The paper examines a potential reverse causality between the growth of GDP per capita and Democracy (data from Policy IV project). Therefore, a simultaneous equation generalized probit model is used. In the first step, the model is estimated under the assumption that the relationship between economic growth and democracy is linear and in the second step under the assumption the relationship is quadratic. Additional exogenous variables are the degree of urbanization, the age of the regime and the percentage of non-fuel exports in total exports. Further, the influence of religion is taken into account, whereby religion and ethnicity are distinguished. It is observed that the ethnical fragmentation has the opposite effect of religious fragmentation.
The outcomes suggest that economic growth and the degree of a country´s democratization indeed are mutually dependent and should not be treated as independent. Additional the outcomes confirm the idea that the relationship between growth and democracy is quadratic.
Table of Contents
1 Introduction
2 Framework for the Empirical Analysis
2.1 Methodology
2.1.1 Preliminaries
2.1.2 Procedure
3 Data
3.1 Endogenous Variable: Growth
3.2 Endogenous Variable: Non-Democratic
3.3 Exogenous Variables:
4 Empirical Findings
4.1 Direction of Effects
4.2 Squared per Capita Growth and the Policy Variable
4.3 Communism
5 Conclusion
A Mathematical Appendix
A.1 Reduced Form
A.2 Corrected Variances
Research Objectives and Themes
The primary objective of this thesis is to empirically investigate the mutual dependency between economic growth and democratic development. Utilizing a simultaneous equation system with a generalized probit model, the research addresses the issue of reverse causality to determine whether economic prosperity fosters democratic systems and, conversely, whether democratization influences economic performance.
- Simultaneity between per capita economic growth and political regimes.
- The application of a generalized probit model to account for reverse causality.
- The non-linear impact of growth on democratization (linear vs. quadratic).
- The role of exogenous factors such as religion, ethnicity, geography, and colonial history.
Excerpt from the Book
1 Introduction
A widespread preconception when it comes about democracy is that it has a positive effect on economic prosperity. Furthermore, without a detailed analysis, this notion seems to be in line with empirics. In depth analyses of the effect of democracy on growth are presented, among others, by Barro [1996] as well as Przeworski [2000]. Przeworski [2000] finds that there is neither a positive nor a negative effect of democracy on economic development. Additionally, he finds that “In poor countries, regimes simply do not matter. In wealthier countries, their average growth rates are the same [independent of their political system], but the patterns of growth are different.” Also Barro [1996] does not find a clear pattern for the effect of democracy on economic growth. On the one hand he finds some indication for a quadratic relationship between democracy and economic growth, but on the other hand, if all other potential determinants of economic growth are held constant, the influence of democracy on growth is negative.
However, there could potentially also be a reversed effect, one from economic growth on the development and emergence of democratic systems, respectively. This effect is analyzed in Lipset [1959] and is identified empirically by Barro [1996]. There, he finds some evidence for a positive effect of economic growth on democratization.
If both, the effect of democracy on growth and the effect in the opposite direction, are taken together, there is simultaneity problem caused by reverse causality. Democracy fosters growth and growth, via wealth, fosters democracy. Hence, I use a simultaneous equation system to examine the impact of democracy on economic growth per capita and the effect the other way round. Due to the discontinuous nature of the classification of different political systems, I use a simultaneous equation system with a generalized probit model. The estimation system consists of two equations, one represents the impact of democracy on growth per capita, while the second equation, the probit equation, captures the impact of growth per capita on democracy. Given this framework, I run a cross-sectional estimation procedure for more than 107 countries and two different points in time, 1986 and 2000.
Summary of Chapters
1 Introduction: This chapter introduces the research context, highlighting the potential mutual dependency between economic growth and democracy, and outlines the methodological approach to addressing reverse causality.
2 Framework for the Empirical Analysis: This chapter details the simultaneous equation model and the estimation procedure, specifically contrasting the approaches of Amemiya (1978) and Vreeland (2003) to justify the choice of model.
3 Data: This chapter describes the dataset used, including the definition of endogenous variables for growth and political regimes, as well as various exogenous control variables such as religion, ethnicity, and geography.
4 Empirical Findings: This chapter presents the results of the estimations for 1986 and 2000, discussing the direction of effects, the impact of squared per capita growth, and the observations regarding communist regimes.
5 Conclusion: This chapter summarizes the key findings, noting that economic growth and democratic development are mutually dependent, and suggests directions for future research using panel data.
A Mathematical Appendix: This section provides the technical derivations for the reduced form equations and the corrections for variances and standard errors used in the empirical analysis.
Keywords
Democracy, Economic Growth, Simultaneous Equation System, Generalized Probit Model, Reverse Causality, GDP per capita, Political Development, Democratization, Marginal Effects, Colonial History, Regime Change, Religious Fractionalization, Urbanization, Non-democratic, Robustness
Frequently Asked Questions
What is the core subject of this thesis?
The thesis examines the relationship between economic growth and the development of democratic systems, specifically investigating whether these two factors mutually influence each other.
What are the central thematic areas?
The central themes include the endogeneity of political systems, the impact of economic wealth on democratization, the role of institutional and historical factors, and the identification of non-linear relationships between growth and democracy.
What is the primary research question?
The research seeks to determine if democracy drives economic growth and if economic growth, in turn, fosters the development of democratic institutions, while accounting for reverse causality.
Which scientific methods are employed?
The author uses a simultaneous equation system estimated with a generalized probit model, allowing for a cross-sectional analysis of over 107 countries across the years 1986 and 2000.
What topics are covered in the main section?
The main section covers the formal framework of the empirical analysis, a detailed description of the data sources, the presentation and discussion of empirical results, and an extension of the model to include squared per capita growth.
Which keywords characterize this work?
Key terms include democracy, economic growth, generalized probit model, reverse causality, regime changes, and political development.
How does the inclusion of squared per capita growth affect the findings?
Introducing squared per capita growth reveals a non-linear, quadratic relationship where growth initially fosters democratization but reaches a turning point after which further growth may have a negative effect.
What conclusion does the author reach regarding communist countries?
The author concludes that communism acts as a perfect predictor for non-democratic systems, noting limited data observations for communist states in the 2000 sample compared to 1986.
- Quote paper
- Katharina Böhm-Klamt (Author), 2015, Growth of GDP per capita and Democracy. A Simultaneous Equation Generalized Probit Model, Munich, GRIN Verlag, https://www.grin.com/document/384280
