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Democracy and growth

Democracy and growth. Thorvaldur Gylfason. outline. Sources of economic growth around the world Economic policy and institutions matter for growth Democracy as an aspect of social capital Democracy is good for growth Cross-country patterns in data 164 countries, World Bank data 1960-2000

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Democracy and growth

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  1. Democracy and growth ThorvaldurGylfason

  2. outline • Sources of economic growth around the world • Economic policy and institutions matter for growth • Democracy as an aspect of social capital • Democracy is good for growth • Cross-country patterns in data • 164 countries, World Bank data 1960-2000 • Including political data on aspects of democracy • Cross-country regressions • Interactions of human, real, financial, natural, and social capital, including democracy

  3. Growing apart:Sweden and Argentina • Argentina and Sweden went hand in hand 1900-1930, and then grew apart • Sweden pursued free trade, liberal democracy, and income equality, and avoided high inflation • Argentina did not GDP per capita 1900-2003 (US$ at 1990 prices) Sweden 2.1% per year Argentina 1.0% per year 1.011103 = 3.1

  4. Growing apart:Botswana and Nigeria • Botswana and Nigeria went hand in hand 1965-1970, and then grew apart • Botswana practiced democracy, stressed education, and resisted corruption • Nigeria’s finance minister: “Oil has made us lazy” GDP per capita 1965-2004 (US$ at 2000 prices) Botswana 7.1% per year Nigeria 0.6% per year 1.06539 = 11.7

  5. Iceland‘s per capita output 1901-2006 (2000 = 100) Iceland was Ghana Korea Botswana Namibia Lesotho Ghana

  6. Accumulation of Different kinds of capital drives growth Resource curse

  7. Natural capital affects other kinds of capital Interactions among determinants of growth

  8. Natural capital: a mixed blessing • Listen toKing Faisal of Saudi Arabia (1964-1975), as quoted by his Oil Minister, Sheik Yamani: • “In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.”

  9. Natural capital: a mixed blessing • Lee Kwan Yew,founding father of Singapore (1959-1991), would not have been surprised either: • “I thought then that wealth depended mainly on the possession of territory and natural resources, whether fertile land ..., or valuable minerals, or oil and gas. It was only after I had been in office for some years that I recognized ... that the decisive factors were the people, their natural abilities, education and training.”

  10. Two hypotheses about democracy and growth • Democracy makes it easier to replace bad governments by better ones and for ideas to compete in the political arena, thus fostering efficiency and diversification, which is good for growth • Democracy plays into the hands of pressure groups that abuse their power by swaying public policies and institutions in their favor, which is bad for growth Empirical question

  11. Concept of democracy and source of data • Schumpeter (1942) • “the democratic method is that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote.” • Source of data • Polity IV (Marshall and Jaggers, 2001) • 21-point scale, from -10 to 10, extensive coverage of countries

  12. Advancing Democracy 1946-2000 1946: 20 out of 70 2000: 90 out of 170 Democracy Oligocracy Number of countries Autocracy

  13. Economic growth and democracy 1960-2000 Rank correlation 164 countries 0.51 A rise in democracy index by 7 points goes along with an increase in per capita growth by one percentage point per year Democracy is good for growth

  14. Economic growth and corruption 1960-2000 0.75 Corruption hurts growth

  15. Corruption and democracy 1960-2000 Different aspects of social capital go together 0.60

  16. Democracy and education 1960-2000 Human capital and social capital go together 0.62

  17. Democracy and natural capital 1960-2000 Natural capital crowds out social capital -0.67

  18. Economic growth and natural capital 1960-2000 -0.67 Natural capital share and growth are inversely related

  19. Economic growth and education 1960-2000 0.69 Education is good for growth An increase in school life expectancy by 3 years goes along with an increase in per capita growth by one percentage point per year

  20. Economic growth and fertility 1960-2000 Social content of growth -0.62 A decrease in fertility by 3 children per woman goes along with an increase in per capita growth by 2 percentage points per year

  21. Education and natural capital 2000-2005 Natural capital crowds out human capital -0.82

  22. Corruption and natural capital 1960-2000 -0.74 Natural capital crowds out social capital

  23. Economic growth and inflation 1960-2000 Inflation impedes growth -0.46 Stabilization increases efficiency by reducing production distortions, uncertainty, inflation tax, and overvaluation

  24. Economic growth and inflation 1960-2000 Inflation impedes growth -0.46 High inflation is a sure sign of lax fiscal and monetary policies, so sound policies support rapid growth

  25. Institutions, economic policies, and natural resources side by side Preliminaries I • Null hypothesis • Democracy is good for growth, and so are investment, education, health care, usw. • Alternative hypothesis • Democracy is not good for growth, or worse • Not trying to demolish other potential explanations of growth • Rather, trying to find a complementary role for democracy: add, not subtract

  26. Preliminaries II Theoretical framework • Neoclassical vs. endogenous growth • False contrast • Empirically indistinguishable • Endogenous growth, endogenous democracy • Long run vs. medium term • Medium term: Policy-relevant choice • Forty years of data, 1960-2000 • Long run is irrelevant except as a benchmark

  27. Preliminaries IiI Empirical strategy • Levels of income vs. rates of growth • Recursive modeling vs. instruments • Averages vs. initial values of independent variables • Prefer averages when available so as not to discard data after the initial period • Cross sections vs. panels • Begin with cross sections, will add panels

  28. Levels of income vs. rates of growth

  29. Levels of income vs. rates of growth

  30. Levels of income vs. rates of growth

  31. Levels of income vs. rates of growth

  32. Levels of income vs. rates of growth Conditional convergence requires b > 0  < 1 One-to-one correspondence between parameters

  33. Structure of model Economic growth depends on the accumulation of capital and the efficiency with which it is used Five, or rather six, kinds of capital • Social capital: democracy, corruption • Human capital: education, fertility • Realcapital: investment • Financialcapital: low inflation • Foreign capital: openness -- ignore 6) Natural capital

  34. Regression results on democracy and economic growth

  35. Regression results on democracy and economic growth

  36. Regression results on democracy and economic growth

  37. Regression results on democracy and economic growth

  38. Regression results on democracy and economic growth

  39. Regression results on democracy and economic growth

  40. Regression results on democracy and economic growth

  41. Regression results on democracy and economic growth

  42. Sir Arthur Lewis got it right Since the second world war it has become quite clear that rapid economic growth is available to those countries with adequate natural resources which make the effort to achieve it. W. Arthur Lewis (Accra, 1968)

  43. Sir Arthur Lewis got it right Since the second world war it has become quite clear that rapid economic growth is available to those countries with sound democratic institutions which make the effort to achieve it. W. Arthur Lewis (Accra, 1968)

  44. conclusion • Diversification is good for growth • Economic diversification away from excessive reliance on natural resources • Political diversification away from narrowly based political elites toward full-fledged democracy • Social and human capital are good for growth • Democracy seems to make a difference • Social insurance also makes a difference, as well as education and health care • Judicious use of natural resources requires good institutions, including democracy • Key to Norway’s successful oil management

  45. These slides – and more! – can be viewed on my website: www.hi.is/~gylfason Conclusion: it can be done • The development effort required around the world includes a double diversification • Economic diversification • Away from agriculture and other natural-resource intensive activity into manufacturing (as in China) and services (as in India) • Political diversification • From dictatorship to democracy (as in Korea and Taiwan) The End

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