Economic Growth, Development, and Democracy: A Review and Further Analysis

2012-09358, 2011-40531, 2012-10478

I.

Introduction
A. Background of the Problem
A notable regularity in political economy today is the relationship between economic
growth and democracy. All OECD or the industrialized countries are democratic and most nondemocracies are poor (Acemoglu et al 2008).
B. Purpose and Significance of the Study
With globalization happening at a pace faster than we can imagine, different aspects of
different countries are adapted by others which continually bring borders closer together. Apart
from cultures, fashion, and lifestyles, politics and economics are two other factors which find
themselves at the edge of the borders. This study aims to find the link between democracy, of
which 122 countries are, and growth and development, indicators of how well-off a country is.
Specifically, the authors of this paper hypothesize that economic growth induces democracy.
Currently, most developed countries are democratic, while most less-developed countries
are not democratic. This could be because of a lack of protection in property rights in nondemocratic countries, which prevents the market from performing optimally and reduces investor
confidence. A reason why democratic countries may perform better is that the better their
citizens' welfare is taken care of, the higher their political efficacy is and are more willing to
participate in political processes. This and other reasons will be tackled in the succeeding parts of
this paper.
A quantitative analysis was used for this paper, using cross-sectional and panel data
regression. The authors used indicators and data for economic growth and development spanning
39 years across 189 countries in the 5 geographic divisions according to the United Nations.
Findings include a positive relationship between economic growth and democracy for all
countries, however not all were statistically-significant. Asia and Africa, for example, did not
have statistically-significant results, possibly because the highly-developed countries in the
region are not democratic. The Americas and Europe shows statistical significance, possibly
because these regions was where democracy originated and were properly implemented.

II.

Literature Review
The discussion on the relationship between economic growth and development is not
new. There is a plethora of essays and researches that give their own insights to the debate. There
are those who claim that the two have a positive relationship, that either economic growth
induces democracy or democracy induces economic growth. Then, there are those who claim that

the two are negatively related, that democracy actually hinders economic growth. And then, there
are those who say that the two dont really have a direct relationship. Here, a review of the
different sides to this rich debate is presented.
Democracy Induces Economic Growth
Much of the literature for this side of the debate focuses on the fact that a democratic
environment would be more conducive for economic growth, with particular focus on the
protection of property rights. North (1990) argues that citizens will be more motivated to invest,
profit-maximizing private activity can be maintained, and an effective allocation of resources in
the market can be ensured in a climate of liberty, free-flowing information, and secured control
of property which are distinct characteristics of democratic states. Democracies also limit state
intervention in the economy and are more responsive to the demands of the public in areas such
as health, and education, and hence encourages stable long run economic growth (Baum and
Lake, 2003). Feng (1997) asserts is likely to have a significant indirect effect on growth through
its impact on political stability. This and political freedoms improves property rights and market
competition which in turn encourages growth and expansion. Lastly, Bhagwati (1995) posits that
democracies would rarely be engaged in armed conflict and this environment of peace would
promote
economic
growth.
There has been an ongoing debate on whether democracy helps or hinders economic
growth, and there have been a lot of case studies done to help aid this debate. One specific case
would be the cases of India and China, the former being a democracy and the latter being on the
edge of authoritarianism (Nadgrodkiewicz 2008). This case was further looked into by a
professor in MIT, Yasheng Huang. Huang looked at the history of the two countries and gave
particular attention to political and economic reforms in both India and China.
China had a huge boost in economic growth during the 1980s because political reforms
made it less authoritarian. Mandatory retirement of government officials, legal reforms,
strengthening of the National Peoples Congress, all of these happened during the 80s and these
political actions affected the economy of China (Huang 2009)
Indias economic growth sped up during the 90s as the country privatized some assets,
introduced political decentralization and other efforts to improve governance. It can be said that
India was in a form of stagnation between 1966 to 1984, but this is not due to the fact that India
is a democracy, rather it was only appearing to be democracy. Indira Ghandis term had the
essential features of a democracy, but it became unaccountable and corrupt. (Huang 2009)
Huang concluded that political liberalization spurred growth in both India and China, thus
political reforms, especially those that are in line with democracy, can affect the economy
positively.

Economic Growth Induces Democracy

Literature from this side of the debate focuses on the effects of increased economic
growth on individuals (through education and standard of living) and how these increase the
probability of a democratic society. In Lipsets view, most often referred to as Lipsets
hypothesis, democracy would depend on the economic development of society: the more
developed it is, the greater the chance of sustaining democracy (1959). Lipsets idea was taken
from Aristotle: From Aristotle down to the present, men have argued that only in a wealthy
society in which relatively few citizens lived in real poverty could a situation exist in which the
mass of the population could intelligently participate in politics and could develop the selfrestraint necessary to avoid succumbing to the appeals of irresponsible demagogues. Bilson
(1982) gives the argument that economic development allows the dynamic elements in the
society to achieve status and income independently of the government, thus promoting political
freedom. Similarly, Pennar et al argues that growth leads to democracy because of the impact of
relative deprivation and the eventual impact of education on a populace that would demand
political and civil rights (1993). This was also furthered by a research conducted by Barro of 100
countries from 1960 to 1990 (1994). According to him, improvements in the standard of living measured by GDP, health status, and education - substantially raise the probability that political
freedoms will grow. In contrast, countries that democratize without prior economic development
would tend not to last. The propensity for democracy rises with per capita GDP, primary
schooling, and a smaller gap between male and female primary attainment (Barro 1999). A
similar research was conducted by Burkhart and Lewis-Beck (1994) on 131 states. According to
their Granger test, economic development causes democracy and democracy does not cause
economic development.
There are a lot of approaches on how to tackle the problem of associating economic
development to democracy, Huber used a comparative historical form of research and also used
cross-national statistical research. The level of economic development is causally related to the
development of political democracy, the underlying reason behind this is that capitalism changes
the class structure (Huber 1993). The most consistent opponent of democracy is the landed upper
class; economic development weakens them by enlarging the work of middle-classes and
facilitating self-organization (Huber 1993)
Democracy Hinders Economic Growth
The often cited case for democracy acting as a hindrance for growth and development is
India. In terms of the determinants of democracy like participation in the electoral process, the
poor and socially-disadvantaged are the major participants, with the whole voter population
larger than those of the USA, Western Europe, and Japan (Bardhan, 2015). This leads to greater
group self-esteem, as well as promoting a sense of social revolution in India. However, this can
lead to a negative effect on growth. Bardhan (2015) notes that policies of clientelism and
patronage may arise instead of investment in public goods. In a country heavily populated and
experiencing poverty nationwide, it should not have survived as a democracy after gaining

independence in 1947. These factors deem the Indian democracy as weak and underdeveloped,
which affect the already existing social and economic equalities in the country. Unequal
distribution of property rights, itself at the foundation of liberalism, led to limited access to
political democracy (as it was property which endowed people with the right to vote) (Nayyar
1998). If we extend democracy to include the political concept of term limits, the accountability
mechanism alters the possible policies to be enacted by the leaders. Economic growth and
development is achieved by distributing resources among citizens, which implies a long runshort run dichotomy (Bolle and Sahli, 2007). Democracies impose term limits of short lengths,
which gives politicians an incentive to implement policies which have short-term and immediate
effects to improve their public image. Such policies may not be as effective compared to a longterm approach and may cause problems during transitional governments. Similarly, it has also
been thought that democracy hinders growth when pressure for increased consumption is present
(Przeworski and Limongi 1993). This causes a decline in investment, which affects long-term
growth. Democracies, as institutions which adhere to group interests, fail to resist such pressures.
Neither Positive Nor Negative Relationship
Finally, there is a body of thought the posits that there is neither a positive nor negative
relationship between economic growth and democracy. Sirowy and Inkeles (1990) did a review
and assessment of of the various hypotheses on the topic. They conclude that there is little
support for a positive causal relationship between economic growth and democracy. There are
few robust conclusions that can be supported on the basis of existing empirical multi-case
studies. The authors believe that methodological flaws are part of the problem. They suggest to
conduct more refined studies for better results. Przeworski and Limongi (1993) have a similar
conclusion. They examined 18 studies and concluded that these studies did not provide a clear
basis
for
conclusion
on
the
relationship
between
the
two.
The link between democracy and economic development is quite a controversial issue.
Halperin, Siegle and Weinstein examined this for the purpose of writing a book. (CFR 2003) The
data gathered during the research shows that autocracies have no distinct advantage over
democracies; rather both have grown at approximately 1.5% of GDP per capita, this average
came from 40 years of data. Halperin, Siegle and Weinstein experimented with the data, and it
was found out that democracies performed better when East Asia was removed from the sample,
and this could be because of the current state of the developing countries in that region. When
East Asia was removed from the sample, democracies performed better by around 0.5% GDP per
capita. (CFR 2003)
There was no distinct advantage in the comparison of the economic growth of autocracies
and democracies both result in the same rate of growth, so no distinction could be made if
democracy induces economic development.

III.

Body
A. Model and Methodology

This paper uses an augmented version of the democracy model derived from the work of
Acemoglu and Robinson (2006) which was further discussed in Robinson (2006). It was then
augmented to be closer to that of Barros (1999), to include more variables - his determinants of
democracy. To summarize, the theoretical model discussed in Robinson (2006) looks at income
redistribution from the economic and political elites to the citizens. The elites are in currently
power but they can be overthrown by the citizens through riots, demonstrations, and the like.
Therefore, to avoid such, they would need to redistribute resources. The optimal choice would be
to allow the citizens to choose the level of redistribution that they would most prefer and hence
to democratize. The model suggests that as resources increase because of economic growth, and
hence more income to be redistributed to the citizens, the probability of democratization
increases.
The general statistical model discussed by Robinson (2006) is as follows:
d i= 0 + 1 y i + 2 z i +u
Where d i is the measure of democracy in a country for some time period i, y i is the
per capita level of income in the country for some period i, z i refers to another variable
explaining how democratic a country is, and u is the error term. In Acemoglu and Robinson
(2006), the dependent variable is democracy; and the independent variables are lagged values (by
1 year) of democracy, log of GDP, log of population, education and age structure. In Barro
(1999), the dependent variable is also democracy; and the independent variables are as follows:
5-year and 10-year lagged value of democracy, log of GDP, years of primary schooling, gap
between male and female primary schooling, urbanization rate, log of population, and a dummy
for an oil exporting country.
This paper uses the following statistical model:
d i= 0 + 1 d i5 + 2 d i5 + 3 log yi + 4 e i + 5 h i+ 6 log pi+ u
Where d i is the measure of democracy in a country for some time period i, d i5 and
d i10 are the lagged variables of democracy (5 years and 10 years respectively), y i is the
income per capita in the country, e i refers to variables describing the education in the county ,
hi refers to variables describing the health condition in the country, pi is the population of
the country, and u is the error term. The variables for both income and population were logged
to account for growth effects.
The basis for the choice of variables are as follows: 1) there had to be a variable
describing democracy and economic growth/performance; 2) there also had to variables
describing economic development which justifies the inclusion of education and health-related
indicators as they were taken from the commonly used HDI measure; 3) as in Robinsons
discussion (2006), there was some inclusion of other factors relating to democracy. The variable
for democracy was lagged, 5 years and 10 years, with the assumption that past democracy
would affect how democratic a country currently is. The variables chosen were also influenced
by data availability of said variable.
This model is a simple Ordinary Least Squares (OLS) regression. As stipulated in
Robinson (2006), however, this model would treat income as exogenous which in reality is not

the case (as democracy can have an effect on income). As such, estimating with a simple OLS
would lead the coefficient for income (and further those for the indicators of development) to be
biased. To remedy such would be to introduce fixed effects into the model. This is fairly simple
to do in OLS models and it removes any relationship between income per capita and democracy
(treating income as endogenous).
This paper uses the statistical software Stata 11 for its analysis of data. Data was simply
input into the software, commands were entered, and the results interpreted.
First, a regression was done looking at the basic relationship of economic growth and
democracy using cross section data for a pool of countries for 2010. This was also applied to all
OECD countries and per geographic region (via the inclusion of a dummy variable). The
application to OECD countries is to show that the more rich countries are really democratic. The
application to each demographic region is to show whether the relationship of economic growth
and democracy is the same throughout all parts of the world.
Then a regression of the above explained model was done to check for the effects of the
different variables on democracy using panel data for a pool of countries from to 1972-2010.
Fixed effects was model to treat income and related variables as endogenous to the model (as
discussed in Robinson 2006). This was also applied per geographic region (via the inclusion of a
dummy variable). The application to each demographic region is to show whether the
relationship of economic growth and democracy is the same throughout all parts of the world.
B. Description of Data and Sources; and Variable Definitions
This paper uses the Standard Dataset (both time-series and cross-section) obtained from
the Quality of Governance Institute of the University of Gothenburg (2015 version of the
dataset). This dataset includes data from a variety of sources such as but not limited to Freedom
House, the United Nations, the International Monetary Fund, and others.
1. Cross Section
The cross section regression looks at the basic relationship between democracy and
economic growth. Here, the variable for democracy uses a scale of 0-10 where 0 is the least
democratic and 10 is the most democratic. This data comes from Freedom House; it is their
Imputed Polity measure. This data is available for 193 countries in the year 2010. The variable
for economic performance is real GDP per capita (at constant US dollars base year 2000) from
Gleditsch. This data is available for 189 countries in the year 2010. As such, 4 countries, namely
Germany, Serbia, Vietnam, and Yemen, were removed from the analysis for consistency, so in
total 189 countries. For the OECD analysis, there are 34 member states. Germany was removed
from the analysis for consistency, for a total of 33 countries. In both cases, read GDP per capita
was logged to take into account growth effects.
The countries were also grouped per geographic region in accordance with the UN
standard. Countries were assigned a number from 1-5 where 1 refers to countries belonging to
the region of Africa, 2 Americas, 3 Asia, 4 Europe, and 5 Oceania. The authors opted not to

further subdivide the countries into smaller subregions (e.g. America can be further subdivided to
North, Central, and South America, and the Caribbean) as this would give the dummy variable a
value ranging from 1-21 and would divide the countries too much, and hence less observations
for the analysis.
Additional note: For this cross section analysis, economic growth is defined only as an
increase in GDP per capita. The Freedom House definition of democracy is applied.
2. Panel
The panel regressions looks at the different factors that influence democracy, most
importantly economic growth and development. The following are the definitions and
description of each variable:
Democracy ( d i ): Here again we used the Imputed Polity score from Freedom
House. It uses a scale of 0-10 where 0 is the least democratic and 10 is the most democratic.
The data is available for 207 countries from 1972-2012, for a total of 7040 observations.
Income ( y i ): Here again we used real GDP per capita (at constant US dollars
base year 2000) from Gleditsch. The data is available for 205 countries from 1950-2011, for
a total of 9420 observations. In the model, this was logged to account for growth rates.
Education ( e i ): For these factors, we used the average years of schooling for
both female, and male and female 25 years and older. This data comes from the Barro & Lee
datasets. For both variables, the data is available for 147 countries from 1950-2010, for a
total of 1504 observations each.
Health ( hi ): To account for health, we used under-5 mortality rate from the
World Development Indicators of the World Bank. Under-5 Mortality (as defined by the
World Bank) is the probability that a newborn child will die before reaching the age of 5 for
every 1,000 live births, if subjected to current age-specific mortality rates. This data is
available for 196 countries from 1960-2012, for a total of 7962 observations.
Population ( pi ): This refers to all inhabitants of a particular country. This data
was obtained from UN Statistics. This data is available for 202 countries from 1970-2012,
for a total of 7452 observations.
Note: Here, we use observations to mean countries multiplied by number of variables across time
(i.e. Data for 4 countries for 1 variable from 1991-1995, and so 20 observations).
As with the cross section analysis real GDP per capita was logged to take into account
growth effects. This was also the case for population. Aside from that, the variable for
democracy was lagged as stipulated in the model.
To avoid any gaps in the data analysis, the time frame considered for this study was only
from 1972-2010 as this is the only time wherein all variables had complete data. Also, the
number of countries were reduced to 113 countries (Originally 147 to accommodate the
education variables, as seen above, data was available for 147 countries. However, this was
further reduced to remove the countries that didnt have complete other variable data for the
entire time period). In total, there were 35, 256 observations.

The countries were also grouped per geographic region in accordance with the UN
standard. Countries were assigned a number from 1-5 where 1 refers to countries belonging to
the region of Africa, 2 Americas, 3 Asia, 4 Europe, and 5 Oceania. The authors opted not to
further subdivide the countries into smaller subregions (e.g. America can be further subdivided to
North, Central, and South America, and the Caribbean) as this would give the dummy variable a
value ranging from 1-21 and would divide the countries too much, and hence less observations
for the analysis.
Additional note: For this panel data analysis, economic growth is defined only as an
increase in GDP per capita, while economic development is defined as an increase in GDP per
capita along with improvements in both health and education. The Freedom House definition of
democracy is applied.
C. Analysis of Results
1.1 Cross Section All Countries
Below are the results generated from Stata:
. reg

fh_ipolity2 lgle_rgdpc

Source |
SS
df
MS
-------------+-----------------------------Model | 212.869655
1 212.869655
Residual | 1569.91734
187 8.39527987
-------------+-----------------------------Total | 1782.78699
188 9.48290953

Number of obs
F( 1,
187)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

189
25.36
0.0000
0.1194
0.1147
2.8975

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lgle_rgdpc |
.8282708
.1644876
5.04
0.000
.5037811
1.15276
_cons | -.5038439
1.44898
-0.35
0.728
-3.362291
2.354603
------------------------------------------------------------------------------

Interpreting this, a 1% increase in real GDP per capita would increase the democracy
score by 0.828. Basing from the p value (0.000), this result is statistically significant at a 5%
significance level. R-squared is at around 12%.
Below is a scatter plot of the above regression:

From this, there is generally a positive relationship between economic growth and
democracy.
The regression was checked for heteroskedasticity. Below is a plot of the residuals and
democracy score:
4.51144 +
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+----------------------------------------------------------------+
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fh_ipolity2
10

1.2 Cross Section Per Region

Below are the results generated from Stata:

. reg

fh_ipolity2 lgle_rgdpc if

region_dummy == 1

Source |
SS
df
MS
-------------+-----------------------------Model | .039029369
1 .039029369
Residual | 323.981586
51 6.35258011
-------------+-----------------------------Total | 324.020615
52 6.23116567

Number of obs
F( 1,
51)
Prob > F
R-squared
Adj R-squared
Root MSE

=
53
=
0.01
= 0.9378
= 0.0001
= -0.0195
= 2.5204

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lgle_rgdpc |
.0291592
.3720096
0.08
0.938
-.7176813
.7759996
_cons |
5.005206
2.824524
1.77
0.082
-.6652627
10.67567
------------------------------------------------------------------------------

Interpreting this, a 1% increase in real GDP per capita of countries in Africa would
increase the democracy score by 0.029. Basing from the p value (0.938), this result is not
statistically significant at a 5% significance level. R-squared is at 0%.
. reg

fh_ipolity2 lgle_rgdpc if

region_dummy == 2

Source |
SS
df
MS
-------------+-----------------------------Model | 26.8630184
1 26.8630184
Residual | 117.094064
34 3.44394307
-------------+-----------------------------Total | 143.957083
35 4.11305951

Number of obs
F( 1,
34)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

36
7.80
0.0085
0.1866
0.1627
1.8558

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lgle_rgdpc |
.9435682
.33785
2.79
0.009
.2569745
1.630162
_cons | -.1306372
3.008985
-0.04
0.966
-6.245631
5.984357
------------------------------------------------------------------------------

Interpreting this, a 1% increase in real GDP per capita of countries in America would
increase the democracy score by 0.943. Basing from the p value (0.009), this result is
statistically significant at a 5% significance level. R-squared is around 18%.
. reg

fh_ipolity2 lgle_rgdpc if

region_dummy == 3

Source |
SS
df
MS
-------------+-----------------------------Model | 1.02578557
1 1.02578557
Residual | 416.724337
43 9.69126366
-------------+-----------------------------Total | 417.750123
44 9.49432098

Number of obs
F( 1,
43)
Prob > F
R-squared
Adj R-squared
Root MSE

=
45
=
0.11
= 0.7465
= 0.0025
= -0.0207
= 3.1131

------------------------------------------------------------------------------

fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lgle_rgdpc |
.1361127
.4183701
0.33
0.747
-.707611
.9798364
_cons |
3.226802
3.779418
0.85
0.398
-4.395122
10.84873
------------------------------------------------------------------------------

Interpreting this, a 1% increase in real GDP per capita of countries in Asia would increase
the democracy score by 0.136. Basing from the p value (0.747), this result is not statistically
significant at a 5% significance level. R-squared is at 0.25%.
. reg

fh_ipolity2 lgle_rgdpc if

region_dummy == 4

Source |
SS
df
MS
-------------+-----------------------------Model | 26.3139019
1 26.3139019
Residual | 91.4827041
39 2.34571036
-------------+-----------------------------Total | 117.796606
40 2.94491515

Number of obs
F( 1,
39)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

41
11.22
0.0018
0.2234
0.2035
1.5316

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lgle_rgdpc |
1.195802
.3570293
3.35
0.002
.4736421
1.917962
_cons | -2.820358
3.579099
-0.79
0.435
-10.05977
4.419053
------------------------------------------------------------------------------

Interpreting this, a 1% increase in real GDP per capita of countries in Europe would
increase the democracy score by 1.196. Basing from the p value (0.002), this result is statistically
significant at a 5% significance level. R-squared is at 22%.
. reg

fh_ipolity2 lgle_rgdpc if

region_dummy == 5

Source |
SS
df
MS
-------------+-----------------------------Model | 4.09517978
1 4.09517978
Residual | 50.0414938
12 4.17012448
-------------+-----------------------------Total | 54.1366735
13
4.1643595

Number of obs
F( 1,
12)
Prob > F
R-squared
Adj R-squared
Root MSE

=
14
=
0.98
= 0.3413
= 0.0756
= -0.0014
= 2.0421

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lgle_rgdpc |
.5831964
.5885087
0.99
0.341
-.6990539
1.865447
_cons |
3.842748
4.880414
0.79
0.446
-6.790761
14.47626
------------------------------------------------------------------------------

Interpreting this, a 1% increase in real GDP per capita of countries in Oceania would
increase the democracy score by 0.583. Basing from the p value (0.341), this result is not
statistically significant at a 5% significance level. R-squared is at 7%.
The results show that the pattern of the positive relationship between economic growth
and democracy does not necessarily exist in all parts of the world.

1.3 Cross Section OECD Countries

Below are the results generated from Stata:
. reg

fh_ipolity2 lgle_rgdpc

Source |
SS
df
MS
-------------+-----------------------------Model | 2.62644581
1 2.62644581
Residual | 7.79190532
31 .251351785
-------------+-----------------------------Total | 10.4183511
32 .325573473

Number of obs
F( 1,
31)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

33
10.45
0.0029
0.2521
0.2280
.50135

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lgle_rgdpc |
.7412816
.229319
3.23
0.003
.2735825
1.208981
_cons |
2.172441
2.341875
0.93
0.361
-2.603844
6.948726
------------------------------------------------------------------------------

Interpreting this, a 1% increase in real GDP per capita would increase the democracy
score by 0.741. Basing from the p value (0.003), this result is statistically significant at a 5%
significance level. R-squared is at around 25%.
Below is a scatter plot of the above regression:

From this, there is generally a positive relationship between economic growth and
democracy. It should be noted however, that there are two distinct outliers in the data from
OECD countries.
2.1 Panel All Countries
Below are the results generated from Stata:
. xtreg fh_ipolity2 lag5fh_ipolity2 lag10fh_ipolity2 lgle_cgdpc bl_asy25f bl_asy25mf wdi_mortuf
lunna_pop, fe
Fixed-effects (within) regression
Group variable: ccodecow

Number of obs
Number of groups

=
=

4041
113

R-sq:

Obs per group: min =

avg =
max =

26
35.8
36

within = 0.3246
between = 0.6047
overall = 0.5270

corr(u_i, Xb)

= 0.0093

F(7,3921)
Prob > F

=
=

269.27
0.0000

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lag5fh_ipo~2 |
.3498535
.0137172
25.50
0.000
.32296
.376747
lag10fh_ip~2 | -.1163145
.0131106
-8.87
0.000
-.1420187
-.0906102
lgle_cgdpc |
.4131869
.0653377
6.32
0.000
.2850879
.5412859
bl_asy25f | -.1348848
.1246429
-1.08
0.279
-.3792558
.1094863
bl_asy25mf |
.328689
.1358442
2.42
0.016
.062357
.595021
wdi_mortuf | -.0119777
.0012601
-9.51
0.000
-.0144482
-.0095072
lunna_pop | -.2882172
.1889399
-1.53
0.127
-.658647
.0822125
_cons |
5.241069
3.102615
1.69
0.091
-.8418215
11.32396
-------------+---------------------------------------------------------------sigma_u | 1.8719554
sigma_e | 1.5001703
rho | .60892837
(fraction of variance due to u_i)
-----------------------------------------------------------------------------F test that all u_i=0:
F(112, 3921) =
22.54
Prob > F = 0.0000

Interpreting this, a point increase in the democracy score from 5 years ago would increase
the current democracy score by 0.349 (p value 0.000; statistically significant). A point increase in
the democracy score from 10 years ago would decrease the current democracy score by 0.116 (p
value 0.000; statistically significant). A 1% increase in real GDP per capita would increase the
current democracy score by 0.413 (p value 0.000; statistically significant). A one year increase in
the average years of schooling for females would decrease the current democracy score by 0.134
(p value 0.297; statistically insignificant). A one year increase in the average years of schooling
for males and females would increase the current democracy score by 0.329 (p value 0.016;
statistically significant). A one year increase in child mortality would decrease the current
democracy score by 0.012 (p value 0.000; statistically significant). A 1% increase in the

population would decrease the current democracy score by 0.288 (p value 0.127; statistically
insignificant). R-squared is overall at around 52%. This is the result for all countries.
2.2 Panel Per Region

. xtreg fh_ipolity2 lag5fh_ipolity2 lag10fh_ipolity2 lgle_cgdpc bl_asy25f bl_asy25mf wdi_mortuf

lunna_pop if dummy_regio
> n == 1, fe
Fixed-effects (within) regression
Group variable: ccodecow

Number of obs
Number of groups

=
=

1224
34

R-sq:

Obs per group: min =

avg =
max =

36
36.0
36

within = 0.4082
between = 0.1035
overall = 0.0087

corr(u_i, Xb)

= -0.8819

F(7,1183)
Prob > F

=
=

116.57
0.0000

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lag5fh_ipo~2 |
.2815069
.023425
12.02
0.000
.2355477
.327466
lag10fh_ip~2 |
.0505343
.0229741
2.20
0.028
.0054599
.0956088
lgle_cgdpc | -.4004309
.1363023
-2.94
0.003
-.6678522
-.1330096
bl_asy25f |
.010638
.2168426
0.05
0.961
-.4148011
.436077
bl_asy25mf | -.1972905
.2428358
-0.81
0.417
-.6737274
.2791464
wdi_mortuf | -.0060205
.0018051
-3.34
0.001
-.0095621
-.0024789
lunna_pop |
3.605551
.3652779
9.87
0.000
2.888886
4.322216
_cons | -49.88204
5.727761
-8.71
0.000
-61.11974
-38.64434
-------------+---------------------------------------------------------------sigma_u | 4.8637105
sigma_e | 1.4414286
rho | .91925992
(fraction of variance due to u_i)
-----------------------------------------------------------------------------F test that all u_i=0:
F(33, 1183) =
26.87
Prob > F = 0.0000

Interpreting this, a point increase in the democracy score from 5 years ago would increase
the current democracy score by 0.281 (p value 0.000; statistically significant). A point increase in
the democracy score from 10 years ago would increase the current democracy score by 0.050 (p
value 0.028; statistically insignificant). A 1% increase in real GDP per capita would decrease the
current democracy score by 0.400 (p value 0.003; statistically significant). A one year increase in
the average years of schooling for females would increase the current democracy score by 0.011
(p value 0.961; statistically insignificant). A one year increase in the average years of schooling
for males and females would decrease the current democracy score by 0.197 (p value 0.417;
statistically insignificant). A one year increase in child mortality would decrease the current
democracy score by 0.006 (p value 0.001; statistically significant). A 1% increase in the
population would decrease the current democracy score by 3.605 (p value 0.000; statistically
significant). R-squared is overall at around 0%. This is the result for countries in Africa.

. xtreg fh_ipolity2 lag5fh_ipolity2 lag10fh_ipolity2 lgle_cgdpc bl_asy25f bl_asy25mf wdi_mortuf

lunna_pop if dummy_regio
> n == 2, fe
Fixed-effects (within) regression
Group variable: ccodecow

Number of obs
Number of groups

=
=

890
25

R-sq:

Obs per group: min =

avg =
max =

26
35.6
36

within = 0.4870
between = 0.1872
overall = 0.2372

corr(u_i, Xb)

= -0.7246

F(7,858)
Prob > F

=
=

116.37
0.0000

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lag5fh_ipo~2 |
.2986662
.0270307
11.05
0.000
.2456121
.3517203
lag10fh_ip~2 | -.1779587
.0255426
-6.97
0.000
-.228092
-.1278254
lgle_cgdpc |
1.305662
.1999972
6.53
0.000
.913121
1.698203
bl_asy25f | -1.100098
.3391281
-3.24
0.001
-1.765716
-.4344802
bl_asy25mf |
1.270275
.3701692
3.43
0.001
.5437323
1.996819
wdi_mortuf | -.0260991
.004068
-6.42
0.000
-.0340835
-.0181147
lunna_pop | -1.876311
.6150797
-3.05
0.002
-3.083548
-.6690742
_cons |
25.25772
9.257162
2.73
0.006
7.088385
43.42705
-------------+---------------------------------------------------------------sigma_u | 3.0492482
sigma_e |
1.484769
rho | .80834185
(fraction of variance due to u_i)
-----------------------------------------------------------------------------F test that all u_i=0:
F(24, 858) =
25.77
Prob > F = 0.0000

Interpreting this, a point increase in the democracy score from 5 years ago would increase
the current democracy score by 0.299 (p value 0.000; statistically significant). A point increase in
the democracy score from 10 years ago would decrease the current democracy score by 0.0177
(p value 0.000; statistically significant). A 1% increase in real GDP per capita would decrease the
current democracy score by 1.306 (p value 0.000; statistically significant). A one year increase in
the average years of schooling for females would decrease the current democracy score by
-1.100 (p value 0.001; statistically significant). A one year increase in the average years of
schooling for males and females would decrease the current democracy score by 1.270 (p value
0.001; statistically significant). A one year increase in child mortality would decrease the current
democracy score by 0.026 (p value 0.000; statistically significant). A 1% increase in the
population would decrease the current democracy score by 1.876 (p value 0.002; statistically
significant). R-squared is overall at around 23%. This is the result for countries in America.

. xtreg fh_ipolity2 lag5fh_ipolity2 lag10fh_ipolity2 lgle_cgdpc bl_asy25f bl_asy25mf wdi_mortuf

lunna_pop if dummy_regio
> n == 3, fe
Fixed-effects (within) regression

Number of obs

991

Group variable: ccodecow

Number of groups

28

R-sq:

Obs per group: min =

avg =
max =

30
35.4
36

within = 0.2740
between = 0.0592
overall = 0.0814

corr(u_i, Xb)

= -0.4499

F(7,956)
Prob > F

=
=

51.53
0.0000

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lag5fh_ipo~2 |
.3573656
.0273687
13.06
0.000
.303656
.4110753
lag10fh_ip~2 |
-.120586
.024829
-4.86
0.000
-.1693116
-.0718604
lgle_cgdpc |
.3453515
.0983545
3.51
0.000
.1523358
.5383673
bl_asy25f |
.135462
.1894528
0.72
0.475
-.2363294
.5072534
bl_asy25mf |
.0232138
.1990556
0.12
0.907
-.3674225
.4138501
wdi_mortuf | -.0076505
.0019662
-3.89
0.000
-.0115091
-.0037918
lunna_pop | -.6092483
.2995013
-2.03
0.042
-1.197004
-.0214924
_cons |
10.03039
5.149035
1.95
0.052
-.0743227
20.13511
-------------+---------------------------------------------------------------sigma_u | 2.9139627
sigma_e |
1.351847
rho | .82289477
(fraction of variance due to u_i)
-----------------------------------------------------------------------------F test that all u_i=0:
F(27, 956) =
25.10
Prob > F = 0.0000

Interpreting this, a point increase in the democracy score from 5 years ago would increase
the current democracy score by 0.357 (p value 0.000; statistically significant). A point increase in
the democracy score from 10 years ago would decrease the current democracy score by 0.120 (p
value 0.000; statistically significant). A 1% increase in real GDP per capita would decrease the
current democracy score by 0.345 (p value 0.000; statistically significant). A one year increase in
the average years of schooling for females would increase the current democracy score by 0.135
(p value 0.475; statistically insignificant). A one year increase in the average years of schooling
for males and females would increase the current democracy score by 0.023 (p value 0.907;
statistically insignificant). A one year increase in child mortality would decrease the current
democracy score by 0.008 (p value 0.000; statistically significant). A 1% increase in the
population would decrease the current democracy score by 0.609 (p value 0.042; statistically
significant). R-squared is overall at around 8%. This is the result for countries in Asia.
. xtreg fh_ipolity2 lag5fh_ipolity2 lag10fh_ipolity2 lgle_cgdpc bl_asy25f bl_asy25mf wdi_mortuf
lunna_pop if dummy_regio
> n == 4, fe
Fixed-effects (within) regression
Group variable: ccodecow

Number of obs
Number of groups

=
=

792
22

R-sq:

Obs per group: min =

avg =
max =

36
36.0
36

within = 0.5155
between = 0.1240
overall = 0.0692

F(7,763)

115.99

corr(u_i, Xb)

= -0.9966

Prob > F

0.0000

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lag5fh_ipo~2 |
.2029184
.0290301
6.99
0.000
.14593
.2599068
lag10fh_ip~2 | -.2210889
.0272401
-8.12
0.000
-.2745633
-.1676145
lgle_cgdpc |
.7630841
.1701383
4.49
0.000
.4290893
1.097079
bl_asy25f |
2.367109
.5134705
4.61
0.000
1.359126
3.375091
bl_asy25mf | -2.017415
.5442997
-3.71
0.000
-3.085918
-.9489124
wdi_mortuf | -.0584729
.0056929
-10.27
0.000
-.0696484
-.0472973
lunna_pop | -15.51187
1.046452
-14.82
0.000
-17.56614
-13.45761
_cons |
248.44
16.40728
15.14
0.000
216.2312
280.6487
-------------+---------------------------------------------------------------sigma_u | 24.941083
sigma_e | 1.2986382
rho | .99729623
(fraction of variance due to u_i)
-----------------------------------------------------------------------------F test that all u_i=0:
F(21, 763) =
20.40
Prob > F = 0.0000

Interpreting this, a point increase in the democracy score from 5 years ago would increase
the current democracy score by 0.202 (p value 0.000; statistically significant). A point increase in
the democracy score from 10 years ago would decrease the current democracy score by 0.221 (p
value 0.000; statistically significant). A 1% increase in real GDP per capita would increase the
current democracy score by 0.763 (p value 0.000; statistically significant). A one year increase in
the average years of schooling for females would increase the current democracy score by 2.367
(p value 0.00; statistically significant). A one year increase in the average years of schooling for
males and females would decrease the current democracy score by 2.017 (p value 0.00;
statistically significant). A one year increase in child mortality would decrease the current
democracy score by 0.058 (p value 0.000; statistically significant). A 1% increase in the
population would decrease the current democracy score by 15.511 (p value 0.000; statistically
significant). R-squared is overall at around 7%. This is the result for countries in Europe.
. xtreg fh_ipolity2 lag5fh_ipolity2 lag10fh_ipolity2 lgle_cgdpc bl_asy25f bl_asy25mf wdi_mortuf
lunna_pop if dummy_regio
> n == 5, fe
Fixed-effects (within) regression
Group variable: ccodecow

Number of obs
Number of groups

=
=

144
4

R-sq:

Obs per group: min =

avg =
max =

36
36.0
36

within = 0.4657
between = 0.9290
overall = 0.6219

corr(u_i, Xb)

= -0.9848

F(7,133)
Prob > F

=
=

16.56
0.0000

-----------------------------------------------------------------------------fh_ipolity2 |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------lag5fh_ipo~2 |
.0209519
.0842102
0.25
0.804
-.1456127
.1875164
lag10fh_ip~2 | -.0496877
.072004
-0.69
0.491
-.1921088
.0927334
lgle_cgdpc |
1.730008
.6086889
2.84
0.005
.5260451
2.933971

bl_asy25f | -4.011453
2.574757
-1.56
0.122
-9.104223
1.081317
bl_asy25mf |
3.664419
2.682789
1.37
0.174
-1.642033
8.970871
wdi_mortuf |
.0309015
.0401386
0.77
0.443
-.0484911
.1102941
lunna_pop | -2.861765
3.632089
-0.79
0.432
-10.0459
4.322367
_cons |
35.37791
49.19255
0.72
0.473
-61.92304
132.6789
-------------+---------------------------------------------------------------sigma_u | 7.5843673
sigma_e | .80933287
rho | .98874104
(fraction of variance due to u_i)
-----------------------------------------------------------------------------F test that all u_i=0:
F(3, 133) =
24.15
Prob > F = 0.0000

Interpreting this, a point increase in the democracy score from 5 years ago would increase
the current democracy score by 0.020 (p value 0.804; statistically insignificant). A point increase
in the democracy score from 10 years ago would decrease the current democracy score by 0.049
(p value 0.491; statistically insignificant). A 1% increase in real GDP per capita would increase
the current democracy score by 1.730 (p value 0.005; statistically significant). A one year
increase in the average years of schooling for females would decrease the current democracy
score by 4.011 (p value 0.122; statistically insignificant). A one year increase in the average
years of schooling for males and females would increase the current democracy score by 3.66 (p
value 0.174; statistically insignificant). A one year increase in child mortality would increase the
current democracy score by 0.030 (p value 0.443; statistically insignificant). A 1% increase in the
population would decrease the current democracy score by 2.861 (p value 0.432; statistically
insignificant). R-squared is overall at around 62%. This is the result for countries in Oceania.
IV.

Conclusion and Recommendation

1. on cross section regressions
- relationship between economic growth and democracy is positive when we regressed for all
countries
- results not significant in some regions, give possible reason why (e.g. in America and Europe,
positive >> origins of democracy; asia >> most fast growing countries are not really democratic)
- relationship between economic growth and democracy is also positive in oecd countries
- note that the general predictions are expected >> american and european, oecd relationships.
model fit is better with america/europe, oecd >> r2 is higher compared to the regression for all
countries
2. on panel
- explain the relationship of the independent variables to democracy
- explain more on the variations of the variables per region pero focus more on economic growth
and economic development indicators
- can discuss how model is bad fit (very low r2) for some regions >> fit variations across the
different regions
- discuss variations in the signs and significance of the different variables across the different
regions
3. recommendations

- more data >> to control for life expectancy; more countries for education indicators (generally
reduced our country sample because of limitations to the education data)
- longer time frame
- inclusion of other determinants of democracy accdg to Barro (1999)

V.

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