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Working Paper Series∗
Department of Economics
Alfred Lerner College of Business & EconomicsUniversity of Delaware
Working Paper No. 2004-03
Institutional Quality and Economic Growth:
Maintenance of the Rule of Law or Democratic
Institutions, or Both?†
James L. Butkiewicz and Halit Yanikkaya
February 2004
∗http://www.be.udel.edu/economics/workingpaper.htm† c© 2004 by author(s). All rights reserved.
INSTITUTIONAL QUALITY AND ECONOMIC GROWTH: MAINTENANCE OF THE RULE OF LAW OR DEMOCRATIC INSTITUTIONS, OR BOTH?
James L. Butkiewicz
Department of Economics University of Delaware
Newark, DE 19716 [email protected]
Halit Yanikkaya
College of Business and Administrative Sciences Department of Economics
Celal Bayar University Manisa, Turkey 45030
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Abstract
Analysis of the factors determining rates of economic growth has found that country-specific characteristics have important effects on growth performance. Empirical evidence to date suggests that maintenance of the rule of law promotes growth, while adopting democratic institutions does not appear to improve growth performance. We find that these conclusions are very sensitive to sample selection and to estimation technique. When an identical sample of countries is used, we find that countries with democratic institutions do enjoy superior growth performance. The relationship between growth and democratic institutions is also sensitive to the estimation technique used. Estimates using instrumental variable techniques suggest that democratic institutions do experience better growth performance. These results are especially relevant for developing nations. JEL Classifications: O40, P16 Keywords: Rule of Law, Democracy, Economic Growth
I. Introduction
Governmental institutions establish the framework for economic activity within a
country. Good institutions create an environment that promotes economic activity,
inventiveness, and growth and development. Bad institutions typically result in
economic stagnation. Two characteristics that typify most developed economies are
democracy and maintenance of the rule of law. While related, these two institutional
characteristics are not identical. Maintenance of the rule of law is not necessarily
unique to democratic societies. However, these two institutional characteristics are
high correlated.
Evaluation of these two institutional frameworks for their effects on economic
growth requires separate assessment of each. Empirical analysis of the impacts of
each institutional type on growth has found that maintenance of the rule of law
enhances growth, while establishing democratic political systems has no significant
effect on growth.
In this paper, we report findings suggesting that these conclusions are not
robust to sample selection or estimation technique. Specifically, we find evidence
indicating that both maintenance of the rule of law and democratic institutions increase
real economic growth. The evidence also indicates that the effects of democracy are
greatest for developing countries, a finding that is especially germane for development
policy in these countries.
The next section briefly reviews the literature investigating the impact of social
institutions on growth. Section III presents the empirical model and discusses the data
used in this study. Results are presented in Section IV. In Section V, the sensitivity of
the results to estimation technique is analyzed. Concluding comments are in Section
VI.
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II. Literature Review
Whether two of the most important institutional characteristics of countries—the
overall maintenance of rule of law and the practice of democracy—affect economic
growth differently, especially in developing countries, has been extensively debated in
the growth and development literature. An apparent consensus of the empirical growth
literature is that the maintenance of the rule of law is important for economic growth,
whereas democracy has no strong effect on growth, after controlling for other important
growth determinants. For example, Knack and Keefer (1995) conclude that the rule of
law is a better measure of institutional quality than Gastil indices (measures of
democracy) and political violence measures. Recently, Dollar and Kraay (2000) report
that while better rule of law raises real per capita income and income of the poor,
democracy has no strong effect on real per capita income and income of the poor.
However, as emphasized in many other studies, it is important to recognize that
democracy provides non-material benefits in addition to its potential economic impacts.
Adherence to the rule of law is manifested by maintenance of property rights
and absence of corruption. These characteristics can serve as alternative measures of
the establishment and practice of the rule of law. In the theoretical literature,
maintenance of property rights is considered one of the most important pillars of a free
market economy. Well-defined property rights are an important determinant of
economic growth through their effects on the level of investment (North, 1990; North
and Weingast, 1989). A number of studies (Shleifer and Vishny 1993, Ehrlich and Lui
1999) argue that corruption is detrimental for economic growth. Although Bardhan
(1997) agrees with the primary arguments made by Shleifer and Vishny, he argues that
if pervasive and cumbersome regulations exist in a country, corruption may actually
improve efficiency and increase growth (see Tanzi (1998) for a more complete review
of the definitions and the economic impacts of corruption). Using the International
Country Risk Guide (ICRG) data and/or Kaufmann, Kraay, and Zoido-Lobaton (1999)
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data, a number of studies (such as Knack and Keefer 1995; Mauro 1995; Sala-i-Martin
1997; Dollar and Kraay 2000) provide evidence supporting the idea that some measure
of the rule of law or property rights or corruption is significantly correlated with growth
of per capita real income.
Theory suggests that democratic institutions may be growth enhancing or
growth retarding. The negative effect of democracy on growth is generally attributed to
one of two factors. The first argument against democracy is such that democracy
undermines investment because democracy leads to pressures for immediate
consumption, resulting in reduced investment and thus reduced steady-state income
and possibly growth. The second potential problem attributed to democracy is related
to the idea of “developmental states,” that is, how well can states resist the pressures
from special interest groups such as large firms and unions (Przeworski and Limongi,
1993)? In other words, economic development requires a strong hand from above.
Necessary structural and economic reforms promoting long-run growth cannot be
undertaken in the messy push and pull of democratic politics. The experience of a
handful of economies in East and Southeast Asia under authoritarian regimes and
Chile under Pinochet are widely cited examples for this latter argument. However, the
many slowly growing countries with autocratic regimes contradict the assertion that
democracy retards growth.
Evidence that democracy promotes growth is found in a number of studies
(Durham 1999; Przeworski and Limongi 1993; Bardhan 1997; Rodrik 1997, 2000).
Rodrik ( 2000, 3) argues that “participatory and decentralized political systems enable
higher-quality growth: they allow greater predictability and stability, are more resilient to
shocks, and deliver superior distributional outcomes”. Bardhan (1997) suggests that
compared to democracies, authoritarian regimes are actually less stable under
deteriorating economic performance because they lack popular legitimacy, even
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though authoritarian regimes might survive during periods of sustained economic
growth. Similarly, Przeworski and Limongi (1993) emphasize the idea that
authoritarian regimes are likely to be predatory states that eventually become a source
of inefficiency.
Empirical studies of the growth effects of democracy and political regime types
suggest that a weak relationship exists between democracy and growth. Some studies
(Knack and Keefer 1995; Sala-i-Martin 1997; Barro 1997, 1999; Rodrik 1997, 2000;
Chowdhurie-Aziz 1997) find a positive impact; while other studies (Levine and Renelt
1992; Helliwell 1994; Dollar and Kraay 2000; Tavares and Wacziarg 2001) report a
weak, negative relationship between democracy and growth (see Brunetti 1997 for a
more complete literature review of this issue).
Barro finds a non-linear relationship between democracy and growth, with
growth increasing in democracy at low levels of democracy and decreasing in
democracy at higher levels of democracy. The turning point appears to be at roughly
the level of democracy existing in Malaysia and Mexico (in 1994), and somewhat above
South Africa’s level prior to its transition. Chowdhurie-Aziz (1997) finds a positive
association between the degree of non-elite participation in politics and economic
growth. Tavares and Wacziarg (2001), who estimate a system of simultaneous
equations, find a positive effect of democracy on growth through the channels of
enhanced education, reduced inequality, and lower government consumption.
However, they report that democracy has an overall negative and significant, albeit
small, effect on growth.
Helliwell (1994) finds that democracy spurs education, measured by secondary
schooling enrollment, and gross domestic investment, but has a negative (and
insignificant) effect on growth holding constant investment and education. On balance,
he finds no “systematic net effects of democracy on subsequent economic growth.”
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(1994, p225) Dollar and Kraay (2000) find that there is a modest negative relationship
between democracy and growth in growth regressions restricted to a sample of poor
countries.
Several recent papers show that either democracy or the rule of law can help to
mitigate social or ethnic conflict (Collier 2000, Easterly 2001, Rodrik 1999). Countries
having neither one of these institutional strengths are prone to conflict and crisis, and
consequently suffer poor growth performance.
III. Model and Data
An empirical growth model is used to investigate the relationship between
country institutional characteristics and long-run growth. In general form, this model
can be characterized as
( ))(;,, ttttyt ZhkyFγ = , (1)
where γyt is country y’s per capita annualized growth rate of real output in period t, yt is
initial real GDP per capita, kt is the physical capital stock per person, and ht is initial
human capital per person. Telephone mainlines per worker and life expectancy rates
serve as proxies for the stock of physical and human capital, respectively. Although
the initial GDP per capita level is employed to estimate the rate of conditional
convergence, it is possible to interpret this variable as a proxy for the stock of capital
for a country. The variable Z represents a vector of control and environmental
variables, the majority of which are determined by the decisions of governments or
individuals. These variables include a large number of the rule of law and democracy
measures, trade intensity ratios, and four regional dummies.
Real GDP growth is calculated using the national accounts data from the World
Development Indicators 1999 CDROM (WDI 1999). Initial GDP per capita levels are
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from Penn-World Table 5.6.1 Data for telephone mainlines per employee and life
expectancy rates are from Easterly and Sewadeh (2002)2. Data on trade shares as a
percent of GDP are also from WDI 1999.
This study uses five different measures of democracy. The first two measures
of democracy, political rights and civil liberties (commonly known as Gastil indices), are
used extensively in the literature. The data have been normalized from zero to one,
with one denoting the greatest degree of freedom. We then use three measures of
democracy from the Polity III database3. Democracy (autocracy), which measures the
level of democracy (autocracy) in countries, takes values from 0 to 1. Higher (low)
values indicate a higher level of democracy (autocracy) in a country. The last
measure, political regime type, indicates whether a country has a civilian regime,
military regime or a combination of these two regimes. This variable ranges from 1 to
4, with 1 indicating a civilian regime; 2 indicating a civilian-military regime; 3 indicating
a military regime, and 4 indicating others (such as Iran and Afghanistan).
The rule of law variable is a composite index based on measures of the quality
of the bureaucracy, political corruption, the likelihood of government repudiation of
contracts, the risk of government expropriation, and the overall maintenance of the rule
of law. Each component of the rule of law index (the quality of the bureaucracy,
corruption in government, the likelihood of government repudiation of contracts, the risk
of government expropriation) is also used as a separate independent variable in the
growth regressions. All five components of the rule of law index have been normalized
from zero to one, with one denoting the greatest degree of rule of law. Data for all of
1Nuxoll (1994) and Summers and Heston (1991) discuss the reasons why the Summers and Heston data should be used for initial income levels while World Bank data should be used for income growth rates. 2 They maintain the “Global Development Network Growth Database” on the World Bank web site. http://www.worldbank.org/research/growth/ 3 Polity III web site: http://paradocs.pols.columbia.edu/datavine/BrowseFrameSet.jsp?dsetID=100.
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the component variables are from Easterly (1999)4. The mean values for each variable
by decade are listed in Table 1.
Cross-country regressions are estimated for a panel of one hundred countries5
for the sample period 1970 to 1999. The number of countries is limited by the
availability of data. The system is a three-equation system estimated using the
seemingly unrelated regression technique (SUR) and/or three stages least squares
(3SLS) as in Barro (1997)6. The dependent variables are the average annual growth
rates of real per capita GDP over three periods: 1970-1979, 1980-1989, and 1990-
1999.
IV. Results
Mean values of endogenous and exogenous variables by decade are listed in
Table 1. Mean values of variables for the restricted sample are reported in the bottom
portion of Table 1.
Table 2 reports the correlation coefficients between the rule of law and
democracy measures. For every pair of institutional variables there is a statistically
significant correlation with the expected sign. The significant correlations suggest that
multicollinearity would be a significant problem, precluding using these variables
together in the same regressions. Given the high correlation between the rule of law
and democracy measures, it is hard to understand the claim that the overall
maintenance of rule of law is more important than democratic institutions in promoting
economic growth, especially developing countries.
The estimates of the basic growth model are reported in Tables 3 and 4. The
model is estimated as a two or three-equation panel using the seemingly unrelated
4 See Knack and Keefer (1995), Gastil (1988), and the Polity III web site for detailed information about the institutional variables. 5 The list of countries is available from the authors.
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regression (SUR) technique. Other than the constant terms, all coefficients are
constrained to have the same value in each equation. The reported R-squares
correspond to each equation in the panel of two or three equations. As is the practice
in the literature, the effects of the rule of law and democracy are estimated separately.
As expected, the proxies for human and physical capital have significant,
positive effects on growth, while the initial level of real GDP per capita has a significant
negative effect. The estimated rate of convergence is consistent with that found in
several other studies. Trade as a percentage of GDP (a measure of openness) has an
insignificant positive effect on growth in Table 3 but it has a significant positive, albeit
small, effect on growth in Table 47. While the area-specific dummies indicate below
average growth in Africa, Latin America, and the OECD countries, the area effect is
positive but frequently insignificant for East Asian nations in most of the estimates.
Equation 2 in Table 3 reports the estimated effects of the rule of law. The
significant and positive estimated coefficient supports the hypothesis that overall
maintenance of the rule of law promotes growth. The one possible mechanism by
which the rule of law promotes growth is that overall maintenance of the rule of law
creates a better investment environment, attracting more investment, especially foreign
direct investment. The following four columns of Table 3 report the estimated
coefficients for the individual components of the rule of law. Government repudiation of
contracts and risk of expropriation indices, which indicate a commitment to the
maintenance of the property rights in a country, have statistically significant and
positive coefficients, indicating that maintenance of property rights is especially
important for growth. Alternatively, the estimated coefficients for the corruption and
6 See Greene (1997) for a detailed discussion of these techniques. 7 The results in Table 3 for trade shares support the results of Rodrik et al. (2002). They report that trade shares lose their significance in growth regressions when used in combination with the several rule of law variables. It is important to note that in a restricted model, inclusion of all
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bureaucratic quality indices are not statistically significant. Thus, these results suggest
that political corruption does not hamper growth, which is not inconsistent with the
theoretical literature reviewed in section II. Note that we focus first on the rule of law
data because rule of law data are available for a larger sample of countries and
combine all four measures of institutional quality.
Gastil indices are used as measures of the level of democracy in each country.
Results for the estimated specifications are reported in Table 4. Columns 2 and 3 in
Table 4 contain estimated results for the growth model including political rights and civil
liberties as measures of democracy. For both specifications, the estimates imply that
the level of democracy has no effect on real GDP growth for the countries in the
sample. As an alternative, three measures of democracy from the Polity III database
are used in the growth regressions. The estimated coefficients for all three measures
of democracy, reported in columns 4 through 6 in Table 4, indicate a positive but
insignificant relationship exists between democracy and growth. While some previous
studies find a positive, significant relationship between Gastil indices and growth, the
results reported here fail to find any significant, positive relationship between
democracy and long-run growth. A possible explanation is that the number of countries
used in this study is considerably greater than the number of countries used in most
other studies. For example, while Barro (1997) uses 87 countries, Knack and Keefer
(1995) use 46 or 97 countries depending on the specification.
An alternative approach is to divide the sample by income level using the World
Bank country classification. (Our data include 29 developed countries and 85
developing nations according to this classification scheme.) The rationale for this
approach is that the theoretical literature suggests that the developmental impact of
institutional variables on growth depends upon the level of development in each
of the democracy variables also obtains insignificant and positive coefficients for trade shares.
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country. The estimated results for specifications segregating countries by income level
are reported in Table 5. As shown by the results reported in the first Panel of Table 5,
dividing the sample according to income levels obtains different implications for the rule
of law variables. Now, while the estimated coefficient for overall maintenance of the
rule of law is significant for developed countries, the estimated coefficients for
government repudiation of contracts and risk of expropriation are significant for
developing countries. This suggests that rule of law measures have different
implications for countries at different stages of development.
Estimates of the effect of democracy variables when countries are divided by
income level are reported in the second Panel of Table 5. The results are similar to
those previously reported. In all cases, for both developing and developed countries,
the estimated coefficients indicate insignificant positive effects.
Our results show that while some measures of institutional quality have a strong
relationship with growth, democracy measures have no apparent relationship with
growth, even though there is a very high correlation between these institutional
measures that supposedly measure similar factors. The results reported so far are
standard in the literature. For example, Knack and Keefer (1995) report similar results
for these measures and conclude that the rule of law is a better measure of institutional
quality than the Gastil indices. Although this may be true, we consider the possibility
that the considerably different country and time coverage between the democracy
measures and the rule of law measures may account for the weak correlation between
democracy and growth. To investigate this possibility, we use the same specification
as in column 2 of Table 3 with the same sample of countries and with the same time
period (87 countries in the 1980s and 101 countries in the 1990s) for both institutional
measures, and reestimate the regressions in Table 4. A simple examination of the
See also Rodrik et al. (2002) for further discussion of the issue and additional references.
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data reveals that all of the missing observations in the 1980s and 1990s (with the
exception of Bahamas in the 1980s) are developing countries. For developed
countries both growth rates and democracy measures are almost identical in both the
unrestricted and restricted samples. However, growth rates are slightly higher in the
1990s for developing countries in the restricted sample. Developing countries also
have slightly higher democracy levels in the restricted sample for two of the decades.
Averages for the restricted sample are in the bottom panel of Table 1.
The last panel of Table 5 (the restricted sample) reports these estimates.
Compared to the unrestricted sample, in the restricted sample the estimated
coefficients are substantially larger in absolute value for all countries and for the
developing countries. Also, the all-country estimated coefficients for all of the
democracy measures except for civil liberties are now positive and statistically
significant. These estimates are reported in the first column of Table 5, Panel 3. It is
significant that these results are driven by the experiences of the developing countries.
These results demonstrate that the estimated effects of democracy measures are
extremely sensitive to time periods and country coverage. This can explain the
contradictory results reported throughout the literature. More importantly, these results
challenge the idea that overall maintenance of rule of law is more important than
democratic institutions for growth, especially for developing countries. The results
presented here imply that both institutional types are important (or probably not
important if we consider the unrestricted model) for economic growth.
On the whole, our estimated results support the idea that the rule of law and
democracy are equally important conditions for growth. These results also shed light
on the widely debated topic as to whether any systematic difference exists between the
growth performance of democratic regimes and undemocratic regimes. Our estimates
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indicate that democratic countries grow faster, as suggested by the signs and
magnitudes of the estimated coefficients for the various measures of democracy.
V. Sensitivity Analysis
A number of studies emphasize the possibility of simultaneity problems for
estimates using institutional variables as explanatory variables. One possible source of
bias is that rich countries have more resources to expend on building strong
institutions. Another possible source of bias is that the populace demands more
political freedom and civil liberty as income and wealth increase. To test whether
simultaneity affects the estimated results, one widely used approach is to estimate the
model using an instrumental variables technique. However, a major limitation with this
approach is that it is difficult to find good instruments that are correlated with the
exogenous variables but are not correlated with the error terms. Two studies in the
literature suggest possible instruments. Mauro (1995) argues that the index of ethnic
fractionalization is a valid instrument for institutional variables and Rodrik (1997)
argues that secondary enrollment ratios are a valid instrument for democracy
measures8. The correlations between these two variables and the institutional
variables are reported in Table 2. Except for the correlation coefficient between regime
type and ethnic fractionalization, all of the other coefficients are statistically significant,
showing that countries with good institutions have less ethnic fractionalization and
higher secondary enrollment ratios.
In addition to the current or lagged values of other exogenous variables used in
the specifications in Table 3 (or Table 4), these two variables are used as instruments
in the three-stage least-squares (3SLS) estimates and the results are reported in Table
6. Comparing the SUR estimates in Table 5 and 3SLS estimates in Table 6 shows that
8 The ethnic fractionalization index is from Easterly and Sewadeh and secondary enrollment ratios are from Easterly (1999).
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there are some differences between these two sets of estimates. Substantially larger,
statistically significant coefficients are estimated using the 3SLS technique for all
measures of rule of law with the exception of the corruption index. These results
suggest a much higher positive impact of the rule of law on growth for all countries and
for developing countries.
In the unrestricted sample, controlling for the simultaneity obtains larger
estimated coefficients for the democracy variables in the developing country sample.
For the instrumental variable estimates, statistically significance results for civil liberties
and for autocracy indicate that democratic developing countries grow faster than
undemocratic developing countries. In the restricted sample, the SUR and 3SLS
estimates are similar for the democracy variables, but while eight of the ten SUR
estimates are significant, only five 3SLS estimated coefficients are significant for all
countries and for developed countries. Overall, these results demonstrate that while
controlling for the existence of endogeneity does not change the significance levels of
most of the estimated coefficients, the coefficients estimated by 3SLS are, in most
cases, larger than the SUR estimates, suggesting a much larger effect of institutional
quality on growth.
V. Conclusion
Previous research has established the importance of maintenance of the rule of
law for promoting economic growth, but found no evidence that democracy provided
any growth benefit to developing economies. Here, using a larger sample than those
used in previous studies, we find comparable results. The rule of law, but not
democracy, enhances economic growth.
However, we also find that these results are very sensitive to sample selection
and estimation methodology. When an identical sample is used to assess the impact
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of the rule of law and democracy, we find that both institutions promote growth.
Democratic institutions appear to be particularly important for developing nations.
Similarly, controlling for simultaneity is very important. Estimates using three-
stage least squares find large, significant effects of both the rule of law and democracy
on growth. Again, the importance of democratic institutions for developing nations is
particularly notable.
Contrary to previous findings, we find that democratic institutions promote
growth. Developing nations in particular benefit from the establishment of democratic
political systems. Given the many nations that remain in early stages of development,
the contribution of a democratic society to economic success cannot be
overemphasized.
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Table 1 Basic Statistics
Developing Countries Developed Countries
Variables 1970s 1980s 1990s 1970s 1980s 1990sGDP per capita growth rates (%) 2.43 0.55 1.05 3.64 2.63 1.97Initial GDP per capita (log) 3.13 3.22 3.21 3.85 3.98 4.09Life expectancy rates (log) 1.70 1.73 1.76 1.85 1.86 1.88Telephone mainlines per worker 25.53 27.02 53.21 93.17 114.43 177.93Trade (% of GDP) 58.24 61.14 67.01 76.91 87.47 87.08Rule of law (0-1) .. 0.38 0.40 .. 0.90 0.84Gov't repudiation of contracts (0-1) .. 0.51 0.49 .. 0.78 0.92Risk of expropriation (0-1) .. 0.50 0.59 .. 0.79 0.95Corruption (0-1) .. 0.39 0.56 .. 0.92 0.82Bureaucratic quality (0-1) .. 0.35 0.48 .. 0.93 0.87Political Rights (0-1) 0.35 0.37 0.43 0.85 0.90 0.95Civil liberties (0-1) 0.40 0.38 0.45 0.81 0.88 0.91Democracy (0-1) 0.27 0.28 0.42 0.86 0.93 0.96Autocracy (0-1) 0.52 0.46 0.32 0.07 0.02 0.01Political regime (1-4) 1.33 1.35 1.27 1.01 1.00 1.00
Restricted Sample GDP per capita growth rates (%) .. 0.54 1.15 .. 2.66 1.97Political Rights (0-1) .. 0.44 0.47 .. 0.90 0.95Civil liberties (0-1) .. 0.44 0.47 .. 0.88 0.91Democracy (0-1) .. 0.35 0.44 .. 0.93 0.96Autocracy (0-1) .. 0.41 0.30 .. 0.02 0.01Political regime (1-4) .. 1.29 1.23 .. 1.00 1.00For a discussion of these variables, see section 3.
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Table 2
Pearson Correlation Coefficients for Various Institutional Measuresa
Variable
Gov't R
epudiation of Contracts
Risk of E
xpropriation
Corruption
Bureaucratic Q
uality
Political R
ights
Civil Liberties
Dem
ocracy
Autocracy
Political R
egime Type
Ethnolinguistic Fractionalizatio
Secondary E
nrollment R
atios
Rule of Law 0.77 0.83 0.53 0.71 0.60 0.65 0.58 -0.47 -0.22 -0.33 0.6040.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.003 0.0001 0.0001
Gov't Repudiation1.00 0.87 0.33 0.57 0.61 0.63 0.56 -0.46 -0.35 -0.26 0.66of Contracts 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.001 0.0001Risk of Expropriation 1.00 0.42 0.66 0.61 0.63 0.59 -0.49 -0.31 -0.25 0.66
0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.002 0.0001Corruption 1.00 0.45 0.25 0.28 0.38 -0.34 -0.11 -0.20 0.40
0.0001 0.0001 0.0001 0.0001 0.0001 0.144 0.01 0.0001Bureaucratic Quality 1.00 0.47 0.48 0.52 -0.46 -0.29 -0.29 0.57
0.0001 0.0001 0.0001 0.0001 0.0001 0.0002 0.0001Political Rights 1.00 0.91 0.87 -0.82 -0.40 -0.39 0.66
0.0001 0.0001 0.0001 0.0001 .0001 0.0001Civil Liberties 1.00 0.83 -0.79 -0.33 -0.41 0.64
0.0001 0.0001 0.0001 0.0001 0.0001Democracy 1.00 -0.92 -0.38 -0.35 0.63
0.0001 0.0001 0.0001 0.0001Autocracy 1.00 0.30 0.34 -0.57
0.0001 0.0001 0.0001Political Regime Type 1.00 0.04 -0.32
0.47 0.0001Ethnolinguistic Fractionalization 1.00 -0.47
0.0001Secondary Enrollment Ratios 1.00a The top number is the simple correlation coeffcient for each decade averages; the bottom numberare the P-level for each correlation coefficient.
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Table 3
SUR Estimates of the Effects of Rule of Law Measures on Growth Variable 1 2 3 4 5 6Log (Initial GDPSH) -1.92*** -2.79*** -3.11*** -2.99*** -2.32*** -2.61***
(2.43) (3.18) (3.26) (3.24) (2.74) (3.00)Log (Life Expactancy) 14.96*** 17.48*** 14.09*** 13.83*** 18.34*** 16.88***
(3.80) (3.89) (2.66) (2.65) (3.63) (3.39)Telephone mainlines per worker 0.011*** 0.010** 0.009** 0.009* 0.010** 0.010***
(2.64) (2.23) (1.87) (1.84) (2.33) (2.38)Trade (% of GDP) 0.009*** 0.005 0.004 0.003 0.005 0.004
(2.42) (1.30) (1.03) (0.84) (1.37) (1.32)Rule of Law 2.06***
(2.43)Government Repudiation 3.52**of Contracts (2.28)Risk of Expropriation 3.89**
(2.84)Corruption -0.22
(0.50)Bureaucratic Quality 0.79
(1.31)AFRICA -1.11** -1.45** -2.33*** -2.37*** -1.59*** -1.78**
(1.92) (2.15) (3.28) (3.45) (2.53) (2.87)LATIN -2.26*** -2.34*** -2.23*** -2.33*** -2.42*** -2.32***
(4.61) (4.72) (4.50) (4.74) (5.10) (4.90)EASIA 0.74 0.76 0.74 0.66 1.09** 1.01**
(1.41) (1.41) (1.16) (1.06) (2.20) (2.06)OECD -1.32** -1.94*** -2.05*** -2.16*** -1.12* -1.30**
(2.09) (2.78) (2.74) (2.91) (1.84) (2.14)For each equation, R2 .45, .27 .59, .24 .63, .30. .65 ,.30 .59, .29 .63, .26 (N) 228 188 155 155 175 175Each specification is estimated using the SUR technique. The system has 2 equations, where the dependent variables are the per capitagrowth rate for each decade. Each equation has a different constant term (not reported here). Other coefficients are restricted to be the same for all periods. t-statistics are in parentheses. *** Significant at the 1 percent-level** Significant at the 5 percent-level
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Table 4
SUR Estimates of Democracy Measures on Growth Variable 1 2 3 4 5 6Log (Initial GDPSH) -2.49*** -2.60*** -2.57*** -2.37*** -2.33*** -2.37***
(3.66) (3.76) (3.71) (3.28) (3.25) (3.28)Log (Life Expactancy) 17.51*** 17.15*** 17.38*** 16.52*** 16.79*** 16.58***
5.38) (5.23) (5.32) (4.77) (4.91) (4.78)Telephone mainlines per worker 0.010*** 0.010*** 0.010*** 0.009*** 0.009*** 0.009***
(3.01) (2.96) (3.26) (2.58) (2.64) (2.61)Trade (% of GDP) 0.011*** 0.011*** 0.010*** 0.012*** 0.011*** 0.011***
(3.37) (3.29) (3.26) (3.32) (3.26) (3.17)Political Rights 0.46
(0.90)Civil Liberties 0.36
(0.60)Democracy 0.56
(1.15)Autocracy -0.76
(1.33)Political Regime Type -0.44
(1.52)AFRICA -1.41*** -1.41*** -1.41*** -1.44*** -1.32*** -1.37***
(2.73) (2.72) (2.72) (2.66) (2.48) (2.56)LATIN -2.16*** -2.23*** -2.23*** -2.13*** -2.18*** -1.91***
(4.81) (4.90) (4.80) (4.51) (4.60) (3.99)EASIA 0.41 0.41 0.40 0.62 0.64 0.70
(0.86) (0.87) (0.84) (1.24) (1.28) (1.38)OECD -1.30** -1.42*** -1.41** -1.57*** -1.58*** -1.29**
(2.29) (2.44) (2.35) (2.60) (2.63) (2.21)For each equation, R2 .34, .42 .33, .43 .34, .42 .32, .42 .31, .43 .32, .41 (N) .28,(342) .29,(342) .28,(342) .30,(321) .29,(321) .30,(321)Each specification is estimated using the SUR technique. The system has 3 equations, where the dependent variables are the per capitagrowth rates during each decade. Each equation has a different constant term (not reported here). Other coefficients are restricted to be the same for all periods. t-statistics are in parentheses. *** Significant at the 1 percent-level** Significant at the 5 percent-level
19
Table 5
SUR Estimates of the Effects of Rule of Law and Democracy Measures on Growth Countries Divided by Income Level
All Countries Developing Countries Developed Countries
Variable R2 R2 R2
SUR # of obs SUR # of obs SUR # of obsRule of Law 2.07*** .59, .24 1.60 .48, .24 2.39** .82, .65
(2.43) 188 (1.45) 131 (2.19) 57Gov't Repudiation 3.52** .63, .30. 5.69*** .67, .24 0.48 .76of Contracts (2.28) 155 (3.26) 120 (0.15) 35Risk of Expropriation 3.89** .65 ,.30 4.44*** .65, .25 4.33 .77
(2.84) 155 (2.90) 120 (1.18) 35Corruption -0.22 .59, .29 -0.39 .52, .29 -0.56 .72, .71
(0.50) 175 (0.74) 120 (0.52) 55Bureaucratic Quality 0.79 .69, .26 0.28 .54, .27 0.76 .75, .69
(1.31) 175 (0.39) 120 (0.64) 55Unrestricted Sample
Political Rights 0.46 .33, .43,.29 0.39 .29, .32, .26 1.35 .55, .66 ,.67(0.90) 342 (0.65) 255 (1.18) 87
Civil Liberties 0.36 .34, .42, .28 0.50 .30, .31, .26 0.92 .55, .66, .66(0.60) 342 (0.67) 255 (0.90) 87
Democracy 0.56 .32, .42, .30 0.46 .28, .31, 28 0.20 .48, .68, .58(1.15) 321 (0.83) 240 (0.18) 81
Autocracy -0.76 .31, .43, .29 -0.62 .28, .32, .28 -0.34 .49, .67, 58(1.33) 321 (0.97) 240 (0.17) 81
Political Regime Type -0.44 .32, .41, .30 -0.35 .28, .30, .29 2.81 .47, .68, .59(1.52) 321 (1.08) 240 (0.65) 81
Restricted SamplePolitical Rights 1.35** .55, .29 1.63** .47, .27 0.55 .71, .71
(2.08) 188 (2.13) 131 (0.37) 57Civil Liberties 1.17 .54, .28 1.87** .47, .28 0.94 .71, .72
(1.54) 188 (1.99) 131 (0.74) 57Democracy 0.99* .51, .26 1.05 .44, .26 0.66 .68, .64
(1.70) 180 (1.49) 126 (0.50) 54Autocracy -1.50** .53, .26 -1.47* .45, .26 0.04 .68, .63
(2.15) 180 (1.78) 126 (0.01) 54Political Regime Type -0.74* .50, .28 -0.85* .41, .30 no variation
(1.90) 180 (1.84) 126See notes for Tables 3 and 4.
20
Table 6
3SLS Estimates of the Effects of Rule of Law and Democracy Measures on Growth: Countries Divided by Income Level
All Countries Developing Countries Developed CountriesVariable R2 R2 R2
3SLS # of obs 3SLS # of obs 3SLS # of obsRule of Law 7.99*** .55, .18 6.36*** .53, .26 5.18*** .84, .45
(4.25) 155 (2.61) 103 (3.27) 52Gov't Repudiation 10.92*** .58, .29 11.58*** .69, .26 -0.44 .70of Contracts (2.60) 129 (3.61) 97 (0.09) 32Risk of Expropriation 7.71*** .60, .39 8.09*** .64, .36 4.59 .72
(2.51) 129 (2.67) 97 (0.73) 32Corruption 1.51 .59, .35 1.88 .58, .33 -1.44 .69, .66
(0.93) 147 (1.01) 97 (0.96) 50Bureaucratic Quality 7.11*** .66, .16 5.32*** .64, .26 0.42 .74, .63
(4.10) 147 (2.65) 97 (0.27) 50Unrestricted Sample
Political Rights 0.14 .28, .52, .40 1.33 .22, .46, .42 -0.05 .68, .70, .56(0.13) 252 (1.22) 177 (0.05) 75
Civil Liberties 1.25 .28, .52, .40 3.27** .21, .45, .40 -0.04 .68, .70, .56(1.01) 252 (2.21) 177 (0.04) 75
Democracy 0.27 .21, .49, .40 1.54 .14, .45, .44 -0.73 .66, .70, .52(0.24) 246 (1.47) 174 (0.83) 72
Autocracy -1.80 .20, .52, .41 -2.60** .13, .49, .43 1.24 .65, .71, .53(1.42) 246 (2.10) 174 (0.90) 72
Political Regime Type -0.10 .21, .48, .40 0.01 .16, .40, .43 5.57 .62, .70, .55(0.15) 246 (0.02) 174 (1.58) 72
Restricted SamplePolitical Rights 1.69 .54, .37 3.54** .46, .34 1.51 .69, .65
(1.10) 155 (2.03) 103 (0.82) 52Civil Liberties -0.44 .52, .36 3.37 .48, .36 2.76 .65, .67
(0.23) 155 (1.56) 103 (1.43) 52Democracy 2.92* .48, .35 4.03*** .43, .31 1.48 .66, .65
(1.70) 151 (2.75) 101 (0.70) 50Autocracy -3.68** .52, .35 -4.20*** .51, .34 0.97 .68, .63
(2.00) 151 (2.74) 101 (0.23) 50Political Regime Type -1.17 .49, .36 -1.13 .42, .37 no variation
(0.98) 151 (1.25) 101The instruments are the five-year earlier log of (GDPSH) (for example, 1965 in the 1970-1979 equation); five-year lagged values of log (LIFE) (for example, 1965-1969 in the 1970-1979 equation); actual values of TELPW , and previous five-year values of OPEN are used. For example, the 1980-1989 equation uses averages for OPEN for the 1975-1980period. Finally, secondary enrollment ratios and an index of ethnolinguistic fractionaliazitonin 1960 are used in all specifications.
21
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