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Democracy and income: taking parameter heterogeneity and cross-country dependency into account

  • Tiago Neves Sequeira EMAIL logo
Veröffentlicht/Copyright: 12. Mai 2017
The B.E. Journal of Macroeconomics
Aus der Zeitschrift The B.E. Journal of Macroeconomics Band 17 Heft 2

Abstract

This paper investigates the relationship between income and democracy using common correlated effects (CCE) extended estimators which take into account the fact that democracy variables are highly correlated across countries and the possibility of heterogeneous effects of income on democracy in different countries. Using a wider database than ever, covering annual data from 1804 to 2010 for almost all countries, we show that overall, the effect of income on democracy is significantly negative when the time-series features of the data are taken into account, a result that comes from the low-income countries. This calls back into question the controversy about the empirical effect of income on democracy.

Keywords: cross-country dependency; democracy; income
JEL Classification: H10; N40; O10; O50

Acknowledgements

I gratefully acknowledge financial support from FCT and FEDER/COMPETE, through grant UID/ECO/04007/2013 (POCI-01-0145-FEDER-007659). Excellent research assistance from Marcelo Santos is greatly acknowledged. I also thank Joaquim Ramalho for early discussions on the relationship between income and democracy and about the adequate econometric methods to analyze it and participants on the CEFAGE Seminar. The usual disclaimer applies.

A Appendix

A.1 Cross-sectional dependence and stationarity tests

Table 11:

Cross-section dependence of democracy by legal origin.

VariableCD testp-ValueCountries
Polity (non-British)87.610.00033
Polity (non-French)43.790.00010
Polity (non-Scandinavian)91.370.00034
Polity (non-Socialist)111.250.00036

  1. The number of countries included in the test is substantially reduced such that the imbalance of the panel is reduced until the Pesaran (2004) cross-sectional test performs well. Average number of observations are 188, 229, 189 and 190 respectively.

Table 12:

Unit-root tests.

Variable: polityWithout trendWith trend
lag 0−2.653 (0.004)−0.192 (0.424)
lag 1−3.285 (0.001)−1.353 (0.088)
lag 2−1.159 (0.057)0.478 (0.684)
lag 3−1.334 (0.091)1.025 (0.847)
lag 41.079 (0.860)3.010 (0.999)

  1. Pesaran (2007) unit-root test. p-Value in parentheses. Avr. Average number of time-series observations is 133. Number of countries is 184.

Table 13:

Unit-root tests.

Variable: GDP per capitaWithout trendWith trend
lag 09.365 (1.000)3.349 (1.000)
lag 17.407 (1.000)2.959 (0.998)
lag 29.952 (1.000)4.929 (1.000)
lag 39.982 (1.000)4.048 (1.000)
lag 412.161 (1.000)5.324 (1.000)

  1. GDP per capita is in natural logarithms. Pesaran (2007) unit-root test. p-Value in parentheses. Avr. Average number of time-series observations is 100. Number of countries is 155.

A.2 Alternative specifications

Table 14:

Democracy and income: four (4) lags of cross-section averages.

(1)(2)(3)(4)
Dependent variableΔPolity indexΔPolity indexΔPolyarchy democracy indexΔPolyarchy democracy index
GDP per capitat−10.007**−0.038***0.569***−1.181***
(0.048)(0.001)(0.000)(0.007)
ΔGDP per capitat−0.029−0.047**0.046−0.387
(0.125)(0.017)(0.939)(0.455)
EC coefficient
 Dt−1−0.133***−0.220***−0.224***−0.292***
(0.000)(0.000)(0.000)(0.000)
Trend
 t–0.001***–0.039***
(0.000)(0.000)
N Observ.9636938181108110
Avr. N Obs.64706262
Min–max15–20616–20616–18616–186
Number countries150133131131
Wald232.87***260.46***237.12***219.24***
CD-test (res)−0.53 (0.594)−0.74 (0.460)−3.51*** (0.000)−3.66*** (0.000)
Stat-test (res)rejects I(1)rejects I(1)rejects I(1)rejects I(1)
Sig. signs/countries for GDP per capita (long-run)↗(20)↘(8)↗(10)↘(30)↗(37)↘(9)↗(16)↘(29)
Sig. signs/countries for GDP per capita (short-run)↗(7)↘(13)↗(3)↘(12)↗(6)↘(14)↗(6)↘(16)

  1. Dependent variable is a democracy index defined in the first row of the Table. GDP per capita is in natural logarithms. Values in parentheses below coefficients are p-values from robust (clustered) standard errors. Regressions include three lags of lagged differences of cross-section averages. Level of significance: ***for p-value < 0.01; **for p-value < 0.05; *for p-value < 0.1. Wald test is a joint significance test for the regressors. CD-test is a Pesaran (2004) cross-section dependence test on the null of cross-section independence done on the residuals from the regression (p-value presented in parentheses), on a restricted sample with increased balance. Stat-test is the Pesaran (2007) unit root test made on the residuals. This test used four lags and rejects I(1) means that in all lags the test of unit root rejects with and without trend. The list of countries that enter in regressions is available upon request.

Table 15:

Democracy and income: fixed effects estimation.

(1)(2)(3)(4)
Dependent variableΔPolity indexΔPolity indexΔPolyarchy democracy indexΔPolyarchy democracy index
GDP per capitat−10.013***0.0000.934***0.310**
(0.000)(0.991)(0.000)(0.025)
ΔGDP per capitat−0.054***−0.032*−1.724***−1.032*
(0.002)(0.074)(0.003)(0.071)
EC coefficient
 Dt−1−0.065***−0.081***−0.079***−0.102***
(0.000)(0.000)(0.000)(0.000)
Time dummies–Yes–Yes
N Observ.104161041687718771
Avr. N Obs.66.866.85757
Min–max4–2104–2104–1904–190
Number countries156156154154
R20.01650.02800.01840.0242

  1. Dependent variable is a democracy index defined in the first row of the Table. GDP per capita is in natural logarithms. Values in parentheses below coefficients are p-values from robust (clustered) standard errors. Level of significance: ***for p-value < 0.01; **for p-value < 0.05; *for p-value < 0.1. The list of countries that enter in regressions is available upon request.

Table 16:

Democracy and income: after 1960.

(1)(2)(3)(4)
Dependent variableΔPolity indexΔPolity indexΔPolyarchy democracy indexΔPolyarchy democracy index
GDP per capitat−10.007−0.048***0.545−2.236***
(0.166)(0.005)(0.102)(0.005)
ΔGDP per capitat−0.024−0.045**−1.076−1.637*
(0.194)(0.036)(0.313)(0.054)
EC coefficient
 Dt−1−0.139***−0.250***−0.268***−0.411***
(0.000)(0.000)(0.000)(0.000)
Trend
 t–0.002***–0.062***
(0.000)(0.000)
N Observ.6179617946184618
Avr. N Obs.40403636
Min–max14–4814–4817–3817–38
Number countries154154130130
Wald159.49***201.81***201.57***236.70***
Stat-test (res)rejects I(1)rejects I(1)rejects I(1)rejects I(1)

  1. Dependent variable is a democracy index defined in the first row of the Table. GDP per capita is in natural logarithms. Values in parentheses below coefficients are p-values from robust (clustered) standard errors. Regressions include three lags of lagged differences of cross-section averages. Level of significance: ***for p-value < 0.01; **for p-value < 0.05; *for p-value < 0.1. Wald test is a joint significance test for the regressors. CD-test is not performed due to small time-series and unbalanced sample. Stat-test is the Pesaran (2007) unit root test made on the residuals. This test used two lags and rejects I(1) means that in all lags the test of unit root rejects with and without trend. The list of countries that enter in regressions is available upon request.

Table 17:

Democracy and income: comparison with Murtin and Wacziarg (2014) – MW.

(1)(2)(3)(4)(5)
Democracy polity index1800–2010 (used in MW)1800–2014 update1800–2014 update1800–2014 update1800–2014 update
Source for GDPMaddison (2006)Maddison (2006)Project MaddisonProject MaddisonProject Maddison
Time series dimensionDecennialDecennialDecennialAnnualAnnual
GDP per capitat−10.105**0.105**0.123***0.013***−0.001
(0.010)(0.010)(0.003)(0.000)(0.829)
Dt−10.332***0.332***0.302***0.935***0.919***
(0.000)(0.000)(0.000)(0.000)(0.000)
Time dummiesYesYesYesNoYes
N Observ.56056053710,66310,663
Avr. N Obs.8.18.17.86868
Min–max2–132–132–135–2115–211
Number countries696969156156
R20.620.620.600.950.95

  1. Regressions by fixed-effects estimation. Dependent variable is a democracy index from the polity database. GDP per capita is in natural logarithms. Values in parentheses below coefficients are p-values from robust (clustered) standard errors. Level of significance: ***for p-value < 0.01; **for p-value < 0.05; *for p-value < 0.1. Wald test is a joint significance test for the regressors. The list of countries that enter in regressions is available upon request.

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Published Online: 2017-5-12

©2017 Walter de Gruyter GmbH, Berlin/Boston

Artikel in diesem Heft

  1. Advances
  2. Does microfinance reduce poverty? Some international evidence
  3. Exchange rate policy and the role of non-traded goods prices in real exchange rate fluctuations
  4. Democracy and income: taking parameter heterogeneity and cross-country dependency into account
  5. Pass-through of imported input prices to domestic producer prices: evidence from sector-level data
  6. Economic policy uncertainty and household inflation uncertainty
  7. Corruption, fiscal policy, and growth: a unified approach
  8. Monetary policy and energy price shocks
  9. Government education expenditures and economic growth: a meta-analysis
  10. Has the forecasting performance of the Federal Reserve’s Greenbooks changed over time?
  11. Life-cycle consumption, precautionary saving, and risk sharing: an integrated analysis using household panel data
  12. Can removing the tax cap save Social Security?
  13. A non-monotonic relationship between public debt and economic growth: the effect of financial monopsony
  14. The Euler equation around the world
  15. Structural change and non-constant biased technical change
  16. Contributions
  17. Trade and growth in a model of allocative inefficiency
  18. Macroeconomic Shocks and Corporate R&D
https://doi.org/10.1515/bejm-2016-0113
Schlagwörter für diesen Artikel
cross-country dependency; democracy; income

Artikel in diesem Heft

  1. Advances
  2. Does microfinance reduce poverty? Some international evidence
  3. Exchange rate policy and the role of non-traded goods prices in real exchange rate fluctuations
  4. Democracy and income: taking parameter heterogeneity and cross-country dependency into account
  5. Pass-through of imported input prices to domestic producer prices: evidence from sector-level data
  6. Economic policy uncertainty and household inflation uncertainty
  7. Corruption, fiscal policy, and growth: a unified approach
  8. Monetary policy and energy price shocks
  9. Government education expenditures and economic growth: a meta-analysis
  10. Has the forecasting performance of the Federal Reserve’s Greenbooks changed over time?
  11. Life-cycle consumption, precautionary saving, and risk sharing: an integrated analysis using household panel data
  12. Can removing the tax cap save Social Security?
  13. A non-monotonic relationship between public debt and economic growth: the effect of financial monopsony
  14. The Euler equation around the world
  15. Structural change and non-constant biased technical change
  16. Contributions
  17. Trade and growth in a model of allocative inefficiency
  18. Macroeconomic Shocks and Corporate R&D
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