Labor Productivity and Economic Growth

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Corruption, Democracy, and Economic Growth A. C OOPER D RURY , J ONATHAN K RIECKHAUS , AND M ICHAEL L USZTIG A BSTRACT . Scholars have long suspected that political processes such as democracy and corruption are important factors in determining economic growth. Studies show, however, that democracy has only indirect effects on growth, while corruption is generally accepted by scholars as having a direct and negative impact on economic perfor- mance. We argue that one of democracy’s indirect benefits is its ability to mitigate the detrimental effect of corruption on economic growth. Although corruption certainly occurs in democracies, the electoral mechanism inhibits politicians from engaging in corrupt acts that damage overall economic performance and thereby jeopardize their political survival. Using time-series cross-section data for more than 100 countries from 1982–97, we show that corruption has no significant effect on economic growth in democracies, while non-democracies suffer significant economic harm from corruption. Keywords: • Corruption • Democracy • Economic growth • Political economy • States It is no great insight to proclaim that liberal democracies tend to be wealthier than non-democracies. Since the end of World War II, a great deal of scholarly effort has gone into exploring the relationship between economic growth and liberal democracy, with many pursuing an obvious explanation for their association, namely that democracy facilitates wealth by stimulating economic growth. 1 While intuitively appealing, reality suggests the relationship is more complicated. Indeed, a number of studies find no direct, statistically significant relationship between democracy and economic growth, although democracy appears to have important indirect influences on growth, due to its positive effect on such things as educational expenditure, life expectancy, and political stability (Baum and Lake, 2003; Helliwell, 1994; Kurzman et al., 2002). This does not put an end to the matter, of course. It simply suggests that greater understanding is needed of the apparently symbiotic role played between the most robust system of government International Political Science Review (2006), Vol 27, No. 2, 121–136 DOI: 10.1177/0192512106061423 © 2006 International Political Science Association S AGE Publications (London, Thousand Oaks, CA and New Delhi) ever developed (Fukuyama, 1992) and the economic growth and efficiency that appears to sustain it. We attempt to enhance the understanding of the indirect effects that democ- racy has on economic growth. Although our focus is on just one of these indirect effects, it is one that, as is clear from the discussion below, is substantively important and exists worldwide to varying degrees. We concentrate on political corruption, which is present in all regimes, albeit at differing levels. We are hardly the first to delve into the role that corruption plays with respect to economic growth. As the literature review below suggests, some argue that corruption has beneficial effects for an economy. We disagree, and while this disagreement is somewhat intuitive, some of our findings are unexpected and shed new light on the connection between democracy and economic performance. In this article, we use time-series cross-section data from 100 countries over a 16- year period and find, rather intuitively, that corruption has a significant, negative impact on economic performance in non-democracies. Our unique contribution, however, is to explore further these relationships by examining democracy’s indirect effects on economic growth. Our expectation (discussed below) is that Labor Productivity and Economic Growth Labor Productivity and Economic Growth By: OpenStaxCollege Sustained long-term economic growth comes from increases in worker productivity, which essentially means how well we things In other words, how efficient is your nation with its time and workers? Labor productivity is the value that each employed person creates per unit of his or her input The easiest way to comprehend labor productivity is to imagine a Canadian worker who can make 10 loaves of bread in an hour versus a U.S worker who in the same hour can make only two loaves of bread In this fictional example, the Canadians are more productive Being more productive essentially means you can more in the same amount of time This in turn frees up resources to be used elsewhere What determines how productive workers are? The answer is pretty intuitive The first determinant of labor productivity is human capital Human capital is the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses Typically the higher the average level of education in an economy, the higher the accumulated human capital and the higher the labor productivity The second factor that determines labor productivity is technological change Technological change is a combination of invention—advances in knowledge—and innovation, which is putting that advance to use in a new product or service For example, the transistor was invented in 1947 It allowed us to miniaturize the footprint of electronic devices and use less power than the tube technology that came before it Innovations since then have produced smaller and better transistors that that are ubiquitous in products as varied as smart-phones, computers, and escalators The development of the transistor has allowed workers to be anywhere with smaller devices These devices can be used to communicate with other workers, measure product quality or any other task in less time, improving worker productivity The third factor that determines labor productivity is economies of scale Recall that economies of scale are the cost advantages that industries obtain due to size (Read more about economies of scale in Cost and Industry Structure.) Consider again the case of 1/10 Labor Productivity and Economic Growth the fictional Canadian worker who could produce 10 loaves of bread in an hour If this difference in productivity was due only to economies of scale, it could be that Canadian workers had access to a large industrial-size oven while the U.S worker was using a standard residential size oven Now that we have explored the determinants of worker productivity, let’s turn to how economists measure economic growth and productivity Sources of Economic Growth: The Aggregate Production Function To analyze the sources of economic growth, it is useful to think about a production function, which is the process of turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers A microeconomic production function describes the inputs and outputs of a firm, or perhaps an industry In macroeconomics, the connection from inputs to outputs for the entire economy is called an aggregate production function Components of the Aggregate Production Function Economists construct different production functions depending on the focus of their studies [link] presents two examples of aggregate production functions In the first production function, shown in [link] (a), the output is GDP The inputs in this example are workforce, human capital, physical capital, and technology We discuss these inputs further in the module, Components of Economic Growth 2/10 Labor Productivity and Economic Growth Aggregate Production Functions An aggregate production function shows what goes into producing the output for an overall economy (a) This aggregate production function has GDP as its output (b) This aggregate production function has GDP per capita as its output Because it is calculated on a per-person basis, the labor input is already figured into the other factors and does not need to be listed separately Measuring Productivity An economy’s rate of productivity growth is closely linked to the growth rate of its GDP per capita, although the two are not identical For example, if the percentage of the population who holds jobs in an economy increases, GDP per capita will increase but the productivity of individual workers may not be affected Over the long term, the only way that GDP per capita can grow continually is if the productivity of the average worker rises or if there are complementary increases in capital 3/10 Labor Productivity and Economic Growth A common measure of U.S productivity per worker is dollar value per hour the worker contributes to the employer’s output This measure excludes government workers, because their output is not sold in the market and so their productivity is hard to measure It also excludes ... Democracy and Economic Growth: A meta-analysis Hristos Doucouliagos* and Mehmet Ulubasoglu School of Accounting, Economics and Finance Deakin University Australia * Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood, 3125, Victoria, Australia, douc@deakin.edu.au Acknowledgments: Greg Tangey provided excellent research assistance with the construction of the dataset. 1 Abstract Despite a sizeable theoretical and empirical literature, no firm conclusions have been drawn regarding the impact of political democracy on economic growth. This paper challenges the consensus of an inconclusive relationship with a meta-analytic review and a quantitative assessment of the democracy-growth literature. We apply meta-regression analysis to the population of 470 estimates derived from 81 papers on the democracy-growth association. In addition to traditional meta-analysis estimators, we use also the bootstrap and clustered data analysis, as well as Fixed and Random Effects meta-regression models. Our meta-analysis derives several robust conclusions on the relationship. First, once all the available evidence is considered, there is, on average, no evidence of democracy being detrimental to growth. Taking all the available published evidence together, we conclude that democracy has no direct effect on economic growth. On the other hand, it has robust and significant indirect effects on growth. The results are consistent with democracies being associated with higher human capital accumulation, lower inflation, lower political instability and higher economic freedom. Additionally, there is some evidence that democracies are associated with larger governments and more restrictions to international trade. Our results also point to the existence of country- specific and region-specific democracy-growth effects. In particular the reported evidence shows that growth effect of democracy is higher in Latin America and lower in Asia. We conclude that whatever other effects democracy may have on society, its net effect on the economy is not detrimental. 2 “…despite the lengthy and rich dialogue on the subject, many of the central questions pertaining to the developmental consequences of political democracy remain, by and large, unresolved. Instead, the relevant quantitative, cross-national research continues to be plagued by conflicting findings, a state of affairs made only more complex by conceptual, measurement, modelling and research design differences.” (Sirowy and Inkeles 1990, page 127). “…existing studies fail to develop an adequate political theory of growth and as a result their empirical models are typically misspecified. With competing arguments on both sides of the question, many analysts merely add a variable for democracy to existing economic models and then look at the sign of the coefficient and its significance. This is inadequate.” (Baum and Lake 2003, page 333) 1. Introduction The relationship between political democracy and economic growth has been a center of debate in the past fifty years. A corpus of cross-country research has shown that the theoretical divide on the impact of democratic versus authoritarian regimes on growth is matched by ambiguous empirical results, resulting in a consensus of an inconclusive relationship. Through this paper we challenge this consensus. In contrast to the current consensus, we show that once the microscope of meta-analysis is applied to the accumulated evidence, it is possible to draw several firm and robust conclusions regarding democracy and economic growth. Supporters of democracy argue that the motivations of citizens to work and invest, the z  Democracy and Economic Growth: A meta-analysis Democracy and Economic Growth: A meta-analysis Hristos Doucouliagos* and Mehmet Ulubasoglu School of Accounting, Economics and Finance Deakin University Australia * Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood, 3125, Victoria, Australia, douc@deakin.edu.au Acknowledgments: Greg Tangey provided excellent research assistance with the construction of the dataset. 1 Abstract Despite a sizeable theoretical and empirical literature, no firm conclusions have been drawn regarding the impact of political democracy on economic growth. This paper challenges the consensus of an inconclusive relationship with a meta-analytic review and a quantitative assessment of the democracy-growth literature. We apply meta-regression analysis to the population of 470 estimates derived from 81 papers on the democracy-growth association. In addition to traditional meta-analysis estimators, we use also the bootstrap and clustered data analysis, as well as Fixed and Random Effects meta-regression models. Our meta-analysis derives several robust conclusions on the relationship. First, once all the available evidence is considered, there is, on average, no evidence of democracy being detrimental to growth. Taking all the available published evidence together, we conclude that democracy has no direct effect on economic growth. On the other hand, it has robust and significant indirect effects on growth. The results are consistent with democracies being associated with higher human capital accumulation, lower inflation, lower political instability and higher economic freedom. Additionally, there is some evidence that democracies are associated with larger governments and more restrictions to international trade. Our results also point to the existence of country- specific and region-specific democracy-growth effects. In particular the reported evidence shows that growth effect of democracy is higher in Latin America and lower in Asia. We conclude that whatever other effects democracy may have on society, its net effect on the economy is not detrimental. 2 “…despite the lengthy and rich dialogue on the subject, many of the central questions pertaining to the developmental consequences of political democracy remain, by and large, unresolved. Instead, the relevant quantitative, cross-national research continues to be plagued by conflicting findings, a state of affairs made only more complex by conceptual, measurement, modelling and research design differences.” (Sirowy and Inkeles 1990, page 127). “…existing studies fail to develop an adequate political theory of growth and as a result their empirical models are typically misspecified. With competing arguments on both sides of the question, many analysts merely add a variable for democracy to existing economic models and then look at the sign of the coefficient and its significance. This is inadequate.” (Baum and Lake 2003, page 333) 1. Introduction The relationship between political democracy and economic growth has been a center of debate in the past fifty years. A corpus of cross-country research has shown that the theoretical divide on the impact of democratic versus authoritarian regimes on growth is matched by ambiguous empirical results, resulting in a consensus of an inconclusive relationship. Through this paper we challenge this consensus. In contrast to the current consensus, we show that once the z  A. COOPER DRURY, JONATHAN KRIECKHAUS, AND MICHAEL LUSZTIG Corruption, Democracy, and Economic Growth A. COOPER DRURY, JONATHAN KRIECKHAUS, AND MICHAEL LUSZTIG A BSTRACT . Scholars have long suspected that political processes such as democracy and corruption are important factors in determining economic growth. Studies show, however, that democracy has only indirect effects on growth, while corruption is generally accepted by scholars as having a direct and negative impact on economic perfor- mance. We argue that one of democracy’s indirect benefits is its ability to mitigate the detrimental effect of corruption on economic growth. Although corruption certainly occurs in democracies, the electoral mechanism inhibits politicians from engaging in corrupt acts that damage overall economic performance and thereby jeopardize their political survival. Using time-series cross-section data for more than 100 countries from 1982–97, we show that corruption has no significant effect on economic growth in democracies, while non-democracies suffer significant economic harm from corruption. Keywords: • Corruption • Democracy • Economic growth • Political economy • States It is no great insight to proclaim that liberal democracies tend to be wealthier than non-democracies. Since the end of World War II, a great deal of scholarly effort has gone into exploring the relationship between economic growth and liberal democracy, with many pursuing an obvious explanation for their association, namely that democracy facilitates wealth by stimulating economic growth. 1 While intuitively appealing, reality suggests the relationship is more complicated. Indeed, a number of studies find no direct, statistically significant relationship between democracy and economic growth, although democracy appears to have important indirect influences on growth, due to its positive effect on such things as educational expenditure, life expectancy, and political stability (Baum and Lake, 2003; Helliwell, 1994; Kurzman et al., 2002). This does not put an end to the matter, of course. It simply suggests that greater understanding is needed of the apparently symbiotic role played between the most robust system of government International Political Science Review (2006), Vol 27, No. 2, 121–136 DOI: 10.1177/0192512106061423 © 2006 International Political Science Association SAGE Publications (London, Thousand Oaks, CA and New Delhi) ever developed (Fukuyama, 1992) and the economic growth and efficiency that appears to sustain it. We attempt to enhance the understanding of the indirect effects that democ- racy has on economic growth. Although our focus is on just one of these indirect effects, it is one that, as is clear from the discussion below, is substantively important and exists worldwide to varying degrees. We concentrate on political corruption, which is present in all regimes, albeit at differing levels. We are hardly the first to delve into the role that corruption plays with respect to economic growth. As the literature review below suggests, some argue that corruption has beneficial effects for an economy. We disagree, and while this disagreement is somewhat intuitive, some of our findings are unexpected and shed new light on the connection between democracy and economic performance. In this article, we use time-series cross-section data from 100 countries over a 16- year period and find, rather intuitively, that corruption has a significant, negative impact on economic performance in non-democracies. Our unique contribution, however, is to PROGRAM ON THE GLOBAL DEMOGRAPHY OF AGING Working Paper Series Population Aging and Economic Growth in China Judith Banister, David E. Bloom, and Larry Rosenberg March 2010 PGDA Working Paper No. 53 http://www.hsph.harvard.edu/pgda/working.htm The views expressed in this paper are those of the author(s) and not necessarily those of the Harvard Initiative for Global Health. The Program on the Global Demography of Aging receives funding from the National Institute on Aging, Grant No. 1 P30 AG024409-06. Population Aging and Economic Growth in China Judith Banister, David E. Bloom, and Larry Rosenberg March 2010 Executive Summary According to current UN projections, the population of the world age 60 or older will be 2 billion by 2050. With populations aging in nearly all countries, there has been widespread concern about the possible effects on economic growth and on the ability of countries to provide support for their elderly populations. In particular, because the elderly are in general less economically productive than younger people, a preponderance of old-age individuals would seem to suggest that (a) economic growth will be slower than in the past, and (b) relatively smaller working-age cohorts of the future will be burdened by the need to care for, and pay for the support of, the elderly population. These concerns have found resonance in China, where more than 30% of the population is expected to be age 60 or older in 2050. In part as a consequence of China’s process of population aging to date, the ratio of individuals age 15-64 to those younger and older, which grew rapidly during the last few economic boom decades, has reached its peak and is slated to decline rapidly in coming decades. Because a labor force that is large in size relative to the dependent population is plausibly crucial to rapid economic growth, the decline of this ratio could conceivably herald economic difficulties. The roots of population aging in China are the same as elsewhere: a low fertility rate, rising life expectancy, and the cumulative effect of past changes in birth and death rates. In China, obviously, the decline in the fertility rate, brought about in significant measure by the one-child policy and government efforts leading up to its adoption, has been a central factor in the changing age structure of the Chinese population. Greater longevity has also obviously been a key factor in population aging. If an older population is in fact cause for concern about the future of the Chinese economy, it would be prudent to identify, as soon as possible, measures that could serve to counteract any negative economic effects of population aging. Numerous countries have identified policies that might mitigate the potential economic problems associated with population aging. These policies seek to raise the age of retirement, spur higher savings, facilitate work for those caring for children, increase the labor force participation of women, liberalize immigration, and give more incentives for education. China could indeed begin to change the legal age of retirement, for those to whom this applies. It is unlikely to seek a higher savings rate, since its savings are already ... 4/10 Labor Productivity and Economic Growth Productivity Growth Since 1950 U.S growth in worker productivity was very high between 1950 and 1970 It then declined to lower levels in the 1970s and. .. both GDP and real GDP per hours worked between 2008 and 2012 6/10 Labor Productivity and Economic Growth The Power of Sustained Economic Growth Nothing is more important for people’s standard of... 2.1 and the United States by a multiple of 1.2 9/10 Labor Productivity and Economic Growth Review Questions How is GDP per capita calculated differently from labor productivity? How gains in labor