Democracy, Political Stability and Economic Growth

Democracy, Political Stability and Economic Growth Author(s): Yi Feng Source: British Journal of Political Science, Vol.
27, No. 3 (Jul., 1997), pp. 391-418 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/194123 . Accessed: 26/07/2011 21:32
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B.J.Pol.S. 27, 391-418 Printed in Great Britain
Copyright? 1997 CambridgeUniversityPress
Democracy, Political Stability and Economic Growth

YI FENG*
This article investigates the interactions between democracy, political stability and economic growth. Two aspects of the study differentiate it from previous research. First, a simultaneous approach is adopted which combines the study of economic growth and political stability with that of economic growth and democracy. Secondly, a distinction is made between types of political instability, because different kinds of government change have different effects on economic growth and democracy. This analysis employs three-stage least-squaresestimation, and utilizes aggregate data covering ninety-six countries from 1960 to 1980. The results indicate that democracy has a positive indirect effect upon growth through its impacts on the probabilities of both regime change and constitutional government change from one ruling party to another. In addition, the evidence indicates that the two kinds of political change mentioned above have significant and opposite effects on growth; that growth has a negative effect on regime change and a positive effect on the probability of the ruling party remaining in power; and that long-run economic growth tends to exert a positive effect upon democracy.
Studies of the political economy of growth abound with contradictory hypotheses and findings. Democracy, for example, is alleged both to promote and to inhibit economic development - yet some scholars conclude that democracy and growth are unrelated. Political instability, the other major political variable, is sometimes identified as a cause of poor economic growth, and sometimes as a consequence of it. This article addresses these controversies by developing a simultaneous equation model which explicitly allows for the possibility that democracy, political stability and economic growth are all reciprocally related. The analysis differentiates between three types of political instability: 'irregular' government change (regime-level change); 'major regular' (within-regime) government change; and 'minor regular' (withinregime) government change. The theoretical model developed here is tested against data covering ninety-six countries for the period 1960-80. The statistical tests are intended to assess the long-run interrelationships between growth, stability and democracy, instead of offering an analysis of the short-run dynamics that might be involved in those interrelationships. The model in the article stipulates that while the direct effect of democracy
* Center for Politics and Economics, Claremont Graduate School, Claremont, Calif. The author is indebted to Kenneth A. Bollen, Shaun Bowler, Richard Burdekin, Arthur T. Denzau, John F. Helliwell, Robert W. Jackman and Thomas D. Willett for advice and helpful discussions. The author particularly thanks two anonymous reviewers and David Sanders for detailed comments. Will H. Moore helped in acquiring the data and Michael Toner provided researchassistance. The authoralone is responsible for the remaining errors.
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on growth may be ambiguous, its indirect effect on growth through the channel of political stability should be positive. The empirical results indicate that democracy has a significant and positive effect on economic growth by inhibiting regime interruptionand enhancing system adjustability. Democracy provides a stable political environment which reduces unconstitutional government change; yet along with regime stability, democracy offers flexibility and the opportunity for major government change within the political system. This combination of macropolitical certainty and micropolitical adjustability is conducive to sustained economic growth and expansion. The article is organized as follows: Section I examines the literature on the political economy of growth. Section II develops the central theoretical argument of this study and outlines its methodology. Section III specifies the component equations in the system and describes the data. Section IV presents the results of the simultaneous equation system. Section V provides a summary and conclusions.
I. THE AMBIGUITY OF THE EXISTING EVIDENCE
Two themes in the study of the political economy of growth are the relationship between democracy and growth, and the relationship between political stability and growth. Three schools of thought have worked on the former relationship.' The 'conflict school' argues that democracy hinders economic growth, particularly in less developed countries (LDCs).2 Sirowy and Inkles offer three hypotheses in support of this claim: the 'dysfunctional consequences' of 'premature' democracy slow growth; democratic regimes are unable to implement the policies necessary for rapid growth; and democracy is incapable of pervasive state involvement in the development process in the present world-historical context.3 In addition, it has also been argued that a nation's rapid growth requires autocratic control and reduced freedom and that developing countries, in particular, cannot achieve rapid economic growth without a strong centralized government.4 In contrast, the 'compatibility school' of thought sharply objects to the
Larry Sirowy and Alex Inkeles have provided an excellent review in 'The Effects of Democracy on Economic Growth and Inequality: A Review', Studies in Comparative International Development, 25 (1990), 126-57. 2 This school of thought has been particularly favoured by some scholars in Latin American politics. For a review of variants of the argument that democracy has failed to achieve economic growth in Latin America, see Youssef Cohen, Radical Reformers and Reactionaries: The Prisoner's Dilemma and the Collapse of Democracy in Latin America (Chicago: The University of Chicago Press, 1994), pp. 23-32. 3 Sirowy and Inkeles, 'The Effects of Democracy', p. 129. 4 For example, see John W. Johnson, The Military and Society in LatinAmerica (Stanford, Calif.: Stanford University Press, 1964); Barrington Moore Jr, Social Origins of Dictatorship and Democracy (Boston, Mass.: Little, Brown, 1966); Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, Mass.: HarvardUniversity Press, 1962); and Samuel P. Huntington, Understanding Political Development (Boston, Mass.: Little, Brown, 1987).
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hypotheses of the conflict school and contends that democracy enhances economic growth. Proponents of the democratic model argue that democratic governments in LDCs are best suited to foster sustained and equitable economic development. They maintain that democratic processes as well as the existence and exercise of fundamental civil liberties and political rights generate the social conditions most conducive to economic development. Political and economic freedom enhances property rights and market competition, thus promoting economic growth.5 Finally, according to the 'sceptical' perspective, there is no systematic relationship between democracy and economic development.6 The proponents of this school of thought maintain that having a democratic government alone means very little for economic growth. Instead, the focus should be placed on institutional structures (e.g., two-party vs. multi-party) and government development strategies (e.g., import substitution vs. export promotion), which may vary independently of the democratic character of a political system. The scepticism in this perspective also implies that different political systems are capable of adopting the same economic policy and suggests that the effects on growth of political systems are negligible. Despite the rich texture of the theoretical literature on the subject, cross-national quantitative efforts to test the various hypotheses have fallen short in their attempt to yield clear empirical grounds for rejecting or accepting many of the claims made.7 Some empirical studies have found no significant relationship between economic development and democracy.8 Others have observed a strong impact of democracy on growth.9 Yet others have ascertained
5 For example, see Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Modem Library, 1937); F. A. Hayek, The Road to Serfdom (Chicago: The University of Chicago Press, 1944); Seymour M. Lipset, 'Some Social Requisites of Democracy: Economic Development and Political Development', American Political Science Review, 53 (1959), 69-105; Milton Friedman, 'Capitalism and Freedom', New Individualist Review, 1 (1961), 3-10; L. von Mises, Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Classics, 1981); and William H. Riker and David L. Weimer, 'The Economic and Political Liberalization of Socialism: The FundamentalProblem of PropertyRights', Social Philosophy and Policy, 10 (1993), 79-102. 6 See Lucian Pye, Aspects of Political Development (Boston, Mass.: Little, Brown, 1966); and Robert D. McKinlay and A. S. Cohan, 'A Comparative Analysis of the Political and Economic Performance of Military and Civilian Regimes: A Cross-National Aggregate Study', Comparative Politics, 8 (1975), 1-30. 7 See Sirowy and Inkeles, 'The Effects of Democracy', p. 150. Also see Adam Przeworski and Fernando Limongi, 'Political Regimes and Economic Growth', Journal of Economic Perspectives, 7 (1993), 51-69, at p. 64. 8 For instance, see Atul Kohli, 'Democracy and Development', in John Lewis and Valeriana Kallab, eds, Development Strategies Reconsidered (New Brunswick, NJ: TransactionBooks, 1986), pp. 153-82; and Robert M. Marsh, 'Sociological Explanations of Economic Growth', Studies in Comparative International Development, 23 (1988), 41-76. 9For instance, see Gerald Scully, 'The Institutional Framework and Economic Development', Journal of Political Economy, 98 (1988), 652-62; and Kevin B. Grier and Gordon Tullock, 'An
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only a weak positive effect of freedom on growth,'? or have even discerned a negative influence of freedom on growth." Regional studies focusing on developing countries have also produced ambiguous findings.'2 Like the study of democracy and growth, the study of political stability and growth has also yielded contradictory findings. Alesina, Ozler, Roubini and Swagel find that countries with a high incidence of government collapse have low economic growth, though they also find that low economic growth does not affect political instability.13 Londregan and Poole, however, do not find evidence of reduced growth as a consequence of increased political instability; instead, they infer from their study that low economic growth increases the probability of political instability.14 Some studies that use single equation estimation identify low economic growth as a result of political instability.15 In the study of political stability and economic performance, regime change
(F'note continued)
Empirical Analysis of Cross-National Economic Growth: 1951-1980', Journal of Monetary Economics, 24 (1989), 259-76. '0 Roger C. Kormendi and Philip G. Meguire, 'Macroeconomic Determinants of Growth: Cross-Country Evidence', Journal of Monetary Economics, 16 (1985), 141-63; and Abbas Pourgerami, 'Authoritarianversus NonauthoritarianApproaches to Economic Development: Update and Additional Evidence', Public Choice, 74 (1992), 365-77. " Adam Przeworski, 'Party Systems and Economic Development' (doctoral dissertation, Northwestern University, 1966); Irma Adelman and Cynthia Morris, Society, Politics and Economic Development (Baltimore, Md.: The John Hopkins University Press, 1967); Samuel P. Huntington and Jorge I. Dominguez, 'Political Development', in F. I. Greenstein and N. W. Polsby, eds, Handbook of Political Science, Vol. 3, Macropolitical Theory (Reading, Mass.: Addison-Wesley, 1975), pp. 1-114; Robert M. Marsh, 'Does Democracy Hinder Economic Development in the Latecomer Developing Nations?' Comparative Social Research, 2 (1979), 215-48; Erich Weede, 'The Impact of Democracy on Economic Growth', Kyklos, 36 (1983), 21-39; Daniel Landau, 'Government and Economic Growth in the LDCs: An Empirical Study for 1960-1980', Economic Development and Social Change, 35 (1986), 35-76; and John F. Helliwell, 'Empirical Linkages between Democracy and Economic Growth', British Journal of Political Science, 24 (1994), 225-48. 12 In studies of Latin American countries, Remmer found that,though a democracy performsbetter than an autocracy in economic growth, the difference between them is not statistically significant; Feng found that a democracy grows significantly faster than an autocracy; Sloan and Tedin found that bureaucratic-authoritarian regimes do better than democracies, and traditional dictatorships do worse; see Karen L. Remmer, 'Democracy and Economic Crisis: The Latin American Experience', WorldPolitics, 42 (1990), 315-35; Yi Feng, 'Regime, Polity and Economic Performance:The Latin American Experience', Growth and Change, 26 (1995), 77-104; and John Sloan and Kent L. Tedin, 'The Consequence of Regime Type for Public Policy Outputs', Comparative Political Studies, 20 (1987), 98-124. 13 See Alberto Alesina, Sule Ozler, Nouriel Roubini and Phillip Swagel, Political Instability and Economic Growth (Cambridge, Mass.: National Bureau of Economic Research, Working Paper No. 4173, 1992). 14 John B. Londregan and Keith T. Poole, 'Poverty, the Coup Trap, and the Seizure of Executive Power', World Politics, 32 (1990), 151-83. 15 For instance, see Robert Barro, 'Economic Growth in a Cross-Section of Countries', Quarterly Journal of Economics, 106 (1991), 408-43.
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and government change are typically confounded.16 No distinction is made, for instance, between a military coup d'etat and an election change which involves the succession of one party by another.17 By contrast, Sanders conducts a systematic and comprehensive study of political instability.18 A major contributionof this work is that different types of political instability are defined, and then subjected to multivariate statistical analysis. Sanders identifies two major dimensions of political instability: regime change (changes in regime norms, changes in types of party system, changes in military-civilian status) and government change (changes in the effective executive or cabinet). In a multivariate regression analysis, Sanders finds that freedom contributes to regime-change instability, and economic development inhibits regime-change instability, though freedom and development have much less of an effect on government-change instability. This definition of political instability provides two mutually exclusive subsets of political change which may have different impacts on economic growth. Sanders's empirical result implies that a study of political instability and growth will be theoretically meaningless and probably lead to confusing and ambiguous empirical conclusions unless political instability is properly differentiated. Major political instability (such as a successful coup d'etat) and minor political instability (such as a government change involving the same party) may well have different consequences for growth. The growth literature also finds both that democracies grow faster than authoritarian states and vice versa. One argument is that among developing countries, an authoritarian government is more efficient in utilizing and allocating resources than democracies.19 If this is true, then rapid economic growth will increase the legitimacy of authoritarianregimes. Thus, we would find that growth leads to a relatively low degree of democracy. The counter argument is that rapid growth allows the dynamic elements in the society to achieve status and income independently of the government, thus promoting political freedom.20 It should be noted finally that several studies employ simultaneous equations
16 Easton makes a distinction between 'political authorities' and 'regime'. 'Political authorities' or 'government' refers to a set of decision makers who determine and are seen to determine policy during any given time period, and 'regime' is defined as the legal and informal rules which govern the resolution of conflict within the system; see David Easton, A Systematic Analysis of Political Life (New York: Wiley, 1965), p. 177. 17 For instance, see Alesina et al., Political Instability and Economic Growth; and Alex Cukierman, Sebastian Edwards and Guido Tabellini, 'Seigniorage and Political Instability', American Economic Review, 82 (1991), 537-55. 18 David Sanders, Patterns of Political Instability (New York: St Martin's Press, 1981). 19 For example, see Guillermo A. O'Donnell, 'Reflections on the Patterns of Change in the Bureaucratic Authoritarian States', Latin American Research Review, 13 (1978), 3-36; and Guillermo A. O'Donnell and Philippe C. Schmitter, Transitionsfrom Authoritarian Rule: Tentative Conclusions about Uncertain Democracy (Baltimore, Md.: The John Hopkins University Press, 1986). 2( John F. O. Bilson, 'Civil Liberty: An Econometric Investigation', Kyklos, 35 (1982), 94-114.
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to investigate the causality either between growth and government change21or between growth and democracy,22 but not both. It is likely that government change and democracy are endogenous to each other in their relationships with growth. Democracies may experience typically more constitutional government transfers than dictatorships, and dictatorships may have more unconstitutional government changes than democracies. However, as stability is analytically distinct from the democratic quality of the political system, it should be treated as such empirically.23 This implies that stability and democracy should be included concurrently as separate endogenous variables in the study of economic growth.
II. TOWARDS A MULTI-EQUATION SPECIFICATION
In the mystery of the effect of democracy on growth, an importantclue has been followed by Helliwell, who finds the estimated partial effect of democracy on subsequent economic growth to be negative - though this negative effect is counterbalanced by the positive indirect effect that democracy exerts on growth through education and investment.24Parallel to Helliwell's argument about the indirect effect of democracy on economic growth, an area worthy of study is the positive indirect effect of democracy on growth through the channel of political stability. Such a study can be theoretically framed and empirically carried out through a simultaneous equation model which includes growth, government change and democracy as endogenous variables. In line with the distinction made by Taylor and Hudson, I distinguish between three varieties of instability: 'irregular government change', 'major regular government change' and 'minor regular government change'.25 The following clusters of exposition discuss the theoretical relationships between government change and growth, between government change and democracy, and between democracy and growth, respectively.
21 Alesina et al., Political Instability and Economic Growth; and Londregan and Poole, 'Poverty, the Coup Trap, and the Seizure of Executive Power'. 22 Pourgerami, 'Authoritarianversus NonauthoritarianApproaches'; and Helliwell, 'Empirical Linkages'. 23 Kenneth A. Bollen and Robert W. Jackman, 'Democracy, Stability, and Dichotomies', American Sociological Review, 54 (1989), 612-21. 24 Helliwell, 'Empirical Linkages', pp. 235, 246. 25 Alesina et al., Political Instability and Economic Growth; Cukierman et al., 'Seigniorage and Political Instability'; Charles L. Taylor, World Handbook of Social and Political Indicators (Ann Arbor, Mich.; ICPSR, 1985). Better terminology for irregular government change, major regular government change, and minor regular government change might be 'regime change', 'intergovernmental change', and 'intragovernmental change', respectively, but as this study replicates some previous research, the original terms for political instability are used here.
Democracy, Political Stability and Economic Growth The Instability-Growth Nexus
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Regular and irregular government changes should have different impacts on economic growth. Specifically, irregular political changes such as coups d'etat instil great amounts of uncertainty into the market-place, slowing down and even reversing economic growth. As economic agents have to pay entry or exit costs when they invest, actual or anticipated fundamental changes in the government force them to decrease their investment in order to minimize these costs.26 Economic growth is thus retarded because of the political uncertainty resulting from the potential of fundamental change in the political control of the nation. By contrast, regular government transfers take place within the framework of a nation's constitution. Major regular government change often implies that the ousted government's economic performance was not good, and voters chose a new government because of its potential for improving the economy. In a simultaneous equation model where irregulargovernment change is also entered as an endogenous variable, regular government change may represent political adjustment to market conditions so that the economy will reposition itself for growth. In contrast to the uncertainty caused by regime interruption resulting from irregular government change, major regular government change offers policy adjustmentwithout fundamental change in the political order. In the short run, majorregulargovernment change may create uncertaintyin some economic areas, and its effect on growth may be ambiguous. In the long run, however, major regular government change reflects a pattern of system adjustability and government accountability in favour of economic performance, and is thus likely to produce higher growth. Similarly, a minor regular government transfer represents political adjustment rather than radical change. It represents the continuity of government policy, and may provide the political stability necessary for economic growth and development. Minor regular governmeiit change has two advantages: the government is allowed sufficient time to formulate long-term economic plans without giving in to pressures or temptations for short-term political gains, and investors benefit from low risk premiums of policy changes, as they do not have to concern themselves with significant political shifts. In the context of a popularly elected government, minor regular government change offers 'democracy without turnover'.27 Finally, growth is likely to have a positive impact on the legitimacy of the government, and its effect on substantial government change should be negative. Rapid economic growth increases the popularity of the government,
Yi Feng and Baizhu Chen, 'Government Capacity and Private Investment: A Study of Developing Countries', in MarinaArbetmanand Jacek Kugler, eds, Political Capacity and Economic Behavior (Boulder, Colo.: Westview Press, 1996), chap. 5. 27 The phenomenon of 'democracy without turnover' has been discussed by Samuel P. Huntington;see Samuel P. Huntington, 'Democracy's Third Wave', Journal of Democracy, 2 (1991) 12-34.
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thus diminishing the likelihood that the current government is ousted within a constitutional context or by unconstitutional means. The government party is either punished or rewarded according to its economic performance, and its probability of being reselected into office increases as the result of a good economic record. A major implication of this analysis is that the improvement of the economy should decrease the chance of regime change or major regular government change. This negative effect, moreover, should apply to both democratic and autocratic regimes.
The Instability-Democracy Nexus
In non-democracies, government change is characterized by either irregular government change, in which the country is trapped in a history of coups d'etat,28or by an absence of substantial change in the government, so that it has been led by the same party for decades.29 By contrast, democracy encourages political competition in a constitutional context and tends to bring about government change through party politics, thereby increasing the chances of substantial government turn-over between political parties. In the long run, it reduces the chances both of the same party holding on to power for a long time and of abrupt, profound unconstitutional government change. In general, therefore, it can be hypothesized that democracy will increase the probability of major regulargovernment change, lessen the chances of irregulargovernment change and, in the long run, decrease the propensity for minor regular government change. Regular government change and irregular government change should have different effects on democracy. While major regular government change enhances constitutional adjustability and system flexibility, irregular government change disrupts the constitution and is thus more likely to herald undemocratic governments than to consolidate the democratic process. This implies that, in general, major regular government change promotes democracy and irregular government change leads to a decrease in democracy. Finally, minor regular government change - if it implies a lack of substantial party competition - may in the long run erode democracy.
The Democracy-Growth Nexus
The central argument in this article is that democracy is likely to have a significant indirect effect on growth through its impact on political stability. As noted above, democracy itself is likely to increase the extent of major regular change but to reduce irregularand minor regular change. As also noted, regular government change is likely to have a positive effect on growth, as it tends to
See Londregan and Poole, 'Poverty, the Coup Trap, and the Seizure of Executive Power', pp. 162-3. 29 See Henry Bienen, 'Leaders, Violence, and Absence of Change in Africa', Political Science Quarterly, 108 (1993), 271-82.
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represent political and economic adjustments in response to the demands of the society, including economic stimuli. In contrast, irregular government change may exert a negative impact on growth, as it translates a large degree of political uncertainty into the costs of doing business. It follows that democracy enhances growth where it increases the probability of major regular government change, and where it inhibits the probability of irregulargovernment change. One reason that the literature produces conflicting empirical findings is that the indirect effect of democracy on growth through the channel of political change has not been taken into consideration. Neither the 'compatibility' nor the 'conflict' school of thought referred to above has explored the effect of democracy on growth, as conditioned by political stability. Whether democracy promotes growth through its impacts on major and minor regular government changes depends on the trade-off between the loss of growth as a result of the reduction of the probability of minor regular government change and the increase of growth as a consequence of the augmenting of the probability of major regular government change. It will be important to find out empirically not only how significantly democracy may decrease the likelihood of minor regular government change, but also how significantly minor regular government change may promote growth. The effects of growth on democracy may be ambiguous in terms of a time horizon. In the long run, continuous growth will eventually lead to a high level of development, which has a positive effect on democracy. In the short run, growth may strengthen the hand of a dictator and provide the government with the excuse of sacrificing democracy and freedom. While the long-run effect of growth on democracy is positive, the short-runeffect may be negative. As this study involves twenty-one years, the aggregate effect of growth on democracy is expected to be positive.30 In order to estimate the interactions between democracy, stability and growth as stipulated above, I define the following simultaneous equation system:
+ PI = 1plP2,3 yplG + ,plD + aplXpl + P2 = Ap2P1,3 +
i1
yp2G + (p2D + ap2Xp2 + 62
P3 = ,p3P1,2 + 7p3G + -p3D + ap3Xp3 + E3 G = ygP + CgD + agXg + p D = ydP + CdG+ adXd + )
where P1 = probability of irregular government change, P2 = probability of major regular government change, P3 = probability of minor regular governpotential short-runnegative effect of growth on democracy may be evidenced by a negative correlation between growth and civil liberties in the short run (annual) data (1978-90) for four Asian countries considered to have neo-authoritariangovernments: Singapore, Malaysia, South Korea and Taiwan. The Pearson coefficient is - 0.305 (N = 52). By comparison, the Pearson coefficient for the whole sample is - 0.133 (N = 1,666). The data for civil liberties are from Raymond Gastil, Freedom in the World (Westport, Conn.: Greenwood, 1978-90) and the data for growth are from Robert Summers and Alan Heston, 'The Penn World Tables, Version 5.6' (1994), available on diskette from the National Bureau of Economic Research, Cambridge, Mass. 30 The
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ment change, G = annual rate of economic growth per capita, D = degree of democracy, X = predetermined variables, and e, / and ? are error terms. The
coefficients Ap,y7, g, y d,
p, Cg
and Cdtake into consideration the contemporane-
ous feedbacks among change of government, growth and democracy, while the a coefficients measure the effects of the exogenous variables. Note that pl, P2 and p3 involve three kinds of mutually exclusive government transfers. Methodologically, most studies in the growth literature have used ordinary least squares (OLS) estimation with growth as the dependent variable, and political stability or freedom as the independent variable. A major drawback of a single equation approach is that it does not take into account the endogeneity of growth, government change and democracy. To the degree that growth and democracy may affect government change, or growth and government change may affect democracy, the OLS estimates are biased and inconsistent. The statistical inferences obtained are thus unreliable. The method used in this article is three-stage least-squares (3SLS) estimation, which generalizes the two-stage least-squares method to take account of the correlations between equations. It requires three steps: first, calculate the 2SLS estimates of the identified equations; secondly, use the 2SLS estimates to estimate the structuralequations' errors and then use these to estimate the contemporaneous variance-covariance matrix of the structural equations' errors; thirdly, apply GLS to the large equation representing all the identified equations of the system. The 3SLS estimator is consistent and in general is asymptotically more efficient than the 2SLS estimator. If the disturbances in the different equations are uncorrelated, so that the contemporaneous variance-covariance matrix of the disturbances of the structural equations is diagonal, 3SLS reduces to 2SLS.31
III. DATA AND SPECIFICATION
As the interest of this study lies in the long-term relationship between the political environment and economic development, the average cross-country data for a sufficiently long period of time seem appropriatefor the testing of the different hypotheses. For this purpose, the average of the variables over 1960-80 is adopted. This historical period is the longest for which the relevant data are available. The data used to estimate the simultaneous equations are those developed by Summers and Heston, Barro, Taylor, Gurr, and Banks, respectively.32 Economic data are obtained from the former two data sets and political data from the latter three. The merging of the five data sets results in full observations for the political and economic variables in ninety-six countries, to be discussed below. Exclusive of communist countries, these are either
31 William H. Greene, Econometric Analysis (Englewood, NJ: Prentice Hall, 1990), pp. 611-12.
32 Summers and Heston, 'The Penn World Tables, Version 5.6'; Taylor, World Handbook; Ted Robert Gurr, Polity II: Political Structures and Regime Change, 1800-1986 (Ann Arbor, Mich.: ICPSR, 1990); Arthur S. Banks, Cross-National Time-Series Data (Binghampton: The State University of New York, 1990); and Barro, 'Economic Growth in a Cross-Section of Countries'.
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developed countries (DCs) or less developed countries (LDCs). Since the study does not include years prior to a country's independence, the data for some countries begin after 1960. The Growth Equation One of the endogenous variables, economic growth, is defined as the average growth rate of real Gross Domestic Product (GDP) per capita,33 which is calculated for 1960-80 using the data adjusted by Summers and Heston for longitudinal comparison.34The growth equation includes a group of economic control variables that have been identified as important stimulants to growth in previous studies. (i) GDP. According to the neoclassical growth model, the growth rate tends to be negatively related to the absolute level of per capita GDP, owing to diminishing returns to capital.35Numerous empirical findings have found support for this argument.36In this study, the real GDP per capita in 1960 is used as an indicator of initial economic development, which is expected to have a negative effect on growth. (ii) Human capital accumulation is regarded as the most important factor for economic growth by some scholars,37for whom knowledge-driven growth can lead to a constant or even increasing rate of return.Empirical evidence has revealed a positive relationship between education and growth.38The elementary school enrolment rate in 1960 is thus included as an indicator for the initial accumulation of human capital, and it is expected to have a positive impact on growth.
33 Standards of living might more appropriatelybe measured by GNP per capita, which adjusts GDP to remove net factor payments to foreigners, or by sustainable consumption levels. Since GDP is widely used and over the period of analysis the internationaldifferences in the rates of growth of per capita GDP and GNP are highly correlated, GDP is used in this study. Also, in addition to the growth rate of GDP or GNP per capita, the developmental goals of any country may include improvements in the living standard, health, education, employment, control of inflation, foreign debts, etc. Glenn Firebaugh and Frank D. Beck address some of these issues in 'Does Economic Growth Benefit the Masses? Growth, Dependence, and Welfare in the Third World', American Sociological Review, 59 (1994), 631-53. 34 Summers and Heston, 'The Penn World Tables, Version 5.6'. 35 Robert M. Solow, 'A Contribution to the Theory of Economic Growth', Quarterly Journal of Economics, 34 (1956), 65-94. 36 Robert W. Jackman, Politics and Social Equality (New York: Wiley, 1975); and Barro, 'Economic Growth in a Cross-Section of Countries'. 37 For the theoretical argument, see Robert E. Lucas, 'On the Mechanics of Economic Development', Journal of Monetary Economics, 2 (1988), 3-42; Paul Romer, 'Increasing Returns and Long-run Growth', Journal of Political Economy, 94 (1986), 1002-37; and Alwyn Young, 'A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore', NBER Macroeconomic Annual 1992 (Cambridge, Mass.: NBER, 1992), pp. 13-54. 3' Ross Levine and David Renelt, 'A Sensitivity Analysis of Cross-CountryGrowth Regressions', American Economic Review, 82 (1992), 942-63.
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(iii) Investment has also been considered an engine of growth. Kormendi and Meguire, Firebaugh, and Levine and Renelt all provide empirical support for the proposition that private investment has a significant and positive effect on growth.39 This study includes the average ratio of private investment to GDP during 1950-60 as an indicator for the initial level of investment. The expected sign on this variable is positive. (iv) Inflation. While the Tobin-Mundell hypothesis states that anticipated inflation causes portfolio adjustments that lower the real rate of interest and raise investment and growth, Stockman finds that higher anticipated inflation reduces economic activities, thus lowering investment and growth.40 Gregorio suggests that the effect of the inflation level on investment is negligible if the elasticity of intertemporal substitution is sufficiently small.41Empirically, Kormendi and Meguire find that inflation negatively impacts growth, and Schneider and Frey establish a negative effect of inflation on foreign direct investment.42Fischer finds that high and variable inflation leads to low growth.43Since this study involves countries where inflation is often caused by political crises that depress economic activity,44 the sign on inflation is expected to be negative. (v) Trade expansion has been considered an important determinant of growth as well.45 As a country specializes and exports, developmental gains from trade can contribute to high levels of growth. Because of foreign competition, export expansion raises factor productivity and leads to growth through the efficient use of resources and the adoption of technological innovation. Also, the economy expands as the result of integration into large international markets, which gives rise to greater capacity utilization and gains of scale effects. In this article, the sum of exports and imports of goods and services as a percentage of GDP is used
39 Kormendi and Meguire, 'Macroeconomic Determinantsof Growth'; Glenn Firebaugh, 'Growth Effects of Foreign and Domestic Investment', American Journal of Sociology, 98 (1992), 105-30; Levine and Renelt, 'A Sensitivity Analysis of Cross-Country Growth Regressions'. 40 Alan Stockman, 'Anticipated Inflation and the Capital Stock in a Cash-in-Advance Economy', Journal of Monetary Economics, 8 (1981), 387-93. 41 Jose De Gregorio, 'Inflation, Taxation, and Long-Run Growth', Journal of Monetary Economics, 31 (1993), 271-98. 42 Kormendi and Meguire, 'Macroeconomic Determinants of Growth'; and Friedrick Schneider and Bruno Frey, 'Economic and Political Determinants of Foreign Direct Investment', World Development, 13 (1985), 161-75. 43 Stanley Fischer, Growth, Macroeconomics, and Development (Cambridge, Mass.: National Bureau of Economic Research, Working Paper No. 3702, 1991). 44 Grier and Tullock, 'An Empirical Analysis of Cross-National Economic Growth: 1951-1980'. 45 Anthony M. Tang and James S. Worley, eds, 'Why Does Overcrowded Resource-Poor East Asia Succeed - Lessons for the LDCs?' Economic Development and Cultural Change, 36 (1988), Supplement; Demetrios Moschos, 'Export Expansion, Growth and the Level of Economic Development', Journal of Development Economics, 30 (1989), 93-102; and Levine and Renelt, 'A Sensitivity Analysis of Cross-Country Growth Regressions'.
403
as a control variable. It is expected that this variable has a positive impact on growth.46
The Government Change Equations The probability of government change is not directly observable. Government change is a discrete phenomenon. However, political 'stability and instability', as indicated by government change, are 'relative tendencies, not discrete states'.47 To account for the relationship between the all-or-nothing nature of the transfer of the executive power and the relativity of political instability, I use the limited dependent variable estimation method. This method defines the probability of government change as a continuous variable, characterized as a function of economic and political conditions; it is obtained through a yearly logit model on time-series and cross-section data over the period 1960-80.48 The explanatory variables in the logit model fall into three broad classes: economic variables designed to measure the recent economic performance of the government; political variables, to account for significant political events that may signal the imminence of a government change; and dummy variables that group countries according to their continents. This logit model of government change is based on similar models by Cukierman et al. and Alesina et al.49The definitions and sources of the variables used to construct the probability of a government change are provided in Appendix 2, and the actual logistic regression models to get these probabilities are presented in Appendix 3.50From
I use trade intensity rather than the share of exports in GDP, as it has been found by Levine and Renelt that all findings using the share of exports in GDP could be obtained almost identically using the total trade or import share. Thus, cross-country growth studies that use export indicators should not be interpretedas studying the relationship between growth and exports per se, but rather as between growth and trade defined more broadly. See Levine and Renelt, 'A Sensitivity Analysis of Cross-Country Growth Regressions', p. 959. 47 Sanders, Patterns of Political Instability, p. 57. 4AThe opposite of the probability of government change is the concept of government durability, which implies the stability and efficacy of a government. See G. Bingham Powell Jr, Contemporary Democracies: Participation, Stability, and Violence (Cambridge, Mass.: HarvardUniversity Press, 1986). 49 Alesina et al., Political Instability and Economic Growth; and Cukierman et al. 'Seigniorage and Political Instability'. 50 Most variables in the logit model have the expected sign, even though not all are statistically significant (see Appendix 3). In particular,an increase in consumption levels decreases the likelihood of irregular government change. Riots, political repressions, deaths from political violence and unsuccessful attempts to change the government all signal the imminence of a political crisis and they increase the probability of irregulargovernment change and major regulargovernment change. Partycompetition decreases the probability of irregulargovernment change, whereas it increases the probability of regulargovernment change. The fractionalization of the legislature (as indexed by the number of all seats in the legislature divided by those of the largest party) increases the probability of all three kinds of government change. While non-civilian-controlled governments tend to have more irregulargovernment changes and fewer minor regular government changes, a recent change in the constitution tends to decrease irregular government changes and to increase minor regular
46
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FENG
the fitted values of the logit model using the pooled time-series cross-country data, the probability of a government change for each country in any given year during 1960-80 is estimated and then averaged over this period of time. There are three aggregate probabilities: irregular government change, major regular government change, and minor regular government change.51 In the three government change equations, I use the past average probability of government change as the predetermined variable. Specifically, the annual probability of government change over the period of 1950-60 is averaged to be the instrument in the simultaneous equation system. The initial irregular government change, the initial major regular government change, and the initial minor regular government change are entered into the irregular government change equation, the major regular government change equation and the minor regular government change equation, respectively.52 These predetermined variables provide a historical context in which the current government change takes place. Because of historical continuity, it is expected that the past probability will have a positive impact on the current probability. Thus, I anticipate that the signs on the probabilities of government change are all positive.53 The other exogenous variables in the equation are the initial level of real GDP per capita and the elementary school enrolment rate in 1960, both of which control for the initial social and economic conditions.
The Democracy
Equation
For the measure of democracy, I turn to the index provided by Gurr.54 The data set offers a wide range of annualized variables, including centralization of political authority, identification of major shifts in polity or political regime, and other measures. Most significantly, Gurr offers a composite index of institutionalized democracy, which is conceived as three essential, interdependent elements. One is the presence of institutions and procedures through which citizens can express effective preferences about alternative policies and leaders.
(F'note continued)
nation.Continentdummyvariablesare also statistically changes in that particular government of to factorscontributing the instability the political that indicating thereareadditional significant, with in variables the models.Compared the by systemwhicharenotfully captured theexplanatory OECDcountries,LatinAmericannationstend to have eitherirregular changeor minorregular are regular changeandnotto havemajor change.Asiancountries morelikelyto haveminorregular are change. change.Africancountries least likely to have majorregular 51 Log-odds to of ratiosfortheprobability government changeareusedin 3SLSestimation avoid of as the heteroscedasticity changerangesfrom problem, the valueof the probability government of of function theprobability governzeroto one. The log-oddsratiois a monotonically increasing mentchange. 52 Statistically, they ensurethatthe 3SLS systemis identified. 53 establishthata historyof frequent and coupsd'etatwill leadto Londregan Poole empirically the and of a relatively coupsd'etat.See Londregan Poole, 'Poverty, Coup highprobability current Trap,andthe Seizureof ExecutivePower'.
54
Gurr, Polity II.
405
The second is the existence of institutionalized constraints on the exercise of power by the executive. The third is the guarantee of civil liberties to all citizens in their daily lives and in acts of political participation. Other aspects of plural democracy, such as the rule of law, systems of checks and balances, freedom of the press, and so on, are means to, or specific manifestations of, these general principles. There is no necessary condition for characterizing a political system as democratic; rather,democracy is treatedas a variable. This study avoids using a dummy variable for democracy, as dichotomizing democracy would lump countries with very different degrees of democracy and blur distinctions between borderline cases.55 The value of democracy ranges from zero to ten, with ten representing the most democratic, and is averaged over the period 1960-80. Details of the measurement of democracy are provided in Appendix
4.56
In the democracy equation, the real GDP per capita in 1960 and the primary school enrolment rate in 1960 are also included. Helliwell confirms a robust positive relation between the level of per capita income and education on the one hand and the adoption of democracy on the other. He suggests that there 'appear to be no clearly defined thresholds or prerequisites - just a strong tendency for democracy to become the chosen and maintained form of government as countries get richer and as education levels increase'.57 These results suggest that democracy has an intrinsic value that is increasingly sought after as populations become better off financially and better educated. The level of GDP per capita is also established by Bilson as the only statistically and substantively significant independent variable for democracy.58 Finally, two dummy variables are added to the democratic equation to account for a possible cultural effect.59 Huntington suggests that Islam and Confucianism have not been hospitable to democracy and have been conducive to authoritarianrule.60The variable ISLAMIC takes the value of unity for countries where Islam is the largest religious group and zero otherwise.6' The variable CONFUCIAN scores unity for South Korea, Taiwan, Singapore and Japan, where
55 Bollen and Jackman, 'Democracy, Stability, and Dichotomies'. Also see Robert Harmel, 'Gurr's "Persistence and Change" Revisited: Some Consequences of Using Different Operationalizations of "Change of Policy"', European Journal of Political Research, 8 (1980), 189-214; and Ted Robert Gurr, Keith Jaggers and Will H. Moore, 'The Transformationof the Western State: The Growth of Democracy, Autocracy, and State Power since 1800', Studies in Comparative International Development, 25 (1990), 73-108. 57 Helliwell, 'Empirical Linkages', p. 246. 58 Bilson, 'Civil Liberty', pp. 107-8. 59 The two cultural variables also help identify the equation where they are excluded. Though they take the value of one or zero, they have the same statistical propertiesas other predeterminedvariables in identifying the system. 60 Samuel P. Huntington, 'Will More Countries Become Democratic?' Political Science Quarterly, 99 (1984), 193-218; and 'Clashes of Civilizations?' Foreign Affairs, 72 (1993), 2249. 61 The source is 'Comparative National Statistics', Britannica Book of the Year (Chicago: Encyclopedia Britannica, Inc., 1994), pp. 783-5.
56
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FENG
Confucianism has been regarded as the major cultural influence in the nation. If Huntington's cultural hypothesis of democracy holds, the parameterestimates of the two variables will be negatively signed and their statistical strength will be significantly different from zero.
IV. EMPIRICAL RESULTS
Table I reports cross-sectional results which extend the previous works by Kormendi and Meguire, Scully, Barro, and Alesina et al.62 The results of these regressions confirm the previous studies. Initial per capita income has a significant negative sign, supporting the hypothesis of conditional convergence.63 The initial level of human capital accumulation contributes to growth, confirming the endogenous growth theory emphasizing knowledge-driven growth.64 Trade and investment have a significant and positive impact on growth, similar to the result in a sensitivity analysis conducted by Levine and Renelt.65Finally, inflation is found to have a negative impact on growth, though it is not statistically significant at the 5 per cent level. All of the above findings corroborate the recent research in growth. In all three regressions, the signs on regularand irregulargovernment changes are opposite, and only the parameter estimate on minor regular government change is statistically significant. While the probability of irregulargovernment change is likely to have a negative effect on growth, the probability of regular government change tends to affect growth positively. This discrepancy may reflect the fundamental difference between regular and irregular government changes in their effects on growth, and thus supports the suspicion that the concept of major government change which lumps irregulargovernment change and major regular government change together may not be appropriate. Democracy has a negative sign and is marginally statistically significant after being controlled by the economic variables and government change. This finding is consistent with Helliwell's work, which finds that democracy tends to have a negative but weak impact on growth.66 Next, 3SLS estimation is applied to the simultaneous equation system of democracy, government change and economic growth specified in the preceding section. The results in Table 2 are telling in the sense that they support the hypotheses about the differential effects of regular and irregular government
62 Kormendi and Meguire, 'Macroeconomic Determinants'; Scully, 'The InstitutionalFramework and Economic Development'; Barro, 'Economic Growth in a Cross-Section of Countries'; Alesina et al., Political Instability and Economic Growth. 63 Solow, 'A Contribution to the Theory of Economic Growth'; and Barro, 'Economic Growth in a Cross-Section of Countries'. 64 Lucas, 'On the Mechanics of Economic Development'; Romer, 'Increasing Returns and Long-Run Growth'; Barro, 'Economic Growth in a Cross-Section of Countries'; and Young, 'A Tale of Two Cities'. 65 Levine and Renelt, 'A Sensitivity Analysis of Cross-Country Growth Regressions'. 66 Helliwell, 'Empirical Linkages'.

TABLE
407
Single Equation Estimation (OLS) for Dependent Variable
'Growth'
Independent variables
INTERCEPT
(1) 0.007 (0.006)

- 0.002*
(2) 0.001 (0.004) - 0.002* (0.001) 0.011 (0.007)

0.001 **
(3)
- 0.004
GDP(1960)
EDUCATION(1960)
INVESTMENT
(0.001) 0.013* (0.007)

0.001 **
(0.005) - 0.002* (0.001) 0.010 (0.007) 0.001** (0.000) 0.010** (0.003) - 0.082 (0.630)
- 0.001*
(0.000)
TRADE
(0.000) 0.011** (0.004) -0.100 (0.065)

- 0.001
0.008* (0.004)
- 0.100
INFLATION
(0.065)
DEMOCRACY
- 0.001*
(0.0006)
IRREGULAR CHANGE
(0.0007)
(0.0006)
- 0.047 (0.030) 0.030 (0.031) 0.079** (0.028)

0.405
MAJOR REG. CHANGE
MINOR REG. CHANGE
Adj.R2 N
0.015 96
0.404 0.015 96
0.470 0.013 96
Note: In each case the standard errors are given below, in parentheses. *Statistically significant at the 0.05 level, one tail. **Statistically significant at the 0.01 level, one tail.
changes on growth. The growth equation clearly shows that instability involving drastic political changes is harmful to economic growth. Irregular government change has a negative and significant effect on growth. However, regular government change, particularly major regular government change, has a positive and significant effect on growth. After adjusting for the endogeneity of major regular government change, the parameter estimate on minor regular government change loses its statistical significance. While major regular government change is conducive to economic growth, regime interruption has a deleterious impact on growth. Table 2 also shows that democracy contributes to major regular government
408
TABLE
FENG 2 Joint Estimation of Growth, Democracy Change (3SLS)

Growth equation Irregular equation - 23.771** (5.700) - 0.025** (0.007) 0.024** (0.005) 0.006 (0.005) - 0.010** (0.003) 0.035* (0.018) - 0.007** (0.002) 0.026* (0.012) 0.001* (0.000) - 0.067 (0.066) 0.002 (0.005) 4.646** (1.081) 0.430 (0.331) 1.643** (0.454) - 0.403 (0.495) - 0.940 (1.026) 0.459** (0.149) 0.249 (0.155) -0.114* (0.067) - 0.337 (0.530) - 0.352** (0.071) 0.148 (0.362) 0.426** (0.127) 0.224** (0.039) -0.619 (0.401) 0.135** (0.051) - 0.220 (0.262) -0.056 (0.040) -2.132** (0.342) 0.047 (0.050) -0.071 (0.256) - 1.809 (1.888) 0.390 (0.261) 0.142 (1.345) Majorreg. equation 4.060 (5.087) 0.558** (0.098)
and Government
Minor reg. equation 13.358** (4.502) - 0.070 (0.014) 0.295** (0.121)
Democrac y equation 32.352 (30.872) - 2.748* (0.439) 4.296* (0.371) - 1.977* (0.615)
GROWTH
IRREGULAR
MAJOR REG.
MINOR REG.
DEMOCRACY
INTERCEPT
GDP(1960)
EDUCATION (1960)
INVESTMENT (1960)
INFLATION
TRADE
IRREGULAR (1960)
MAJOR REG. (1960)
MINOR REG. (1960)
ISLAMIC
CONFUCIAN
Notes: Numberof observations:96; system-weightedR2:0.72; system-weighteda: 1.637. In each case, standarderrorsare given below, in parentheses. *Statisticallysignificantat the 0.05 level, one tail. **Statisticallysignificantat the 0.01 level, one tail.
change and reduces the probability of irregular government change. Its effect on minor regular government change is not statistically significant at the 5 per cent level (though it is statistically significant at the 10 per cent level). This lack
409
of conclusive evidence is perhaps due to the fact that the time-series of data used to average the variables are not long enough to reflect the long-run effect of democracy on minor regular government changes. By differentiating government change, we have a new understanding of the indirect effect of democracy on growth through its impacts on regime change and major regular government change. The results in Table 2 significantly reduce the ambiguity about the effect of democracy on growth when it is found that democracy promotes major regular government change but inhibits irregular or minor regular government change. Hence, democracy is likely to have a positive effect on growth (a) where it substantially reduces the probability of irregular government transfers and (b) where it increases the probability of major regular government change. Rapid economic growth requires both a stable regime and a political system which is capable of 'adjusting' to circumstances by changing the party in power or the ruling coalition of parties in a constitutional context. Democracy is likely to provide both of these conditions favourable to growth. Although democracy takes a negative sign in the growth equation, it would be premature to conclude that democracy leads to slower growth. Table 2 also shows that democracy has a negative effect on irregulargovernment change, and a positive effect on major regular government change. Thus, democracy indirectly boosts economic growth by inhibiting regime interruption. Growth, in return,has a strong and negative impact on irregulargovernment change, and a strong but positive effect on minor regular government change. The life of a regime is positively associated with the growth of its economy. In line with the findings of Sanders, and Londregan and Poole,67 this work finds that the probability of a government being overthrown by a coup d'etat appears to be substantially reduced by a relatively high rate of economic growth. By comparison, growth leads to an increase in the probability of minor regular government change, confirming the finding that good economic performance increases a government party's popularity and improves its chance to be reselected into office.68 The regression in Table 2 does not find, however, the expected negative effect of growth on major regular government change. Though major regular government change has a positive and significant effect on growth, the parameter estimate of growth on major government change is not statistically significantly different from zero. This result seems to indicate that long-run growth has no effect on major regular government change. In the government change equations, the average probabilities of irregular, major regular, and minor regular government changes for the period of 1950-60 are all positively signed. Two of them, the probabilities of irregulargovernment change and minor regular government change, are highly statistically
Sanders, Patterns of Political Instability, pp. 151, 184; Londregan and Poole, 'Poverty, the Coup Trap, and the Seizure of Executive Power'. 68 See, for example, Michael Lewis-Beck, Economics and Elections: The Major Western Democracies (Ann Arbor: University of Michigan Press, 1988).
67
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FENG
significant. This result implies that both political instability, such as military coups d'etat, and political stability, symbolized by the government change without a change in the ruling party, tend to have their own self-perpetuating force. This finding is consistent with the arguments that political institutions are relatively permanent and that current instabilities are positively correlated with past instabilities.69 In the democracy equation, while irregularand minor changes have a negative effect on democracy, major regular government change strengthens democracy. This may indicate that the consolidation of democracy is likely to result from democracy of competition and change, rather than 'democracy without turnover',70whereas the decay and loss of democracy to authoritarianrule are likely to be the outcome of either extra-constitutional political change or the 'mainstream' political party remaining in power for a long time. As expected, the effect of growth on democracy is positive but statistically insignificant. This result indicates that in the long run growth tends to be conducive to democracy. This long-run effect, however, contrasts with the short-run effects of growth on democracy, which can be negative. Autocratic regimes may make use of their good economic performance to consolidate their power and rule. Though dictators can benefit from the short-runeffect of growth by keeping themselves in power, each increment in the level of the economy may raise the odds in favour of democracy. As summarized by Pennar et al.,71 growth leads to democracy for two reasons. First, as a small slice of the population is enriched, the rest of the nation aspires to become better off. Such privilege is granted for the public in a democratic political system, while in a dictatorship power is used to further enrich only a small group. Secondly, continued rising incomes allow people to consume 'luxury goods' such as education. A better educated population then tends to demand political freedom and civil rights.72The interaction of the long-run and short-runeffects of growth on democracy tends to render the sign on growth insignificant. After the endogeneity of political stability is controlled for, the parameter estimates for education and initial development are not statistically significant. If the system is estimated without the political instability variables, initial development would have a highly significant positive effect on democracy.73The signs of the two cultural dummy variables are as expected, but neither variable is significant.
69 For the former argument, see Cukierman et al., 'Seigniorage and Political Instability', p. 550; for the latter argument, see Londregan and Poole, 'Poverty, the Coup Trap, and the Seizure of Executive Power', pp. 163, 173. 70 Huntington, 'Democracy's Third Wave'. 71 Karen Pennar et al., 'Is democracy bad for growth?' Business Week, 7 June 1993, pp. 84-8. 72 A classic example of this argumentcan be found in the recent democratization process in South Korea and Taiwan. 73 For a system where all political instability variables (endogenous as well as predetermined)are excluded, the parameterestimates and standarderrors for initial development and education in the democracy equation would be 1.127 (0.225) and 1.228 (2.044), respectively.
411
Huntington's cultural argument cannot be statistically established in this sample of ninety-six countries. Finally, the signs on the predetermined economic variables confirm expectations. In the growth equation, all the economic control variables have the same signs as in the single equation estimation, though two of them (inflation and trade) are not statistically significant. This finding helps confirm that the previous research into the economic conditions for growth has produced quite robust results and justifies the use of those variables as controls in this study. A sensitivity analysis is conducted by using an alternative measure of democracy developed by Bollen.74 The Bollen index of democracy is a variable ranging from 0 to 100. It is based on weighted averages of Banks's political opposition variable,75 Gastil' s political rights measure,76 and Banks' s legislative effectiveness variable.77 The available democracy data by Bollen are for the years 1960, 1965 and 1980. As suggested by Bollen, the three years' data are averaged in this study to indicate the aggregate level of democracy for 1960-80. Therefore, the Bollen index represents a rough approximation of the aggregate level of democratization for this period. By comparison, the Gurr index is an average of democratization indices for all the years in the same period. Note also that the merging of the Bollen index with other variables yields seventy full observations, less than the ninety-six observations when the Gurr index is used. The twenty-six countries that are thus 'lost' include both developed and less developed countries, and both autocracies and democracies.78 Despite the different measurement and loss of information associated with the Bollen index, the correlation between the Bollen index and the Gurr index is 0.867, indicating a great deal of commonality between the two. Accordingly, the use of the Bollen index should not entail serious selection bias. The results in Table 3 are consistent with the findings in Table 2. The use of the Bollen index confirms the major regression results about the interrelationships between democracy, political stability and growth that were observed when using the Gurr index. Irregular government change has a negative effect
Kenneth A. Bollen, 'Issues in the Comparative Measurement of Political Democracy', American Sociological Review, 45 (1980), 567-91; 'Political Democracy: Conceptual and Measurement Traps', Studies in Comparative International Development, 25 (1990), 7-24; and 'Liberal Democracy: Validity and Method Factors in Cross-National Measures', American Journal of Political Science, 37 (1993), 1207-30. In the last mentioned article (p. 1209), Bollen defines democracy as the extent to which a political system allows political liberties and democratic rule. 'Political liberties exist to the extent that the people of a country have the freedom to express a variety of political opinions in any media and the freedom to form or to participate in any political group. Democratic rule exists to the extent that the national government is accountable to the general population, and each individual is entitled to participate in the government directly or through representatives'. 75 Banks, Cross-National Time-Series Data. 76 Gastil, Freedom in the World. 77 Banks, Cross-National Time-Series Data. 78 The following countries are in the Gurrindex, but not the Bollen index average. Note that there are more than twenty-six countries here; in the simultaneous equations, the final number of
74
412 TABLE
FENG
Joint Estimation of Growth, Democracy and Government Change (3SLS)

Growth equation Irregular equation -22.329** (8.021) -0.017** (0.007) 0.017 (0.012) 0.008 (0.009) -0.001* (0.000) 0.062* (0.029) - 0.006** (0.001) 0.032** (0.012) 0.001 ** (0.000) - 0.025 (0.051) 0.001 (0.005) 3.310** (1.041) 0.365 (0.421) 1.200* (0.680) - 8.203 (6.920) - 27.1 10* (12.348) 0.668* (0.342) - 0.024 (0.349) -0.030** (0.011) 0.411 (1.022) - 0.299** (0.080) 0.688* (0.443) 0.632** (0.272) 0.038** (0.008) - 1.379* (0.703) 0.033 (0.092) - 0.531 (0.467) - 0.033** (0.010) - 0.330 (0.769) 0.057 (0.084) 0.402 (0.432) 7.348 (26.082) 2.487 (3.421) 11.351 (19.246) Major reg. equation 2.306 (9.389) - 0.444** (0.173) Minor reg. equation 6.571 (7.857) - 0.300 (0.184) 0.727** (0.241) Democracy equation 272.13 (404.212) - 12.539* (5.510) 4.900 (3.744) - 2.039 (10.239)
GROWTH
IRREGULAR
MAJOR REG.
MINOR REG.
BOLLEN
INTERCEPT
GDP(1960)
EDUCATION (1960)
INVESTMENT (1960)
INFLATION
TRADE
IRREGULAR(1960)
MAJORREG. (1960)
MINOR REG. (1960)
ISLAMIC
CONFUCIAN
Notes: Numberof observations:70; system-weightedR2:0.70; system-weighteda: 2.147. Standard errorsare given below, in parentheses. *Statisticallysignificantat tbe 0.05 level, one tail. **Statisticallysignificantat the 0.01 level, one tail.
413
growth, whereas both major and minor regular government changes tend to have a positive impact on growth (the former is statistically significant at the 10 per cent level). Democracy measured by the Bollen index inhibits irregular and minor changes, and is positively related to major regular government changes. While democracy may have a negative direct effect on growth, its indirect effect on growth through its influence on political stability can be positive.79 Again, growth has a positive but statistically insignificant effect on democracy, probably indicating the ambiguity of the long-run and short-run effects of growth on democracy. Finally, while the impact of major regular government change on democracy is likely to be positive (statistically significant at the 10 per cent level), the effect of irregular government change on democracy is decisively negative.
V. SUMMARY AND CONCLUSIONS
This article contributes to the study of the political economy of growth in three respects. First, the simultaneous approach to the study of the relationships between growth and political stability, and between growth and democracy, allows us to identify the indirect effect of democracy on growth through its impact on political stability. Secondly, this work isolates three discrete forms of political stability, thus clarifying earlier misconceptions about regime stability and government stability. The findings reported here support Alesina et al. in the sense that regime change affects growth adversely.80 At the same time, they also replicate Londregan and Poole's evidence that growth has a
(F'note continued)
observations used in calculations is determined by full observations of all variables in the equations: Algeria, Angola, Argentina, Australia, Austria, Belgium, Bangladesh, Bolivia, Botswana, Brazil, Burkina Faso, Burundi, Cameroon, Canada, Central African Republic, Chad, Chile, El Salvador, Guinea, Guinea-Bissau, Guyana, Kuwait, Lesotho, Malawi, Mauritius, Mozambique, Myanmar, Saudi Arabia, Tanzania, Togo, Zambia and Zimbabwe. 79 Empirically, the net total effect of democracy on growth is found to be small. According to the result in Table 2, the direct and indirect impacts of democracy on growth have very similar absolute values, with the net total effect being - 0.0018. Again, according to Table 3, the difference is very small, with the net total effect being 0.0001. (The derivation from Table 2 is - 0.0018 = 1 X ( - 0.010) + ( - 0.114) X ( - 0.025) + (0.224) X (0.024), and the derivation from Table 3 is 0.0001 = 1 X (- 0.001) + (-0.030) X (-0.017) + (0.038) X (0.016). While the first term on the right-handside of the equation is the direct effect, the second is the indirect effect through the inhibition of irregularchange, and the third is the indirect effect through the promotion of regular change. Note that the effect of minor regular change on growth is insignificant even at the 10 per cent level in both tables.) Two things deserve notice. First, considering the sampling and probabilistic characteristics of data analysis, the difference between the direct and indirect effects may well be statistically and substantively insignificant. Secondly, given the instrumental variable design employed here, the feedbacks between democracy, on the one hand, and investment and education, on the other, have been excluded. Helliwell found a positive effect of democracy on investment and education, both of which, in turn, exert a positive impact on growth. When due allowance is made for these interactions, the net total effect of democracy on growth is very likely to be positive. 8s' Alesina et al., Political Instability and Economic Growth.
414
FENG
negative effect on coups d'etat.8' Additionally, they show support for the argument that growth increases the probability of the same party remaining in power.82 Thus, the inclusion of democracy as an endogenous variable strengthens the feedback between growth and political instability. Thirdly, the ambiguous total effect of democracy on growth is exposed. While democracy may have a negative direct effect on growth, it can have a positive indirect effect on growth through its impact on the probability of regular and irregular government changes. On the one hand, major regular government change has a positive effect on growth and regime change has a negative effect on growth; on the other, democracy has a positive impact on major regular government change and a negative impact on regime change. Overall, therefore, democracy promotes growth indirectly by inducing major regular government change and inhibiting irregular government change. By differentiating political instability and the impact on political instability of democracy, this article shows that the 'compatibility school' and the 'conflict school' can both be correct, depending on the balance between the direct and indirect effects of democracy on growth. Democracy tends to have a positive effect on economic growth by inhibiting extra-constitutional political change and favouring constitutional political change. Democracy provides a stable political environment which reduces unconstitutional government change at the macro level; yet along with regime stability, democracy offers flexibility and the opportunity for substantial political change within the political system. Together with the positive indirect effects on growth of democracy through investment and education, this juxtaposition of macropolitical certainty and micropolitical adjustability may be regarded as the ultimate basis for sustainable economic growth and expansion.
APPENDIX 1: DEFINITIONS OF VARIABLES IN TABLES 1-383
GROWTH: average annualpercentageincrease of per capita real GDP for 1960-80 (Summers and Heston). the of DEMOCRACY:mean value of the institutionalization democracy, 1960-80 (Gurr). BOLLEN:the mean value of the political democracyscore for 1960, 1965 and 1980 (Bollen). IRREGULAR: averageprobabilityof an irregular the governmentchange, 1960-80 (constructed from Taylor; Banks).
MAJOR REG.: the average probability of a major regular government
change, 1960-80
(constructedfrom Taylor;Banks). MINOR REG.: the average probability of a minor regular government change, 1960-80 (constructedfrom Taylor;Banks).
81
82
Londregan and Poole, 'Poverty, the Coup Trap, and the Seizure of Executive Power'. See, for example, the survey of such work in Lewis-Beck, Economics and Elections. 83 The works referredto in the definitions of the variables in Appendix 1 are as follows: Summers and Heston, 'The Penn World Tables'; Gurr, Polity II; Bollen, 'Issues in the Comparative Measurement of Political Democracy', 'Political Democracy' and 'Liberal Democracy'; Taylor, World Handbook; Banks, Cross-National Time-Series Data; Barro, 'Economic Growth in a
Bookof the Year National Britannica of Cross-Section Countries'; Statistics', (1994); 'Comparative
Huntington, 'Clashes of Civilizations?'

GDP(1960): Real GDP per capita in 1960 (Barro).
EDUCATION(1960):
415
INVESTMENT (1960): Average real gross domestic investment (private and public) as a INVESTMENT: Average real gross domestic investment(privateand public) as a percentageof
Enrolmentrate in primaryschool in 1960 (Barro).
percentageof GDP for 1950-60 (Summersand Heston). GDP for 1960-80 (Summersand Heston). and Heston).
TRADE: Averagevalues of exportsand importsas a percentageof GDP for 1960-80 (Summers ISLAMIC: dummy variablefor a countrywhere Muslims make up the largestreligious group A
('ComparativeNational Statistics'). A CONFUCIAN: dummy variablefor Japan,South Korea,Singaporeand Taiwan (Huntington).

APPENDIX GOVERNMENT 2: VARIABLES CHANGE84 IN THE ESTIMATION OF THE PROBABILITIES OF
Governmentchange- dummy variabletaking a value of 1 for the years in which there is a change of the effective control of the executive power and a value of 0 otherwise(Taylor; Banks).
2. Economic Variables CONSUMP cumulativerateof growthof privateconsumptionin the currentand previoustwo -
1. Government Change
years (constructedfrom Summersand Heston).
INFLATION annual rate of growth of GDP deflator (constructed from Summers and Heston). 3. Political Variables CHANGE -lagged values on respective governmentchanges (Taylor;Banks). EXADJ changes in the composition of the executive not resultingin a governmenttransfer
ATTEMPTS -unsuccessful attemptsto change the government, takingthe form of unsuccessful
REPRESS political executions and governmentimposed sanctions (Taylor).
(Taylor).
coups and unsuccessful governmenttransfers(Taylor). 100 citizens involving the use of physical force (Banks). = LEGITIMACY 3 if no parties are excluded; 2 if one or more minor or 'extremist'partiesare excluded; 1 if there is significantexclusion of parties(or groups);0 if no parties,or all but the dominantparty and satellites are excluded (Banks). SIZE the numberof the seats in the legislaturedivided by the numberof seats of the largest party in the legislature(Banks). = civilian government REGIME 1if the governmentis controlledby civilians; 2 if the outwardly is effectively controlled by a military elite; 3 if the governmentis directly ruled by the military;and 4 for all other (Banks). CONCHANGE= the number of basic alterationsin a state's constitutionalstructure(Banks). = CABCHANGE the numberof times in a year that a new premieris named and/or50% of the cabinet posts are occupied by new ministers(Banks). EXESELECT1if the effective executive is elected by popularvote or the election of committed delegates for the purposeof executive selection; 2 if the effective executive is selected by an elected assembly or by an elected but uncommittedelectoral college; 3 if otherwise (Banks).
4. Regional Dummy Variables
DEATHS= deaths from political violence (Taylor). or RIOTS= any violent demonstration clash of more than
Africa, Asia and Latin America.

84 The works cited in Appendix 2 are: Taylor, World Handbook; Banks, Cross-National Time-
SeriesData; Summers Heston,'The PennWorldTables', 1994. and
416
APPENDIX
FENG
3: LOGIT MODEL OF GOVERNMENT CHANGE, 1960-80
Dependent variable
CONSTANT
Irregular government change

-2.162***
Major regular government change - 2.907*** (0.413) -0.501*** (0.190) - 1.022*** (0.219) -0.269 (0.230)
0.347
Minor regular government change 0.230 (0.416) 0.814*** (0.195) 0.033 (0.228) 0.557** (0.253)
1.347
(0.624)
ASIA
-0.372 (0.338)
-0.287
AFRICA
LATIN
(0.308) 0.912*** (0.317)

-2.038*
CONSUMP(- 1)
INFLATION( - 1) CHANGE( - 1)
(1.530) -0.276 (0.913)

- 0.730**
(1.137) 0.191(0.657)
- 0.050
(1.075) 1.128* (0.727)

- 0.790***
(0.367)
EXADJ( 1)
(0.196)
0.088***
(0.171)
0.047
0.011
(0.051)
REPRESS
ATTEMPTS
(0.036) 0.003** (0.001) 0.242*** (0.083) 2.313* (1.786) 0.004** (0.002) 0.140** (0.082) 0.213** (0.102) 0.158 (0.157) - 0.241 (0.241) 0.226** (0.121) 0.325*** (0.123) 2,168 1,585.2 165.2 (df= 17, p = 0.0001)
(0.038) 0.000 (0.001) 0.097* (0.060) 0.000 (0.000) 0.000 (0.002) 0.042 (0.086) 0.055 (0.113)
-0.454***
0.006*** (0.001) 0.137** (0.077) 0.747 (2.049) 0.012*** (0.004)

-0.367***
DEATHS
RIOTS
LEGITIMACY(- 1)
SIZE(-1) REGIME(-1) CONCHANGE(-1)

CABCHANGE( - 1)
(0.150) 0.229* (0.169) 0.379** (0.187)

- 0.603**
(0.175) 0.428** (0.216) 0.222** (0.119) -0.099 (0.121) 2,168 - 1,488.2 94.1 (df= 17, p = 0.0001)
(0.336) 0.033 (0.161) 0.297** (0.157) 2,168 829.4 148.8 (df 17, = 0.0001) p
EXESELECT(- 1)
Numberof observations Model-2LL Model x2
Notes: The average estimatedprobabilitiesof a governmentchange from these regressionsare used in the cross-sectionalregressionsin Tables 2-3. The variableCHANGE( - 1) is the lag of the appropriate kindof government changeas indicatedby the subheading,i.e. irregular, majorregularor minorregular change. The criterionfor significance is the Wald Chi-Square.StandardErrorsin parentheses. *Statisticallysignificantat the 0.10 level.**Statisticallysignificantat the 0.05 level.***Statistically significantat the 0.01 level.

APPENDIX 4: MEASURE IN INSTITUTIONALIZED DEMOCRACY
417
(THE GURR INDEX)85
The operational indicator of democracy in Gurr's Polity II is derived from codings of the competitiveness of political participation, the openness of executive recruitment, and constraints on the chief executive. The democracy indicator is an additive ten-point scale, constructed, using weights, for the traits that are conceptually associated with democracy. In the following Authority Coding, the scale weights Competitiveness of
- Competitive Political Participation 3, Transitional 2, Factional 1, Others 0; Competitiveness of Executive Recruitment - Election 2, Transitional 1, Others 0; Openness of Executive Recruitment - Dual election 1, Open 1, Others 0; Constraints
on Chief Executive - Executive parity or subordination 4, (Intermediate category 3), Substantial limitations 2, (Intermediate category 1).
Definitions
of the Terms Used Above of political participation
Competitiveness Competitive:
There are relatively stable and enduring political groups which regularly compete for political influence at the national level. Competition among them seldom causes widespread violence or disruption. Very small parties or political groups may be restricted in the 'competitive' pattern.
Transitional:
Any transitional arrangements from factional patterns to fully competitive patterns, or vice versa. Transitions to Competitive are not complete until a national election is held on a fully competitive basis.
Factional:
Polities with factional or restricted patterns of competition.
Competitiveness Election:
of executive recruitment
Chief executives are typically chosen in or through competitive elections matching two or more major parties or candidates (elections may be popular or by an elected assembly).
Transitional:
Transitional arrangements between selection (ascription/designation) and competitive election.
Openness of executive recruitment Dual election:
Hereditary succession plus electoral selection of an effective chief minister.

Open:
Chief executives are chosen by elite designation, competitive election, or transitional arrangements between designation and election.
85
See Gurr,JaggersandMoore,'TheTransformation the WesternState'. of
418
FENG
Constraints on Chief Executive Executive parity or subordination: Accountability groups have effective authority equal to or greater than the executive in most areas of activity. Examples of evidence: (i) A legislature, ruling party, or council of nobles initiates much or more important legislation. (ii) The executive (president, premier, king, cabinet, council) is chosen by the accountability group and is dependent on its continued support to remain in office (as in most parliamentary systems). (iii) In multi-party democracies, there is chronic 'cabinet instability'. Substantial Limitations on Executive Authority: The executive has more effective authority than any accountability group but is subject to substantial constraints by them. Example: (i) A legislature or party council often modifies or defeats executive proposals for action. (ii) A council or legislature sometimes refuses funds to the executive. (iii) The accountability group makes important appointments to administrative posts. (iv) The legislature refuses the executive permission to leave the country.

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Democracy, Political Stability and Economic Growth Author(s): Yi Feng Source: British Journal of Political Science, Vol.

B.J.Pol.S. 27, 391-418 Printed in Great Britain

Copyright? 1997 CambridgeUniversityPress