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.
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
Cross-section dependence of democracy by legal origin.
| Variable | CD test | p-Value | Countries |
|---|---|---|---|
| Polity (non-British) | 87.61 | 0.000 | 33 |
| Polity (non-French) | 43.79 | 0.000 | 10 |
| Polity (non-Scandinavian) | 91.37 | 0.000 | 34 |
| Polity (non-Socialist) | 111.25 | 0.000 | 36 |
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.
Unit-root tests.
| Variable: polity | Without trend | With 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 4 | 1.079 (0.860) | 3.010 (0.999) |
Pesaran (2007) unit-root test. p-Value in parentheses. Avr. Average number of time-series observations is 133. Number of countries is 184.
Unit-root tests.
| Variable: GDP per capita | Without trend | With trend |
|---|---|---|
| lag 0 | 9.365 (1.000) | 3.349 (1.000) |
| lag 1 | 7.407 (1.000) | 2.959 (0.998) |
| lag 2 | 9.952 (1.000) | 4.929 (1.000) |
| lag 3 | 9.982 (1.000) | 4.048 (1.000) |
| lag 4 | 12.161 (1.000) | 5.324 (1.000) |
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
Democracy and income: four (4) lags of cross-section averages.
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| Dependent variable | ΔPolity index | ΔPolity index | ΔPolyarchy democracy index | ΔPolyarchy democracy index |
| GDP per capitat−1 | 0.007** | −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. | 9636 | 9381 | 8110 | 8110 |
| Avr. N Obs. | 64 | 70 | 62 | 62 |
| Min–max | 15–206 | 16–206 | 16–186 | 16–186 |
| Number countries | 150 | 133 | 131 | 131 |
| Wald | 232.87*** | 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) |
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.
Democracy and income: fixed effects estimation.
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| Dependent variable | ΔPolity index | ΔPolity index | ΔPolyarchy democracy index | ΔPolyarchy democracy index |
| GDP per capitat−1 | 0.013*** | 0.000 | 0.934*** | 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. | 10416 | 10416 | 8771 | 8771 |
| Avr. N Obs. | 66.8 | 66.8 | 57 | 57 |
| Min–max | 4–210 | 4–210 | 4–190 | 4–190 |
| Number countries | 156 | 156 | 154 | 154 |
| R2 | 0.0165 | 0.0280 | 0.0184 | 0.0242 |
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.
Democracy and income: after 1960.
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| Dependent variable | ΔPolity index | ΔPolity index | ΔPolyarchy democracy index | ΔPolyarchy democracy index |
| GDP per capitat−1 | 0.007 | −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. | 6179 | 6179 | 4618 | 4618 |
| Avr. N Obs. | 40 | 40 | 36 | 36 |
| Min–max | 14–48 | 14–48 | 17–38 | 17–38 |
| Number countries | 154 | 154 | 130 | 130 |
| Wald | 159.49*** | 201.81*** | 201.57*** | 236.70*** |
| Stat-test (res) | rejects I(1) | rejects I(1) | rejects I(1) | rejects I(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.
Democracy and income: comparison with Murtin and Wacziarg (2014) – MW.
| (1) | (2) | (3) | (4) | (5) | |
|---|---|---|---|---|---|
| Democracy polity index | 1800–2010 (used in MW) | 1800–2014 update | 1800–2014 update | 1800–2014 update | 1800–2014 update |
| Source for GDP | Maddison (2006) | Maddison (2006) | Project Maddison | Project Maddison | Project Maddison |
| Time series dimension | Decennial | Decennial | Decennial | Annual | Annual |
| GDP per capitat−1 | 0.105** | 0.105** | 0.123*** | 0.013*** | −0.001 |
| (0.010) | (0.010) | (0.003) | (0.000) | (0.829) | |
| Dt−1 | 0.332*** | 0.332*** | 0.302*** | 0.935*** | 0.919*** |
| (0.000) | (0.000) | (0.000) | (0.000) | (0.000) | |
| Time dummies | Yes | Yes | Yes | No | Yes |
| N Observ. | 560 | 560 | 537 | 10,663 | 10,663 |
| Avr. N Obs. | 8.1 | 8.1 | 7.8 | 68 | 68 |
| Min–max | 2–13 | 2–13 | 2–13 | 5–211 | 5–211 |
| Number countries | 69 | 69 | 69 | 156 | 156 |
| R2 | 0.62 | 0.62 | 0.60 | 0.95 | 0.95 |
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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