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Income and democracy: the modernization hypothesis re-visited via alternative non-linear models

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Abstract

This paper introduces a new approach to examine the relationship between income and democracy by employing panel count data models to explicitly allow for the fact that the primary indices of democracy are non-negative integers with upper bounds. We find evidence that though income and democracy are positively related the magnitude of the coefficient is extremely small implying that there is no evidence of a causal effect, and thus there is no support for the modernization hypothesis. Moreover, once we control for income endogeneity, the relationship between income and democracy turns to be insignificant or even negative.

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Notes

  1. The polity2 index, as in the Polity IV dataset, is the difference between the democracy index and the autocracy index. The Freedom House rate is the average of two indices: the political rights index and the civil liberties index.

  2. We do not supplement the PRFH index with Bollen’s (2001) as the latter is not a count variable and we do not use, in our analysis, averages ( 5- or 10-year averages) since the two indices of democracy will no longer be count variables.

  3. Our sample of countries includes: Algeria, Argentina, Australia, Austria, Bangladesh, Barbados, Belgium, Bolivia, Botswana, Brazil, Burundi, Cameroon, Canada, Central African Republic, Chile, China, Colombia, Congo Democracy, Congo Republic, Costa Rica, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Fiji, Finland, France, Gabon, Ghana, Greece, Guatemala, Honduras, Hungary, India, Indonesia, Israel, Italy, Japan, Kenya, Korea Republic, Lesotho, Liberia, Luxembourg, Madagascar, Malawi, Malaysia, Mauritania, Mexico, Morocco, Nepal, Netherlands, Nicaragua, Nigeria, Norway, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Portugal, Rwanda, Senegal, Singapore, South Africa, Spain, Sri Lanka, Sudan, Sweden, Togo, Trinidad, Tunisia, Turkey, UK, USA, Uruguay, Venezuela, Zambia, Zimbabwe. The choice of these 82 countries from a potential total of 164 countries was dictated by particular judgments about the reliability of data in some cases and data availability in other cases. We drop all non-independent territories and very small states, newly established countries that followed the collapse of the Soviet Union, Yugoslavia and Czechoslovakia, and some African countries.

  4. The code \(-88\) is for the cases of “transition.” The code \(-77\) is for the cases of “interregnum,” or anarchy and the code \(-66\) is for the cases of foreign “interruption”.

  5. For a detailed exposition in count data models see, Cameron and Trivedi (1998), Cameron and Trivedi (2006).

  6. The possible endogeneity of income is explored with this method first used by Windmeijer and Santos-Silva (1997) and Mullahy (1997). An excellent treatise of this method is given in Windmeijer (2006). In the first step a weight matrix is used that assumes the errors are i.i.d and in the second step, a weight matrix is used that assumes heteroskedasticity. The results from this method confirm that there is no evidence of a positive causal effect of income on democracy.

  7. The importance of the instruments having explanatory power for the variable of interest has been highlighted by Bound et al. (1995).

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Acknowledgments

I am grateful to Yves Surry for very helpful comments and suggestions. I would also like to thank two anonymous referees for their detailed and constructive comments on a previous version of the paper.

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Correspondence to Suzanna-Maria Paleologou.

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Paleologou, SM. Income and democracy: the modernization hypothesis re-visited via alternative non-linear models. Empir Econ 48, 909–921 (2015). https://doi.org/10.1007/s00181-014-0811-0

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