do not employ Gastil's rankings of civil and political rights, but use an alternative measure of democracy, which is available for a much longer period than the Gastil rankings. This measure is based upon the number of years that a country can be regarded as a democracy. We also take regime changes into account. The main conclusion is that the relationship between democracy and economic growth is not robust. Regime stability is also not robustly related to economic growth. Although it is possible to find significant relationships, these are not robust. Adding one or two other variables is generally enough for the coefficients to become insignificant. Although we question the robustness of the support that many authors claim to have found for a positive relationship between democratic freedom and economic growth, we think that our evidence clearly points in the direction that political and civil rights perhaps do not improve a country's growth rate, at least they do not necessarily impede it. The implication is that when a country seeks a high level of economic growth, it is not appropriate to adopt a policy in which democratic rights are repressed. This interpretation offers at least some consolation to those who value democracy and human rights as ends in themselves.

Notes 1. There of course, other factors mayhelpexplain growth that the record thehigh of are, many
performingAsian economies. See, for instance,Page (1994) for a provocativeanalysis. 2. Othersurveys are Przeworskiand Limongi (1993) and Brunettiand Weder(1995).

of 3. See Gastil(1990) for an extensivedescription the Comparative Surveyof Freedom project.

4. These authorsdiscuss thirteenempirical studies. Only three reportfindings suggesting an unqualified negative effect of democracy on economic growth; six studies find no

or and four somekindof qualified, conditional, relationship the remaining papers report thesestudies a and So, present verymixed confusing picture positive relationship. "overall,
with regardto the effect of democracyon economic growth"(Sirowy and Inkeles, 1990: 137).

5. Dijkstra modelscanbe manipulated a verylargeextent. to (1995)showsthatregression one one By simplyadding regressor canobtain essentially everyset of desired regression coefficients. 6. Thenumber yearsof democracy is divided thetotalnumber yearsforwhich of of (10) by observations available are (32),whichyields0.31.

194

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196 7. Appendix
TableA-1. Political system index 1961-1992 Line Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 Algeria Argentina Australia Austria Barbados Belgium Benin Bolivia Botswana Brazil BurkinaFaso Burma(Myanmar) Burundi Cameroon Canada CentralAfricanRepublic Chad Chile Colombia Congo Costa Rica Cyprus Denmark DominicanRepublic Ecuador Egypt El Salvador Ethiopia Finland France Gabon Gambia Germany,West Ghana Greece Guatemala Guinea Guyana Haiti Honduras Hong Kong Iceland Democratic Semi-democratic Authoritarian Transitional Stable 0 0.31 1 1 1 1 0.09 0.34 1 0.34 0.06 0.03 0 0 1 0 0.03 0.47 1 0.09 1 0.91 1 0.47 0.28 0 0 0 1 1 0 1 1 0.09 0.75 0 0 0.19 0 0 0 1 0.06 0.25 0 0 0 0 0 0.13 0 0 0.09 0 0 0 0 0 0 0 0 0 0 0 0 0 0.31 0 0.03 0 0 0 0.13 0 0 0.13 0 0.22 0 0 0 0.41 1 0 0.87 0.41 0 0 0 0 0.88 0.50 0 0.31 0.75 0.97 1 1 0 1 0.97 0.47 0 0.88 0 0.03 0 0.50 0.25 1 0.97 1 0 0 0.88 0 0 0.75 0.25 0.69 1 0.81 0.97 0.59 0 0 0.06 0.03 0 0 0 0 0.03 0.03 0 0.34 0.09 0 0 0 0 0 0 0.06 0 0.03 0 0.06 0 0.03 0.16 0 0 0 0 0 0 0 0 0.03 0 0.09 0 0 0.03 0 0 0 0 0 1 1 1 1 0 0 1 0 0 0 1 1 1 1 0 0 1 0 1 0 1 0 0 1 0 1 1 1 0 1 1 0 0 0 1 0 0 0 1 1

197
TableA-1. Continued. Line 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 Country India Indonesia Iran Iraq Ireland Israel Italy Ivory Coast Jamaica Japan Jordan Kenya Korea,South Lesotho Liberia Luxembourg Madagascar Malawi Malaysia Mali Malta Mauritania Mauritius Mexico Morocco Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman Pakistan Panama Paraguay Peru Philippines Portugal Rwanda Saudi Arabia Senegal Democratic 0.94 0 0 0 1 1 1 0 1 1 0 0.10 0.16 0 0 1 0.31 0 0.25 0.03 1 0 1 0 0 0.06 1 1 0.06 0 0 1 0 0.16 0 0 0.38 0.56 0.56 0 0 0 Semi-democratic 0 0 0 0 0 0 0 0 0 0 0.03 0.13 0 0.15 0 0 0 0 0.69 0 0 0 0 0 0 0 0 0 0 0 0.28 0 0 0.16 0.13 0.13 0.19 0 0 0.03 0 0.50 Authoritarian Transitional 0.06 1 1 1 0 0 0 1 0 0 0.97 0.73 0.81 0.85 1 0 0.69 1 0.06 0.94 0 1 0 1 1 0.91 0 0 0.91 1 0.59 0 1 0.59 0.88 0.88 0.34 0.44 0.44 0.97 1 0.38 0 0 0 0 0 0 0 0 0 0 0 0.03 0.03 0 0 0 0 0 0 0.03 0 0 0 0 0 0.03 0 0 0.03 0 0.13 0 0 0.09 0 0 0.09 0 0 0 0 0.13 Stable 0 1 1 1 1 1 1 1 1 1 0 0 0 0 1 1 0 1 0 0 1 1 1 1 1 0 1 1 0 1 0 1 1 0 0 0 0 0 0 0 1 0

198
TableA-1. Continued. Line Country 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 SierraLeona Singapore Somalia South Africa Spain Sri Lanka Sudan Swaziland Sweden Switzerland Syria Tanzania Thailand Togo Trinidad& Tobago Tunisia Democratic Semi-democratic Authoritarian Transitional Stable 0.22 0 0.25 0 0.50 0.69 0 0.24 1 1 0 0.03 0.34 0.13 0.13 1 0 0 0 0.31 0.22 0 0 0 0 0.09 0.19 0 0 0 0.13 0.13 0 0 0 0 0 0 0 0.24 0.66 0 0.75 1 0.44 0 0.72 0.76 0 0 1 0.88 0.41 0.88 0 1 0.16 0.87 0 0 0.25 0 1 1 1 0.66 0 0 0 0 0.06 0 0.06 0 0 0 0 0 0.06 0 0 0 0.03 0 0 0 0.13 0 0 0 0 0.03 0 1 0 1 0 0 0 0 1 1 1 0 0 0 1 1 0 0 1 1 0 1 1 1 1 0

1 0 0.69 Turkey 0 Uganda United Kingdom 1 United States of America 1 0.63 Uruguay Venezuela 1 Yemen ArabRepublic 0 0 Yugoslavia Zaire 0 Zambia 0.07