Democratic institutions and variability of economic growth in Pakistan: some evidence From the time-series analysis.
Zakaria, Muhammad ; Fida, Bashir Ahmed
This paper explores the empirical association between democracy and
per capita output growth in Pakistan using data for the period 1947 to
2006. The findings of the paper indicate a weak negative association
between democracy and output growth. Consistent with some current
empirical literature, democracy is also found to influence output growth
indirectly. The empirical results are robust to different democracy
variables and output growth equation specifications. The empirical
findings also highlight the role of other variables in determining
output growth and, except for rising oil prices, show its positive
linkage to physical and human capital, government consumption, openness
of trade practices and inflation.
JEL classification: C22, 043
Keywords: Democracy, Growth, Time-series
1. INTRODUCTION
The relationship between democracy and economic growth has
concerned social scientists since the seventeenth century. Two main
positions still discussed today were staked out in the 1650s, one side
arguing that democracy endorsed economic growth, while the other side
arguing that democracy obstructed economic growth. (1) Proponents of
democracy argue that autocracy, even when benign, weakens the rule of
law required for routine economic activity. According to this view,
economic growth requires 'developmental democracy', in which
(legal and electoral) limits on arbitrary power provide individuals the
safety to plan for their economic futures [Sklar (1987)]. Democracy
promotes rule of law, brings openness in society and provides freedom of
choice and stable politics, which discourage corruption and extremist
policies. In other words, democracy provides a check on governmental
power and thereby limits the potential of public officials to accumulate
personal wealth and devise unpopular policies. Democracy leads to
credibility of government policies, as lack of credibility tends to
weaken stabilisation programmes, delay investment, depress savings,
encourage capital flight and promote the growth of black market
economies. Democracy limits state intervention in the economy but is
responsive to public demands in areas such as education, health and
justice, and thereby encourages stable and long-run growth [Rodrik
(1999); Baum and Lake (2003)]. Democratic nations are better at managing
conflicts, avoiding catastrophes and dealing with major public health
crises. In short, supporters of democracy argue that the motivations of
citizens to work and invest, the effective allocation of resources in
the marketplace, and profit maximising private activity can all be
maintained in a climate of liberty, free-flowing information and secured
control of property [North (1990)]. With few exceptions, developed
nations are also democratic states.
Opponents of democracy, in both academic and political debates,
argue that democracy is an inefficient system for developing countries.
According to this view, economic growth in developing countries requires
'developmental dictatorship' in which people are required to
do hard work and make sacrifices [Gregor (1979)]. It is also argued that
democracies lend themselves to popular demands for immediate consumption
at the expense of profitable investments. Further, democracies cannot be
insulated from the interests of rent-seekers and cannot utilise
resources efficiently, and that democracies are prone to conflicts due
to social, ethnic and class struggles.
In turn, authoritarianism tends to suppress conflicts, resist
sectional interests and take coercive measures essential for rapid
growth. Many rich countries have become rich under authoritarian rule
and have often experienced declines in growth after a democratic
transformation. (2) If this conventional wisdom is correct, one might be
justified in concluding that democracy is a luxury to be enjoyed only by
countries rich enough to afford it. This, indeed, is a common argument
among authoritarian leaders in the developing world.
These two positions have been joined in debate by a third
perspective of more recent origin, which states that democracy has no
significant effect on economic growth. This view, called as the
"no-effect' position, postulates that economic growth is due
primarily to economic production inputs. The difference between
democratic or non-democratic regimes is less important than the
existence of pro-growth governmental policies. In fact, democracy
affects economic growth through various channels. Some channels exhibit
positive effects of democracy on economic growth while others exhibit
negative effects. The net effects of democracy on economic growth thus
remain ambiguous. As a result, studying the effects of democracy on
economic growth is often deemed a futile endeavour. Yet this issue
deserves close examination as political liberalisation is often the
developed countries' precondition for providing financial
assistance to developing countries like Pakistan. Therefore, determining
democracy's costs and benefits is critical to formulating policies
that boost economic development.
Almost all previous studies on this relationship have focused on
cross-country data analysis. It is quite possible that in one country,
due to its socio-cultural conditions, democracy enhances its economic
growth while in another country it may not. In cross-section data the
positive (negative) effects of democracy on economic growth in one
country may be cancelled out by negative (positive) effects observed in
another country, leading to ambiguous conclusions. Further,
cross-country data analysis uses period average data and ignores the
obvious possibility that the democratic level of a country changes over
time. In addition, the use of a single cumulative or average measure of
economic growth makes empirical results vulnerable to period effects.
This implies that cross-country data analysis may yield bias estimates.
This study examines the relationship between democracy and economic
growth in Pakistan using annual times-series data for the period 1947 to
2006 such that the problems of stationarity, robustness of
specification, as well as the problems related to collinearity,
endogeneity and nonlinearity of the model are also addressed. (3)
The rest of the paper is organised as follows. Section 2 presents a
brief literature review. Section 3 provides a brief history of democracy
and economic growth in Pakistan. Section 4 develops the central
theoretical argument of this study and outlines its methodology. Section
5 presents empirical results. The final section relates the conclusions.
2. LITERATURE REVIEW
Post-1960 empirical literature on democracy and development mainly
focused on the democracy-growth relationship but has failed to arrive at
a clear conclusion. Of the 13 studies surveyed by Sirowy and Inkeles
(1990), three found a negative effect of democracy on economic growth,
four found this negative effect in some situations, and six found no
relationship whatsoever. In their review of 21 statistical findings,
Przeworski and Limongi (1993) stipulate that eight found in favour of
democracy, eight in favour of authoritarianism and five discovered no
difference. Of the 17 papers reviewed in Brunetti (1997), nine found no
effect of democracy on economic growth, four found positive effects and
the other four found negative effects. Kurzman, et al. (2002) reviewed
47 quantitative studies, in which 19 found a positive relationship
between democracy and growth, six found a negative relationship, and 10
reported no statistically significant relationship. Seven studies found
a combination of positive and non-significant results, two found a
combination of negative and non-significant results, two found mixed
positive and negative results, and one [Barro (1996)] reported an
inverted-U effect. (4) More recently, Mobarak (2005) finds that higher
level of democracy promotes growth because democracy reduces volatility
which in turn enhances growth. Gerring, et al. (2005) and Rodrik and
Wacziarg (2005) have also shown that democracy promotes growth. (5)
This literature taken as a whole is fairly inconclusive) Roughly,
the same number of studies stand on both sides of the argument, for and
against democracy as an economic growth factor. There are various
reasons for this inconsistency. The first is inconsistent econometric
modelling assumptions, since the models used by different studies do
vary widely. The second is sample and data selection bias. The third is
the difference in estimation techniques. The fourth is that some studies
examine the direct effect of democracy on economic growth while others
argue that explicit specification of the channels of influence will
allow a better understanding of the economic costs and benefits of
democracy [Alesina, et al. (1996); Tavares and Wacziarg (2001); Baum and
Lake (2003)]. In other words, the ambiguity of theoretical relationship
between democracy and growth is another source of inconsistency in
empirical results. The fifth is the construction of democracy index,
since some studies used a dichotomous variable to measure democracy
while others used some objective indices to measure democracy. Thus, the
issue is complicated by estimates that differ due to data sources,
estimation techniques, sample compositions and time periods. However,
this does not imply that there is no relationship between democracy and
economic growth. The conditional distribution of growth rate as a
function of democracy indices might differ from the unconditional
distribution, even when the conditional mean is the same [Almeida and
Feneira (2002)].
3. HISTORY OF DEMOCRACY AND ECONOMIC GROWTH IN PAKISTAN
3.1. Democracy (7)
Pakistan came into existence as a Muslim majority state trader the
Government of India Act of 1935, which made it a parliamentary
democracy. All successive constitutions of Pakistan maintained this
notion of parliamentary democracy for Pakistan. However, Pakistan has
been under military governance for the majority of its 59 years of
existence (1947-2006). In 1958, the army stepped in for the first time
to take over political power. The second time was in 1977, and in 1999
for the third time. The nation's five elected governments were
established in 1972, 1988, 1990, 1993 and 1997. But these elected
governments were removed by the army. As a result, democracy did not
work satisfactorily in Pakistan and even it could not perform its basic
tasks such as providing law and order, making economic development and
building adequate political institutions. The reasons for
democracy's failure in Pakistan is attributed to:
* Lack of Political Institutions: Political institutions and
political parties are an important element of parliamentary democracy.
In Pakistan political parties are private enterprises of single persons
or families lacking inner democratic structure which prevents them from
putting the country on a democratic path.
* Lack of Sense of Responsibility: The elected representatives are
by and large not aware of their rights and responsibilities and no
effective system has been evolved to train them to function as elected
legislators.
* Lack of Accountability. There has been no public initiative to
monitor the performance of the elected representatives and elected
bodies and to hold them accountable on the basis of their track record.
* Emergence of Democratic Leadership disrupted by Military Rule.
During the periods of military rule, the political process, which on its
own momentum develops new leadership in the country, remained halted.
Whenever democracy was restored, the process did not continue for long
enough to allow new leadership to emerge.
* Strategic Factors. The Kashmir war and the (real or perceived)
Indian military threat for Pakistan were two powerful factors which made
the civilian governments concede preeminence to the army and priority to
its needs. This foothold of the military in Pakistani politics has made
it a full-fledged player in the country's governance.
* Insulation of Educated Middle Classes from Politics: Pakistan has
always been dominated by a small class of the feudal elite. The educated
classes mostly from the middle class have remained largely uninvolved in
national politics. They have either been sidelined or have got
disillusioned seeing no role or prospects for them in the political
process. As a result, political activity has remained largely confined
to the moneyed class..
* International Factors: Foreign vested interests have found it
more convenient to deal with a military government in Pakistan than with
a weak political one. This has also discourged the democratisation
process in Pakistan.
* Socio-economic Structure: Due to widespread illiteracy and
poverty the socioeconomic structure of Pakistan has been such that
people have had to vote the feudal elite or industrialists into power.
The upshot is that the basic conditions that a functional democracy
requires are missing or are insufficient in Pakistan. This flaw or
weakness has provided the excuse to the army to step in when political
governments have failed to deal with a crisis situation.
3.2. Economic Growth
Pakistan's growth performance throughout its history has
remained substandard. Growth trends have fluctuated from period to
period as the country lurched from democratic system to dictatorship as
Figure 1 shows. Average growth rate from 1947 to 1957 was 3.3 percent,
from 1958 to 1971 it was 5.6 percent, from 1972 to 1976 it was 5
percent, from 1977 to 1987 it was 6.5 percent, from 1988 to 1998 it was
4.4 percent, and from 1999 to 2006 it was 5.6 percent. It indicates that
the average growth rate of GDP remained slightly lower during democratic
periods than during dictatorship periods. One reason is that Pakistan
experienced high political instability during democratic periods, which
adversely affected output growth. In turn, due to high political
stability during dictatorship periods, GDP experienced a high level of
growth. However, as the linear GDP growth rate/trend line shows,
Pakistan's GDP growth rate kept on increasing throughout the
period.
[FIGURE 1 OMITTED]
4. ANALYTICAL FRAMEWORK
4.1. Theoretical Arguments
In theoretical debates, three schools of thought have worked on the
relationship between democracy and economic growth, namely the conflict
school, the compatibility school and the skeptical school [Feng (1997)].
(8) Hobbes (1651) is known to have first evolved the conflict view. (9)
To Hobbes, authoritarian regimes were more likely to improve public
welfare simply because they could not promote their own interests
otherwise. Huntington (1968) argues that democracies have weak and
fragile political institutions and lend themselves to popular demands at
the expense of profitable investments. According to Krueger (1974) and
Bhagwati (1982) democratic governments are vulnerable to demands for
redistribution to lower-income groups, and are surrounded by
rent-seekers for directly unproductive profit-seeking activities.
Persson and Tabellini (1992) suggest that democracies attempt to reduce
material inequality through growth deterring redistributive taxation.
Lipset (1959) proposes that some level of development is required for
democracy to function properly. This view became popular after the
growth success stories in South Korea, Taiwan, Hong Kong and Singapore
in the 1950s and the 1960s. Authoritarian systems are supposed to
implement coercively the hard economic policies necessary for growth,
and suppress the growth-retarding demands of low-income earners and
labour in general, as well as social instabilities due to ethnic,
religious, and class struggles, which democracies cannot suppress. Rao
(1984) observes that absolutist regimes increase economic growth by
sacrificing current consumption for investment, which makes them rather
effective at mobilising savings. For economic progress, markets should
come first, and authoritarian systems can easily facilitate such
policies. The argument rests on several assumptions, the main one of
which is that if given power, authoritarian regimes would behave in a
growth-friendly manner. (10) In fact, the conflict view implies that
political democracy is a luxury that developing countries cannot afford.
The compatibility school objects to the arguments made by the
conflict school and stresses that rulers are potential looters
[Harrington (1656)] (11) and democratic institutions can act to
constrain them [North (1990)]. Implementation of the rule of law,
contract enforcement and protection of property rights do not
necessarily imply an authoritarian regime. The latter has a tendency to
confiscate assets if it can expect a brief tenure [Olson (1993)]. Even
in the long-run authoritarian regimes lead to a corrupt and extravagant
use of resources, internally inconsistent policies, and short-lived and
volatile economic progress [Sah (1991); Bhagwati (1995)]. The motivation
of citizens to work and invest, the effective allocation of resources in
the marketplace, and profit maximising private activity can only be
maintained in a democratic system, which leads to higher political
rights and civil liberties. Democracy exhibits peaceful and predictable
transfers of political power and results in political stability, which
is likely to foster investment and growth by reducing the degree of
uncertainty [Barro (1991); Alesina, et al. (1996)]. Further, democracies
rarely engage in military conflict with each other, and this promotes
world peace and economic growth. Proponents of democracy also propose
that if not direct, democracy has indirect effects on economic growth
[Alesina, et al. (1996); Tavares and Wacziarg (2001); Kurzman, et al.
(2002); Baum and Lake (2003); Gerring, et al. (2005)]. Thus, on the
question of democracy-growth relationship, one should remember the
broader associations that encompass the channels, or the indirect
effects, between democracy and growth rather than one-to-one causation
from regime to growth.
Finally, according to the skeptical perspective, there is no
systematic relationship between democracy and economic growth. The
proponents of this view argue that it is the institutional structure and
organisations, rather than regimes per se, that matter for growth.
Pro-growth governmental policies can be implemented in either system. A
good leadership that can resolve collective problems and be responsive
to rapidly changing technical and market conditions is more critical to
economic growth than a political system [Bardhan (1993)].
Another school of thought, which contains the properties of both
conflict and compatible schools, suggests a nonlinear effect of
democracy on economic growth [e.g. see Barro (1996)]. It suggests that
growth will initially increase with democracy, but the relation will
turn out to be negative once a moderate level of democracy is attained.
One way to interpret this result is that in the worst dictatorships an
increase in democracy tends to stimulate growth because the benefit from
limitations on governmental power is the key matter. But in places that
have already achieved a moderate amount of democracy, a further increase
hinders growth because the dominant effect comes from the intensified
concern with social programmes that redistribute resources. Thus, like
empirical literature, theoretical literature is also highly divided on
the effects of democracy on economic growth. However, in contrast to
empirical literature, the theoretical literature is rich enough with
micro and macro level explanations linking democracy to economic growth.
4.2. Empirical Estimation
This section examines democracy-growth linkages using regression
analysis. The approach followed here is to add the democracy variable to
the right-hand-side variables of a standard growth equation as an
explanatory variable. Here the proposition is that democracy is likely
to significantly affect output growth. The specification of out-put
growth equation is similar to those specifications commonly used in the
growth literature [see e.g. Barro (1991); Konnendi and Meguire (1985);
Levine and Renelt (1992); Mankiw, et al. (1992)]. The following dynamic
growth equation, which outlines the basic thrust of output growth model,
will be estimated, (12)
[Y.sub.t] = [[gamma].sub.1] + [[gamma].sub.2] [DMC.sub.t] +
[[gamma].sub.3] [k.sub.t] + [[gamma].sub.4] [hc.sub.t] + [[gamma].sub.5]
[g.sub.t] + [[gamma].sub.6] [open.sub.t] + [[gamma].sub.7] [INF.sub.t] +
[[gamma].sub.8][ oil.sub.t] + [[mu].sub.t]
where the lowercase letters denote that the underlying variables
are in natural log form. The various variables are defined as follows.
[Y.sub.t] = Per capita output growth rate
[DMC.sub.t] = Democracy index
[k.sub.t] = Capital stock per worker
[hc.sub.t] = Human capital
[g.sub.t] = Government consumption
[open.sub.t] = Trade openness
[INF.sub.t] = Inflation rate
[oil.sub.t] = Oil prices
[[mu].sub.t] = White-noise error term
where [gamma]'s are the parameters to be estimated, and
[[mu].sub.t] is the stochastic disturbance term such that [[mu].sub.t] ~
N(0, [[sigma].sup.2]).
Output growth is posited to be the function of a set of control
variables. These control variables include an index capturing democracy,
physical and human capital accumulations, government size, trade
openness, domestic inflation and oil prices. Changes in any of these
control variables would be expected to alter per capita output growth.
(13)
5. DATA, ESTIMATION AND INTERPRETATION OF RESULTS
5.1. Overview of the Data
This study employs annual time-series data for Pakistan for the
period 1947 to 2006. (14) The determining factor behind the selection of
theoretically relevant variables is the availability of data.
Non-availability of data restricted the use of some important growth
determining variables (e.g. corruption, black market premium etc.). The
dependent variable is per capita real GDP growth rate. Democracy is
proxied by Polity2 score, which is taken from Polity IV dataset
described by Marshall and Jaggers. Polity2 is an index ranging from -10
(full autocracy) to +10 (complete democracy). This index employs a
21-point scale and takes into account how the executive is selected, the
degree of checks on executive power and the form of political
competition. This indicator presents good historical coverage and allows
us to consider both the degree and duration of democracy in any given
country-year; so it is appropriate to use it in a time-series context.
(15) A complete description of variables along with data sources is
given in Appendix A.
Table 1 contains summary statistics for the main variables used in
this study, which may help in the interpretation of the coefficient
estimates by providing the scale of the relevant variables. Column (1)
of Table 2 correlates output growth with all independent variables. The
value of correlation coefficient -0.10 indicates that output growth is
slightly negatively correlated with the democracy index. Output growth
is also negatively correlated with oil prices. In turn, growth is
positively correlated with physical capital stock, human capital,
government consumption, trade openness and domestic inflation. Column
(2) contains the correlations between the democracy index and all other
independent variables. The democracy index is positively correlated with
all independent variables with the possible exception of oil prices,
which is negatively correlated with the democracy index. Since the
democracy index is correlated with growth-determining variables, column
(2) might help in exploring the channels through which democracy is
expected to effect output growth.
5.2. Democracy-Growth Analysis
Before estimating the growth equation, we have first checked the
stationarity of the variables using ADF unit-root test. All variables,
except per capita GDP growth and the democracy index, are found to be
integrated of order one. (16) It indicates that the estimated growth
equation can form a long-run relationship of output growth with all
explanatory variables except the democracy index; the latter has a short
run relationship with output growth. To overcome endogeneity and omitted
variable problems, the Generalised Method of Moments (GMM) estimation
technique of Arellano and Bond (1991), Arellano (1993), and Arellano and
Borer (1995) has been applied to estimate output growth equation using
lagged values of the variables as instruments.
Table 3 reports the regression results. The results indicate that
once all control variables are held constant, the marginal contribution
of democracy to growth is slightly negative. The magnitude of the
coefficient of democracy index is very small (-0.0023). This is due to
the fact that the democracy index changes after a number of years (not
after every year), thereby depicting a small impact on output growth in
yearly time-series data. The coefficient estimate implies that, ceteris
paribus, a one point increase in democracy index would decrease per
capita output growth by 0.0023 points. (17) Thus the results are
consistent with the findings of some previous studies, which suggest a
weak adverse influence of democracy on economic growth. Given that the
coefficient of democracy is negative, we can interpret this to mean that
as a government institutionalises democracy over time, economic growth
in the country should decelerate. The estimated coefficient on the
democracy index remains negative and statistically significant to
changing variables in growth equation specifications. The model appears
to perform well from a statistical point of view.
As far as control variables are concerned, it is found that growth
is enhanced by high physical and human capital accumulations. The
statistical significance of human capital is greater than that of
physical capital; it validates the endogenous (new growth) theory that
human capital has a strong influence on growth performance. Moreover,
government consumption expenditures, trade openness and domestic
inflation positively contribute to growth. A possible justification for
the positive effect of government consumption on growth is that, in
Pakistan, the economic benefits of public goods of a larger government
outweigh the cost of financing its activities through distortionary
taxation. Similarly, high inflation rate, for instance, by increasing
investment through reduced real interest rate, raises growth. The
favourable effect of trade openness on growth is also consistent with
the extant literature. In turn, an increase in oil prices distorts
output growth; this result is also consistent with theoretical
predictions. Overall, the explanatory variables account for about 54
percent variation in output growth. The autoregressive (AR) process has
been applied to remove autocorrelation from the model. Values of
Durbin-Watson (DW) statistics are reasonably close to the desired value
of two, which indicates the absence of autocorrelation problem in the
model.
5.3. Sensitivity Analysis
5.3.1. Sensitivity to Political Variables
In this section, two alternative political variables, namely
political constraint and democracy dummy, are used to gauge the effects
of democracy on output growth. Political constraint is proxied by the
POLCONV score, which is taken from POLCON data set described by Henisz.
POLCONV is an index ranging from 0 (no constraints on executive's
powers) to 1 (full constraints on executive's powers). The
political constraint variable measures the degree of constraints on
policy change using data on the number of independent veto points in the
political system (executive, legislative, judicial and sub-federal
branches of government) and the distribution of political preferences
both across and within these branches. High constraints on the powers of
the executive denote high level of democracy. The democracy dummy takes
the value of 1 when there is a democratic system in a given year and
zero, otherwise. It is evident from Table 2 that all three measures of
democracy--the democracy index, political constraint and democracy
dummy--are highly correlated with each other. The correlation
coefficient between the democracy index and political constraint is
0.76, while the correlation coefficient between the democracy index and
democracy dummy is 0.89. Thus both political constraint and the
democracy dummy can be taken as good proxies to measure democracy.
Table 4 provides the regression results. The coefficients on
political constraint and the democracy dummy bear significant negative
signs. These results support the findings of the previous section that
democracy in Pakistan hampers output growth. The magnitude of the
coefficients of both political constraint (-0.0558) and democracy dummy
(-0.0212) is greater than that of democracy index (-0.0023). The results
suggest that, ceteris paribus, a one point increase in political
constraint (democracy dummy) would decrease growth by 0.0558 (0.0212)
points per year. The effect on growth of a one point change in political
constraint (0.0558) is relatively greater not only to the impact of a
change in democracy dummy (-0.0212) but also to the impact of a change
in the democracy index (-0.0023). The results of control variables are
also in accordance with the findings of the previous section in that
both physical and human capital accumulations, government consumption
expenditures, trade openness and inflation positively contribute to
growth while oil prices distort growth.
5.3.2. Sensitivity to the Inclusion of Interaction Terms
The effect of the democracy index on growth may be considered as a
'pure' effect of democracy on growth, independent of the
effect of democracy working through its impact on growth determining
variables. However, in literature it is well determined that the
established link between democracy and economic growth is a result of
the connections between democracy and other determinants of growth, e.g.
physical capital stock, human capital, government consumption, trade
openness, etc. [Barro (1996); Tavares and Wacziarg (2001); Kurzman, et
al. (2002); Gerring, et al. (2005)]. To check the 'indirect
effects' of democracy on growth via growth determining variables,
different interaction terms have been included in the growth equation.
Table 5 provides the regression results. In column (1) the coefficient
of the interaction term 'Democracy Index*Capital Stock' is
-0.0016. It shows that democracy index has decreased the coefficient of
capital stock by -0.0016 percentage points. In other words, it means
that as the level of democracy increases, an increase in capital stock
will decrease output growth by -0.0016 percentage points per year.
Similarly, column (2) suggests that as the level of democracy increases,
an increase in the level of human capital will decrease growth by
-0.0017 percentage points per year. A similar interpretation holds for
columns (3) and (4) in which democracy hinders growth via influencing
government consumption expenditures and the country's commercial
policy respectively. Thus our results are broadly in line with the
findings of previous studies in that democracy hinders economic growth
by influencing growth determining variables. However, the inclusion of
interaction terms has led inflation and oil prices variables to become
statistically insignificant. Similarly, the significant level of the
democracy index has also decreased. Thus the results of Table 5 should
be taken with caution.
6. CONCLUSION
This paper empirically examines the relationship between democracy
and economic growth in Pakistan using annual time-series data for the
period 1947 to 2006. The paper identifies three areas for methodological
improvement in political economy of growth. First, instead of a
dichotomous variable, a near-continuous measure of democracy is used.
Second, rather than using static indicators employed in cross-sectional
studies, this paper employs time-series data that account for the rise
and fall of democracy during the period under study. Third, indirect
effects of democracy on growth are also identified. Using standard
econometric methodology, the empirical results reveal that, ceteris
paribus, democracy has slightly negative effects on economic growth in
Pakistan. This link between democracy and economic growth is robust to
sensitivity checks, which include changing democracy variables and
growth equation specifications. Democracy is also found to impair
economic growth indirectly by influencing physical capital stock, human
capital, government consumption expenditures and trade openness. As far
as control variables are concerned, growth is positively related to
capital stock per worker, human capital, large government size, trade
openness and inflation, while it is negatively related to increased oil
prices.
Pakistan remained under military rule for most of the time, which
discouraged the proliferation of conditions required for the existence
of democracy. As a result, inefficient democratic governments have
halted economic growth in Pakistan. This highlights the need to
establish political institutions and policies to promote strong
democracies in Pakistan. Thus it will take time for Pakistan to become a
fully democratic state to reap the benefits of democracy. In fact, this
notion indirectly supports the 'conflict view' that democracy
improves growth only when a sustainable level of development has been
achieved. Since Pakistan is a developing country, it will take time for
Pakistan to achieve a threshold level of development required for the
existence of democracy. Moreover, independent thinking and discussion is
the way to develop democractic setup in Pakistan. Political scientists
and analysts have to play their role in this process of public thinking
and discussion. In the process of doing so a nation-wide consensus
should be evolved, which could form the basis of a concerted effort to
find a solution for one of the most burning problems of Pakistan.
Although these results may extend the political economy of
development literature in Pakistan in a useful way, it is important to
highlight the limitations of this type of empirical work. For example,
democracy indexes are subjective measures that are likely to capture
other relevant determinants of economic growth other than political
institutions only and the data used to construct democracy indices is
not free of errors. Moreover, democracy has its greatest effect in the
short term, while economic growth is better understood in longer terms.
It is also difficult to control for all relevant characteristics of a
country. In fact, time-series analysis, as undertaken in this paper, can
settle the dispute of democracy's effect on economic growth as the
'conflict view' has been supported by the findings of the
paper. Democracy appears to have complex multiple effects on growth that
need to be further explored as new variables become available in the
time-series format and new estimation procedures are developed for this
work.
Given the fact that developing the main ingredients for democracy,
namely a democratically minded people, who have free minds, are well
educated and can consciously and fully participate in a democratic
set-up, will take time, independent thinking and discussion is the way
to develop and define such an interim set up. Political scientists and
analysts have to play their role in this process of public thinking and
discussion. In the process of doing so a nation-wide consensus should be
evolved, which could form the basis of a concerted effort to find a
solution for one of the most burning problems of Pakistan.
In view of the internal pressure for quick implementation of
democracy and making adherence to democracy a decisive criterion by the
West for advancing loans or development aid, the allocation of
development funds and of other means of economic aid and cooperation,
the incentives for 'going democractic' have risen considerably
in Pakistan.
APPENDIX A
VARIABLE DESCRIPTION AND DATA SOURCES
Output Growth ([Y.sub.t]): Dependent variable used in growth
equation is real per capita GDP growth rate. The data is collected from
Government of Pakistan, Economic Survey (various issues) and
International Financial Corporation, International Financial Statistics
(various issues).
Democracy ([DMC.sub.t)] . Democracy is proxied by Polity2 score,
which is taken from Polity IV dataset described by Marshall and Jaggers.
Polity2 is an index ranging from -10 (full autocracy) to +10 (complete
democracy). The second measure of democracy that is political constraint
is proxied by POLCONV score, which is taken from POLCON dataset
described by Henisz. POLCONV is an index ranging from 0 (no constraints
on executive's powers) to 1 (full constraints on executive's
powers). The third variable of democracy that is democracy dummy takes
the value of 1 when there is democratic system in a given year and zero
otherwise.
Capital Stock per Worker ([k.sub.t]) . Capital stock per worker is
defined as the ratio of capital stock to labour force. Data is taken
from Government of Pakistan, Economic Survey (various issues) and
International Financial Corporation, International Financial Statistics
(various issues).
Human Capital([hc.sub.t]): It is proxied by total secondary school
enrolment (regardless of age and gender). Data source is World Bank,
World Development Indicators, and Government of Pakistan, Economic
Survey (various issues).
Government Consumption([g.sub.t]): It is proxied as the ratio of
real government consumption (net of education and defense expenditures)
to real GDP, and the data is obtained from Government of Pakistan,
Economic Survey (various issues) and International Financial
Corporation, International Financial Statistics (various issues).
Trade Openness ([open.sub.t]) : This variable is defined as the
ratio of total trade to nominal GDP. Data is taken from Government of
Pakistan, Economic Survey (various issues) and International Financial
Corporation, International Financial Statistics (various issues).
Inflation ([INF.sub.t]): Domestic inflation rate is calculated as
the growth rate of consumer price index (CPI), and the data is taken
from Government of Pakistan, Economic Survey (various issues) and
International Financial Corporation, International Financial Statistics
(various issues).
Oil Prices ([oil.sub.t]): Data on world oil prices is taken from
International Financial Corporation, International Financial Statistics
(various issues).
Authors' Note: Authors are thankful to Zhou Ya Hong and Toe Ji
for giving valuable comments on an earlier version of this paper.
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(1) For more details on these positions reader is referred to
Kurzman, et al. (2002).
(2) For example, Asian economies such as Taiwan and South Korea
achieved democracy only recently after decades of high economic growth
under authoritarian regimes.
(3) Earlier studies of time-series include Cohen (1985), Sloan and
Tedin (1987), McMillan, et al. (1993), and Przeworski and Limongi
(1997).
(4) Barro (1996) suggests a nonlinear relationship between
democracy and economic growth in which democracy enhances growth at low
levels of political freedom but depresses growth when a moderate level
of freedom has already been obtained.
(5) Authors are unable to find any time-series study conducted for
Pakistan regarding democracy-development relationship.
(6) The inconclusive relationship between democracy and economic
growth led researchers to explore also other aspects of politics and
growth. For instance, Minier (1998) finds that changes in democracy,
rather than the level of democracy, matter.
(7) While writing this sub-section help is taken from, among
others, Belton (2004), Haqqani (2006) and Robotka (2006).
(8) For more details on the theoretical debates liking democracy
and growth, interested readers are referred to Sirowy and Inkeles
(1990), Przeworski and Limongi (1993), De Haan and Siermann (1995),
Nelson and Singh (1998), Durham (1999), Gasiorowski (2000), Quinn and
Woolley (2001), Kurzman, et al. (2002) and Baum and Lake (2003).
(9) Cited in Kurzman, et al. (2002) and Doucouliagos and Ulubasoglu
(2006).
(10) However, several contrasting cases are provided where
dictators pursued their own welfare, and failed apparently in Africa and
the socialist world [De Haan and Siermann (1995); Alesina, et al.
(1996)].
(11) See footnote 6.
(12) Iqbal and Zahid (1998) have also used such type of growth
model for Pakistan. Also see, among others. Khan (2005); Iqbal and
Sattar (2005) and Malik, et al. (2006) for these types of growth models
in Pakistan.
(13) See Barro (1991) and Bleaney and Nishiyama (2002), among
others, for theoretically predicted signs of various independent
variables on output growth.
(14) In December 1971, East Pakistan became an independent
political entity as Bangladesh. However, prior to 1971 certain
statistics were published on aggregate basis. Our primary interest is in
the democracy index, as it is not possible to disaggregate data on
political grounds, therefore, we have used the published aggregate data.
Also see Amjad (1982) in this regard.
(15) Hereafter the word "democracy index' will connote
'Polity2 score' unless otherwise indicated.
(16) To conserve space ADF test results are not reported here.
However, results may be obtained from authors upon request.
(17) To check the non-linear effect of democracy on output growth a
quadratic term m democracy index was introduced in the growth
regression. But its effect on growth turned out to be statistically
insignificant and hence it is excluded from the estimation. Similarly,
some other control variables were also incorporated in the growth
regression. But due to their statistically insignificant effects on
growth they are also excluded from the estimation.
Muhammad Zakaria <
[email protected]> is Assistant Professor
at Pakistan Institute of Development Economics, Islamabad. Bashir Ahmed
Fida <
[email protected]> is Assistant Professor at the COMSATS
Institute of Information Technology, Islamabad.
Table 1
Descriptive Statistics for Variables Included in Regressions
Mean Median Maximum
Per Capita Output Growth 0.03 0.02 0.64
Democracy Index 0.63 1.00 8.00
Political Constraint 0.20 0.22 0.76
Democracy Dummy 0.45 0.00 1.00
Capital Stock (In) 7.70 7.87 9.29
Human Capital (In) 7.42 7.51 9.00
Govt. Consumption (% of Real GDP) 0.04 0.03 0.07
Trade Openness (% of Nominal GDP) 26.70 28.68 37.95
Inflation 0.06 0.05 0.24
Oil Prices (In) 2.00 2.49 3.94
No. of
Minimum Std. Dev. Obs.
Per Capita Output Growth -0.07 0.09 59
Democracy Index -7.00 5.97 60
Political Constraint 0.00 0.23 59
Democracy Dummy 0.00 0.50 60
Capital Stock (In) 5.38 1.08 60
Human Capital (In) 5.65 0.99 60
Govt. Consumption (% of Real GDP) 0.01 0.01 60
Trade Openness (% of Nominal GDP) 10.24 6.63 59
Inflation -0.04 0.05 59
Oil Prices (In) 0.58 1.26 60
Table 2
Correlation Table for Variables Included in Regressions
(1) (2) (3) (4)
Per Capita Output Growth 1.00
Democracy Index -0.10 1.00
Political Constraint -0.09 0.76 1.00
Democracy Dummy -0.04 0.89 0.55 1.00
Capital Stock (In) 0.31 0.10 0.07 0.25
Human Capital (In) 0.25 0.17 0.07 0.33
Govt. Consumption (Ratio of Real GDP)
(In) 0.14 0.23 0.19 0.26
Trade Openness (Ratio of Nominal GDP)
(In) 0.26 0.16 0.09 0.43
Inflation 0.15 0.52 0.25 0.62
Oil Prices (In) -0.16 -0.10 -0.22 0.17
(5) (6) (7)
Per Capita Output Growth
Democracy Index
Political Constraint
Democracy Dummy
Capital Stock (In) 1.00
Human Capital (In) 0.98 1.00
Govt. Consumption (Ratio of Real GDP)
(In) 0.71 0.66 1.00
Trade Openness (Ratio of Nominal GDP)
(In) 0.68 0.65 0.38
Inflation 0.09 0.20 -0.22
Oil Prices (In) 0.84 0.83 0.41
(8) (9) (10)
Per Capita Output Growth
Democracy Index
Political Constraint
Democracy Dummy
Capital Stock (In)
Human Capital (In)
Govt. Consumption (Ratio of Real GDP)
(In)
Trade Openness (Ratio of Nominal GDP)
(In) 1.00
Inflation 0.45 1.00
Oil Prices (In) 0.78 0.29 1.00
Table 3
The GMM Estimates of the Relationship between Per Capita GDP
Growth and Democracy Index (1947 to 2006)
Variables (1) (2) (3)
Intercept 0.3961 0.0721 0.1761
(4.1499) * (13.5614) * (10.9309) *
Democracy Index -0.0023 -0.0003 -0.0015
(-3.9878) * (-3.1971) * (-6.8629) *
Capital Stock 0.0456 0.0202
(3.0158) * (7.5536) *
Human Capital 0.0581 0.0273
(5.2114) * (11.2773) *
Govt. Consumption 0.0320 0.0141
(2.7813) * (7.5485) *
Trade Openness 0.0409 0.0331
(2.7982) * (4.0898) *
Inflation 0.3616
(3.1294) *
Oil Prices -0.0055
(-1.7105) **
AR (1) -0.3597
(-4.0219) *
[R.sup.2] 0.5447 0.2419 0.2306
Adjusted [R.sup.2] 0.5103 0.2111 0.2170
DW 2.0445 1.8747 2.1278
Variables (4) (5) (6)
Intercept 0.0243 -0.0410 0.1044
(2.8149) * (-2.8557) * (2.9534) *
Democracy Index -0.0021 -0.0018 -0.0012
(-2.6094) * (-3.5863) * (-2.4799) *
Capital Stock 0.0076
(3.9478) *
Human Capital 0.0102
(2.2466) *
Govt. Consumption
Trade Openness
Inflation 0.2205
(2.5320) *
Oil Prices -0.0068
(-2.2510) *
AR (1)
[R.sup.2] 0.2795 0.2282 0.2287
Adjusted [R.sup.2] 0.2531 0.1871 0.1989
DW 2.0799 2.1105 2.0252
Variables (7) (8) (9)
Intercept -0.1853 -0.0386 0.0062
(-2.5509) * (-2.3669) * (1.0672)
Democracy Index -0.0011 -0.0009 -0.0016
(-2.1359) * (-2.0855) * (-3.1626) *
Capital Stock
Human Capital
Govt. Consumption 0.0264
(2.9222) *
Trade Openness 0.0498
(3.8189) *
Inflation 0.1852
(3.2449) *
Oil Prices
AR (1)
[R.sup.2] 0.2492 0.2393 0.2528
Adjusted [R.sup.2] 0.2147 0.1816 0.2207
DW 2.0371 1.8999 2.0238
Variables (10)
Intercept 0.0494
(5.4845) *
Democracy Index -0.0007
(-2.1957) *
Capital Stock
Human Capital
Govt. Consumption
Trade Openness
Inflation
Oil Prices -0.0085
(-2.8966) *
AR (1)
[R.sup.2] 0.2142
Adjusted [R.sup.2] 0.1807
DW 2.1031
Note. Values in parentheses denote underlying student-t values. The
t-statistics significant at 5 percent and 10 percent levels of
significance are indicated by * and ** respectively.
Table 4
The GUM Estimates of the Relationship Between Per Capita GDP Growth
and Political Constraint/Democracy Dummy [1947 to 2006]
Variables (1) (2)
Political Constraint
Intercept 0.1127 0.0116
(0.9028) (0.3710)
Political Constraint -0.0558 -0.0264
(-4.2697) * (-2.7893) *
Democracy Dummy
Capital Stock 0.0512 0.0591
(2.7664) * (2.5206) *
Human Capital 0.0511 0.0597
(4.8675) * (2.6415) *
Govt. Consumption 0.0068
(0.7858)
Trade Openness 0.0299
(2.5004) *
Inflation 0.1769
(2.5766) *
Oil Prices -0.0076
(-1.3439)
AR (1) -0.5790
(-5.6940) *
[R.sup.2] 0.4978 0.2666
Adjusted [R.sup.2] 0.4537 0.2415
DW 2.1140 2.1257
Variables (3) (4)
Political Constraint
Intercept -0.0330 0.0014
(-0.8501) (0.2115)
Political Constraint -0.0236 -0.0273
(-4.1802) * (-3.3809) *
Democracy Dummy
Capital Stock
Human Capital
Govt. Consumption 0.0130
(2.3533) *
Trade Openness 0.0353
(3.7008) *
Inflation 0.1393
(3.5572) *
Oil Prices -0.0055
(-3.0121) *
AR (1)
[R.sup.2] 0.2580 0.2361
Adjusted [R.sup.2] 0.2459 0.2132
DW 2.1506 2.1345
Variables (5) (6)
Democracy Dummy
Intercept 0.3687 0.1355
(3.8260) * (6.3917) *
Political Constraint
Democracy Dummy -0.0212 -0.0212
(-3.9466) * (-3.6277) *
Capital Stock 0.0216 0.0376
(1.7592) ** (2.8191) *
Human Capital 0.0379 0.0260
(4.3388) * (1.8132) **
Govt. Consumption 0.0205
(2.2665) *
Trade Openness 0.0567
(4.4129) *
Inflation 0.2198
(2.7506) *
Oil Prices -0.0001
(-0.0481)
AR (1) -0.3798
(-4.6847)
[R.sup.2] 0.5301 0.2381
Adjusted [R.sup.2] 0.4927 0.2186
DW 2.1447 1.8798
Variables (7) (8)
Democracy Dummy
Intercept 0.1762 0.0325
(10.8586) * (3.4366) *
Political Constraint
Democracy Dummy -0.0142 -0.0451
(-5.1525) * (-5.3930) *
Capital Stock
Human Capital
Govt. Consumption 0.0143
(7.2422) *
Trade Openness 0.0265
(3.9273) *
Inflation 0.3166
(4.5859) *
Oil Prices -0.0060
(-2.7254) *
AR (1)
[R.sup.2] 0.2069 0.1962
Adjusted [R.sup.2] 0.1848 0.1772
DW 2.1696 1.9322
Note: Values in parentheses denote underlying student-t values. The t
statistics significant at 5 percent and 10 percent levels of
significance are indicated by * and ** respectively.
Table 5
The GMM Estimates of the Relationship between Per Capita
GDP Growth and Democracy Index [1947 to 2006]
Variables (1) (2)
Intercept 0.3461 0.4150
(2.9562) * (3.8464) *
Democracy Index -0.0118 -0.0113
(-1.7139) ** (-1.7645) **
Capital Stock 0.0457 0.0373
(2.1166) * (1.8451) **
Human Capital 0.0622 0.0599
(4.5864) * (4.3654) *
Govt. Consumption 0.0225 0.0249
(2.0522) * (1.9821) **
Trade Openness 0.0412 0.0432
(2.3465) * (2.5611) *
Inflation 0.1979 0.1858
(1.1115) (1.1229)
Oil Prices -0.0013 -0.0037
(-0.2025) (-0.5913)
Democracy Index * Capital Stock -0.0016
(-2.0960) *
Democracy Index * Human Capital -0.0017
(-2.1461) *
Democracy Index * Govt. Consumption
Democracy Index * Trade Openness
AR(1) -0.5429 -0.4758
(-6.4828) * (-5.8378) *
[R.sup.2] 0.5834 0.5569
Adjusted [R.sup.2] 0.5536 0.5327
DW 1.9891 2.0938
Variables (3) (4)
Intercept 0.3985 0.4059
(2.8115) * (3.4399) *
Democracy Index -0.0385 -0.0072
(-2.0432) * (-2.0893) *
Capital Stock 0.0343 0.0515
(1.8301) ** (2.9512) *
Human Capital 0.0738 0.0609
(4.5580) * (5.1498) *
Govt. Consumption 0.0117 0.0394
(0.6318) (3.1080) *
Trade Openness 0.0272 0.0283
(1.9944) ** (1.8554) **
Inflation 0.0975 0.4495
(0.3463) (3.4585) *
Oil Prices -0.0229 -0.0057
(-1.5792) (-1.4110)
Democracy Index * Capital Stock
Democracy Index * Human Capital
Democracy Index * Govt. Consumption -0.0051
(-1.9316) **
Democracy Index * Trade Openness -0.0038
(-1.8010) **
AR(1) -0.4297 -0.4071
(-3.9730) * (-4.2589) *
[R.sup.2] 0.5320 0.5321
Adjusted [R.sup.2] 0.5166 0.5139
DW 2.1425 2.1126
Note. Values in parentheses denote underlying student-t values. The t
statistics significant at 5 percent and 10 percent levels of
significance are indicated by * and ** respectively.
