Heterogeneity Happens: How Rights Matter in Economic Development
The paper examines how much governance matters for long run economic development in poor countries. Answering this question confronts four methodological challenges. First, since growth equations are likely to be underspecified, unobserved effects are likely to render standard estimators biased and inconsistent. Second, measurement error, time-varying unobserved effects, and possible feedback from growth into governance will violate the exogeneity assumptions of many estimators. Bias and inconsistency is again the consequence. Third, use of cross-country evidence opens the possibility that the interaction between governance and growth shows considerable country-specificity. In the presence of heterogeneity, estimation under a specification that imposes homogeneity on the governance â€“ growth link, will again result in bias and inconsistency. Finally, an assumption of linearity in the growthâ€ governance relationship across large ranges of per capita income and differences in institutional structure is at least questionable. The paper addresses these problems by contrasting results obtained under pooled OLS, fixed effects, GMM, country specific time series and PMG estimators. Results confirm that all four methodological concerns are valid. Taking account of the problems renders estimates of the impact of governance more robust, and serves to increase its impact. Our best estimate of the impact of improving rights on the level of real per capita output is that this differs between countries with good, mid-range and poor rights. The implied elasticities of a benevolent impact on the level of real per capita output of improving rights ranging from 0.28 to 0.22 for countries with the worst rights, and 0.07-0.02 for countries with the best rights. Countries with midrange rights have a perverse association between improving rights and output, though the estimated elasticity range is relatively weak over the 0.03-0.02 range. Improving rights have an indirect impact on output as well a direct one. Improving rights serve to increase the productivity of investment, with the elasticity of output with respect to investment rising from 0.29 to 0.45 between countries with the worst rights, and those with midâ€ range rights (thus improving its productivity by a factor of 1.6). The impact of economic policy on output similarly improves under improved governance â€“ though more weakly than the productivity of investment â€“ with both the openness and the anti-inflationary policy stance of the economy proving to be significant. Investment in human capital by contrast has an impact on output that is invariant to the level of rights. The estimated elasticity of education on output reaches 0.44 at an average of eleven years of schooling, and unitary elasticity at an average of 25 years of schooling. These results find a significant echo, but also some nuance in equations specified in terms of economic growth. Substantively, our estimation results confirm an increasing productivity of investment for growth purposes under rising governance, and they are consistent with rising levels of investment under improving governance. Further evidence in support of the impact of good governance comes from the fact that physical capital, human capital, openness of the economy, foreign direct investment and anti-inflationary economic policy all further spur growth â€“ often dramatically so. By contrast, for midâ€ range rights countries only investment in physical capital raises economic growth (though strongly so), while for poor rights countries empirical results prove mixed at best. The implications are twofold. Under good governance policy makers have the gamut of standard policy handles at their disposal in promoting growth. Their task is correspondingly easier. And on a methodological note, the finding of strong heterogeneity across countries serves to offer an explanation of why the literature may have struggled to isolate particularly robust results under cross sectional and insufficiently sophisticated panel estimators.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: Newlands on Main, F0301 3rd Floor Mariendahl House, cnr Campground and Main Rds, Claremont, 7700 Cape Town|
Phone: 021 671-3980
Fax: +27 21 671 3912
Web page: http://www.econrsa.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Fielding,, .
"Aggregate Investment in South Africa: A Model with Implications for Political Reform,"
96/13, University of Nottingham, CREDIT.
- Fielding, David, 1997. "Aggregate Investment in South Africa: A Model with Implications for Political Reform," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(3), pages 349-69, August.
- Arellano, Manuel & Bover, Olympia, 1995.
"Another look at the instrumental variable estimation of error-components models,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 29-51, July.
- M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
- Richard Blundell & Steve Bond, 1995.
"Initial conditions and moment restrictions in dynamic panel data models,"
IFS Working Papers
W95/17, Institute for Fiscal Studies.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- James J. Heckman, 1989.
"Choosing Among Alternative Nonexperimental Methods for Estimating the Impact of Social Programs: The Case of Manpower Training,"
NBER Working Papers
2861, National Bureau of Economic Research, Inc.
- Heckman, J.J. & Hotz, V.J., 1988. "Choosing Among Alternative Nonexperimental Methods For Estimating The Impact Of Social Programs: The Case Of Manpower Training," University of Chicago - Economics Research Center 88-12, Chicago - Economics Research Center.
- Robert J. Barro, 1994. "Democracy & Growth," NBER Working Papers 4909, National Bureau of Economic Research, Inc.
- Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
- Daron Acemoglu & Simon Johnson & James Robinson, 2004.
"Institutions As The Fundamental Cause Of Long-Run Growth,"
002889, UNIVERSIDAD DE LOS ANDES-CEDE.
- Daron Acemoglu & Simon Johnson & James Robinson, 2004. "Institutions as the Fundamental Cause of Long-Run Growth," NBER Working Papers 10481, National Bureau of Economic Research, Inc.
- Acemoglu, Daron & Johnson, Simon & Robinson, James A, 2004. "Institutions as the Fundamental Cause of Long-Run Growth," CEPR Discussion Papers 4458, C.E.P.R. Discussion Papers.
- Fedderke, Johannes & Klitgaard, Robert, 1998. "Economic Growth and Social Indicators: An Exploratory Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 46(3), pages 455-89, April.
- Arellano, M., 1989.
"A Note On The Anderson-Hsiao Estimator For Panel Data,"
Economics Series Working Papers
9975, University of Oxford, Department of Economics.
- Arellano, Manuel, 1989. "A note on the Anderson-Hsiao estimator for panel data," Economics Letters, Elsevier, vol. 31(4), pages 337-341, December.
- Phillip B. Levine & Tara A. Gustafson & Ann D. Velenchik, 1997. "More Bad News for Smokers? The Effects of Cigarette Smoking on Wages," ILR Review, Cornell University, ILR School, vol. 50(3), pages 493-509, April.
- Wickens, Michael R., 1996. "Interpreting cointegrating vectors and common stochastic trends," Journal of Econometrics, Elsevier, vol. 74(2), pages 255-271, October.
- Johannes Fedderke, 2001. "Growth and institutions," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(6), pages 645-670.
- Johannes Fedderke, 2004. "Investment in Fixed Capital Stock: Testing for the Impact of Sectoral and Systemic Uncertainty," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(2), pages 165-187, 05.
- Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
- M. Ramírez, 2000. "Foreign Direct Investment in Mexico: A Cointegration Analysis," Journal of Development Studies, Taylor & Francis Journals, vol. 37(1), pages 138-162, October.
- Donald Robertson & James Symons, 1991.
"Some Strange Properties of Panel Data Estimators,"
CEP Discussion Papers
dp0044, Centre for Economic Performance, LSE.
- Jeffrey D. Sachs & Andrew Warner, 1995.
"Economic Reform and the Process of Global Integration,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
- Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
- Klitgaard, Robert, 1989. "Incentive myopia," World Development, Elsevier, vol. 17(4), pages 447-459, April.
- Fielding, David, 1999.
"Manufacturing investment in South Africa: a time-series model,"
Journal of Development Economics,
Elsevier, vol. 58(2), pages 405-427, April.
- David Fielding,, . "Manufacturing Investment in South Africa: A Time-Series Model," Discussion Papers 97/5, University of Nottingham, CREDIT.
- Torsten Persson & Guido Tabellini, 2004. "Constitutional Rules and Fiscal Policy Outcomes," American Economic Review, American Economic Association, vol. 94(1), pages 25-45, March.
- Barro, Robert J., 1999.
"Determinants of Democracy,"
3451297, Harvard University Department of Economics.
- Klitgaard, Robert & Fedderke, Johannes, 1995. "Social integration and disintegration: An exploratory analysis of cross-country data," World Development, Elsevier, vol. 23(3), pages 357-369, March.
- Mohammad Hashem Pesaran & Yongcheol Shin, 1999.
"Long-Run Structural Modelling,"
ESE Discussion Papers
44, Edinburgh School of Economics, University of Edinburgh.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998.
"How does foreign direct investment affect economic growth?1,"
Journal of International Economics,
Elsevier, vol. 45(1), pages 115-135, June.
- Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
- Yaron, J., 1992. "Successful Rural Finance Institutions," World Bank - Discussion Papers 150, World Bank.
- Barro, R.J., 1989.
"Economic Growth In A Cross Section Of Countries,"
RCER Working Papers
201, University of Rochester - Center for Economic Research (RCER).
- Pesaran, M.H. & Smith, R., 1992.
"Estimating Long-Run Relationships From Dynamic Heterogeneous Panels,"
Cambridge Working Papers in Economics
9215, Faculty of Economics, University of Cambridge.
- Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
- Altonji, Joseph G & Segal, Lewis M, 1996.
"Small-Sample Bias in GMM Estimation of Covariance Structures,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 14(3), pages 353-66, July.
- Joseph G. Altonji & Lewis M. Segal, 1994. "Small sample bias in GMM estimation of covariance structures," Working Paper Series, Macroeconomic Issues 94-8, Federal Reserve Bank of Chicago.
- Joseph G. Altonji & Lewis M. Segal, 1994. "Small Sample Bias in GMM Estimation of Covariance Structures," NBER Technical Working Papers 0156, National Bureau of Economic Research, Inc.
- Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 2002. "Governance matters II - updated indicators for 2000-01," Policy Research Working Paper Series 2772, The World Bank.
- Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004.
"Do Institutions Cause Growth?,"
Journal of Economic Growth,
Springer, vol. 9(3), pages 271-303, 09.
- Gradstein, Mark, 2002. "Governance and Growth," CEPR Discussion Papers 3270, C.E.P.R. Discussion Papers.
- Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
- Joseph E. Stiglitz, 1989. "Incentives, Information, and Organizational Design," NBER Working Papers 2979, National Bureau of Economic Research, Inc.
- International Monetary Fund, 1996. "Do Government Wage Cuts Close Budget Deficits? a Conceptual Framework for Developing Countries and Transition Economies," IMF Working Papers 96/19, International Monetary Fund.
- Arellano, M, 1987. "Computing Robust Standard Errors for Within-Groups Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(4), pages 431-34, November.
- Fedderke, J. W. & de Kadt, R. H. J. & Luiz, J. M., 2001. "Indicators of political liberty, property rights and political instability in South Africa: 1935-97," International Review of Law and Economics, Elsevier, vol. 21(1), pages 103-134, March.
- A. Chong & C. Calderón, 2000. "Causality and Feedback Between Institutional Measures and Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 69-81, 03.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
- Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
- Gradstein, Mark, 2004. "Governance and growth," Journal of Development Economics, Elsevier, vol. 73(2), pages 505-518, April.
- Phillip B. Levine & Tara Gustafson & Ann D. Velenchik, 1997. "More bad news for smokers? The effects of cigarette smoking on wages," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 50(3), pages 493-509, April.
When requesting a correction, please mention this item's handle: RePEc:rza:wpaper:220. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Charles Tanton)
If references are entirely missing, you can add them using this form.