Skip to main content

Democracy and economic growth in Sub-Saharan Africa: a panel data approach

Empirical Economics volume 45, pages 987–1008 (2013)Cite this article

Abstract

This paper studies the link between democracy and economic development for 28 countries of Sub-Saharan Africa for the period 1980–2005 in a panel data framework. A democracy index constructed from the Freedom House indices. A variety of panel data unit root and cointegration tests are applied. The variables are found to be integrated of order one and cointegrated. The Blundell–Bond system generalized methods-of-moments is employed to conduct a panel error-correction mechanism based causality test within a vector autoregressive structure. Economic growth is found to cause democracy in the short-run, while bidirectionality is uncovered in the long-run. In addition, the long-run coefficients are estimated through the panel fully modified ordinary least squares and dynamic ordinary least squares methods. Democracy has a positive impact on GDP and vice versa. These results lend support to the virtuous cycle hypothesis.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

References

  • Ahking FW (2002) Model mis-specification and Johansen’s co-integration analysis: an application to the US money demand. J Macroecon 24(1): 51–66

    Article  Google Scholar 

  • Altunbaş Y, Thornton J (2012) Does financial development reduce corruption. Econ Lett 114(2): 221–223

    Article  Google Scholar 

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2): 277–297

    Article  Google Scholar 

  • Baffes J, Shah A (1994) Causality and comovement between taxes and expenditures: historical evidence from Argentina, Brazil, and Mexico. J Dev Econ 44(2): 311–331

    Article  Google Scholar 

  • Baltagi BH (2008) Econometric analysis of panel data, 4th edition. Wiley, Chichester

    Google Scholar 

  • Baltagi BH, Demetriades P (2011) Editors’ introduction: new perspectives on finance and development. Empir Econ 41(1): 1–5

    Article  Google Scholar 

  • Banerjee A, Marcellino M, Osbat C (2004) Some cautions on the use of panel methods for integrated series of macro-economic data. Econom J 7(2): 322–340

    Article  Google Scholar 

  • Banerjee A, Marcellino M, Osbat C (2005) Testing for PPP: should we use panel methods?. Empir Econ 30(1): 77–91

    Article  Google Scholar 

  • Barro RJ (1996) Democracy and growth. J Econ Growth 1(1): 1–27

    Article  Google Scholar 

  • Barro RJ (2002) Quantity and quality of economic growth. J Economía Chilena 5(2): 17–36

    Google Scholar 

  • Basher SA, Westerlund J (2008) Is there really a unit root in the inflation rate? More evidence from panel data models. Appl Econ Lett 15(3): 161–164

    Article  Google Scholar 

  • Bhalla S (1997) Freedom and economic growth: a virtuous cycle?. In: Elster J, Dasgupta P, Hadenius A, Tarschys D (eds) Democracy’s victory and crisis. Cambridge University Press, Cambridge, pp 195–241

    Google Scholar 

  • Bhattarai M, Hammig M (2001) Institutions and the environmental Kuznets curve for deforestation: a cross-country analysis for Latin America, Africa and Asia. World Dev 29(6): 995–1010

    Article  Google Scholar 

  • Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87(1): 115–143

    Article  Google Scholar 

  • Bond SR, Hoeffler A, Temple J (2001) GMM estimation of empirical growth models. CEPR discussion paper, 3048. Centre for Economic Policy Research, London, United Kingdom. http://www.nuff.ox.ac.uk/Economics/papers/2001/21/bht10.pdf. Accessed 16 July 2012

  • Breitung J, Pesaran H (2008) Unit roots and cointegration in panels. In: Mátyás L, Sevestre P (eds) Fundamentals and recent developments in theory and practice, chap 9. Kluwer Academic Publishers, Dordrecht, pp 279–322

    Google Scholar 

  • Burkhart R, Lewis-Beck M (1994) Comparative democracy: the economic development thesis. Am Polit Sci Rev 88(4): 903–910

    Article  Google Scholar 

  • Campbell JY, Perron P (1991) Pitfalls and opportunities: what macroeconomists should know about unit roots, In: Blanchard OJ, Fischer S (eds) NBER Macroeconomics Annual 1991, 6, MIT Press. http://www.nber.org/papers/t0100.pdf. Accessed 16 July 2012

  • Campos NF, Nugent JB (2002) Who is afraid of political instability. J Dev Econ 67(1): 157–172

    Article  Google Scholar 

  • Caner M, Kilian L (2001) Size distortions of tests of the null hypothesis of stationarity: evidence and implications for the PPP debate. J Int Money Financ 20(5): 639–657

    Article  Google Scholar 

  • Chang Y (2002) Nonlinear IV unit root tests in panels with cross-sectional dependency. J Econom 110(2): 261–292

    Article  Google Scholar 

  • Chang Y, Song W (2009) Testing for unit roots in small panels with short-run and long-run cross-sectional dependencies. Rev Econ Stud 76(3): 903–935

    Article  Google Scholar 

  • Choi I (1993) Asymptotic normality of the least-squares estimates for higher order autoregressive integrated processes with some applications. Econom Theory 9(2): 263–282

    Article  Google Scholar 

  • Choi C-Y (2004) Searching for evidence of long-run PPP from a post-Bretton woods panel: separating the wheat from the chaff. J Int Money Financ 23(7-8): 1159–1186

    Article  Google Scholar 

  • Coakley J, Fuertes AM (1997) New panel unit root tests of PPP. Econ Lett 57(1): 17–22

    Article  Google Scholar 

  • Davidson R, MacKinnon JG (2004) Econometric theory and methods. Oxford University Press, New York

    Google Scholar 

  • De Hoyos RE, Sarafidis V (2006) Testing for cross-sectional dependence in panel-data testing for cross-sectional dependence in panel-data models. Stata J 6(4): 482–496

    Google Scholar 

  • Diamond L (2005) Democracy, development and good governance: the inseparable links, annual democracy and governance lecture. Presented at the Center for Democratic Development, British Council Hall, Accra, Ghana, March 1, 2005. http://www.stanford.edu/~ldiamond/papers/CDD_lecture_05.htm. Accessed 16 July 2012

  • Docquier F, Lodigiani E, Rapoport H, Schiff M (2011) Emigration and democracy. Discussion Paper No. 5496. http://ftp.iza.org/dp5496.pdf

  • Engle R, Granger CWJ (1987) Cointegration and error correction: representation, estimation, and testing. Econometrica 55(2): 251–276

    Article  Google Scholar 

  • Farr WK, Lord RA, Wolfenbarger JL (1998) Economic freedom, political freedom and economic well-being: a causality analysis. Cato J 18(2): 247–262

    Google Scholar 

  • Ghosh S, Gregoriou A (2009) Is democracy beneficial for growth in countries with low ethnic diversity? Working Paper No. 09-08. http://www.brunel.ac.uk/9379/efwps/0908.pdf. Accessed 16 July 2012

  • Granger CWJ (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37(3): 424–438

    Article  Google Scholar 

  • Granger CWJ, Newbold P (1974) Spurious regressions in econometrics. J Econom 2(2): 111–120

    Article  Google Scholar 

  • Greene WH (1993) Econometric analysis, 2nd edn. Macmillan Publishing Company, New York

    Google Scholar 

  • Hanke SH, Walters S (1997) Economic freedom, prosperity, and equality: a survey. Cato J 17(2): 117–146

    Google Scholar 

  • Hadri K (2000) Testing for stationarity in heterogeneous panel data. Econom J 3(2): 148–161

    Article  Google Scholar 

  • Hadri K, Kurozumi E (2012) A simple panel stationarity tests in the presence of cross-sectional dependence. Econ Lett 115(1): 31–34

    Article  Google Scholar 

  • Hansen L (1982) Large sample properties of generalized method of moments estimators. Econometrica 50(3): 1029–1054

    Article  Google Scholar 

  • Hanson JR (2003) Proxies in the new political economy: Caveat emptor. Econ Inq 41(4): 639–646

    Article  Google Scholar 

  • Hassler U (2002) The effect of linear time trends on cointegration testing in single equations. http://www.download.tu-darmstadt.de/wi/vwl/ddpie/ddpie_111.pdf. Accessed 16 July 2012

  • Heo U (2010) Democracy and economic development: a simultaneous equation analysis. Working paper. http://www.sejong.org/news/news_data/kM702_%28%EB%B0%9C%ED%91%9C%EB%AC%B8%29%ED%97%88%EC%9A%B1.pdf. Accessed 16 July 2012

  • Heo U, Houngcheul J, Hayam K, Okjin K (2008) The political economy of south korea: economic growth, democratization, and financial crisis. Maryland Series in Contemporary Asian Studies. http://digitalcommons.law.umaryland.edu/mscas/vol2008/iss2/1. Accessed 16 July 2012

  • Heo U, Tan AC (2001) Democracy and economic growth: a causal analysis. Comp Polit 33(4): 463–473

    Article  Google Scholar 

  • Herwartz H, Siedenburg F (2008) Homogeneous panel unit root tests under cross sectional dependence: finite sample modifications and the wild bootstrap. Comput Stat Data Anal 53(1): 137–150

    Article  Google Scholar 

  • Huber E, Rueschemeyer D, Stephens JD (1993) The impact of economic development on democrac. J Econ Perspect 7(3): 71–86

    Article  Google Scholar 

  • Im K-S, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econom 115(1): 53–74

    Article  Google Scholar 

  • Im K-S, Lee J, Tieslau M (2005) Panel LM unit root tests with level shifts. Oxford Bull Econ Stat 67(3): 393–419

    Article  Google Scholar 

  • Jaunky VC (2011) Fish exports and economic growth: the case of SIDS. Coastal Manag 39(4): 377–395

    Article  Google Scholar 

  • Jézéquel J-H (2006) Les Enfants Soldats d’Afrique, un Phenomene Singulier. (Child soldiers in Africa: a singular phenomenon?) Vingtième siècle. Revue d’Histoire. 89: 99–108. Jan–March 2006, translated into English by Edward Gauvin. http://www.diplomatie.gouv.fr/fr/IMG/pdf/0605-JEZEQUEL-UK-2.pdf. Accessed 16 July 2012

  • Kao C, Chiang M-H (2000) On the estimation and the inference of a cointegrated regression in panel data, In: Baltagi BH, (ed) Adv Econom 15:179–222

  • Karlsson S, Lothgren KM (2000) On the power and interpretation of panel unit root tests. Econ Lett 66(3): 249–255

    Article  Google Scholar 

  • Koedijk KG, Tims B, van Dijk MA (2004) Purchasing power parity and the Euro area. J Int Money Financ 23(7–8): 1081–1107

    Article  Google Scholar 

  • Kurzman CK, Werum RW, Burkhart RE (2002) Democracy’s effect on economic growth: a pooled time-series analysis, 1951–1980. Stud Comp Int Dev 37(1): 3–33

    Article  Google Scholar 

  • Kwiatkowski D, Philips P, Schmidt P, Shin Y (1992) Testing the null hypothesis of stationarity against the alternative of a unit root. How sure are we that economic time series have a unit root?. J Econom 54(1–3): 159–178

    Article  Google Scholar 

  • Levin A, Lin C-F, Chu JC-S (2002) Unit root tests in panel data: asymptotic and finite sample properties. J Econom 108(1): 1–24

    Article  Google Scholar 

  • Lipscy PY (2011) Financial crisis and democracy. Paper presented at the annual meeting of the american political science association. http://www.stanford.edu/~plipscy/democracycrisis.pdf. Accessed 16 July 2012

  • Lipset SM (1959) Some social requisites for democracy: economic development and political legitimacy. Am Polit Sci Rev 53(1): 69–105

    Article  Google Scholar 

  • Martins P (2011) Aid absorption and spending in Africa: a panel cointegration approach. J Dev Stud 47(12): 1925–1953

    Article  Google Scholar 

  • Minier JA (1998) Democracy and growth: alternative approaches. J Econ Growth 3(3): 241–266

    Article  Google Scholar 

  • Narayan PK, Narayan S, Smyth R (2011) Does democracy facilitate economic growth or does economic growth facilitate democracy? An empirical study of Sub-Saharan Africa. Econ Model 28(3): 900–910

    Article  Google Scholar 

  • Narayan PK, Smyth R (2006) Democracy and economic growth in China: evidence from cointegration and causality testing. Rev Appl Econ 2(1): 81–98

    Google Scholar 

  • Nelson MC, Donggyu S (2003) Cointegration vector estimation by panel DOLS and long-run money demand. Oxf Bull Econ 65(5): 665–680

    Google Scholar 

  • Nyblom J, Harvey A (2000) Test of common stochastic tends. Econom Theory 16(2): 176–199

    Article  Google Scholar 

  • Pedroni PL (1999) Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxf Bull Econ Stat 61(4): 653–670

    Article  Google Scholar 

  • Pedroni P (2001) Purchasing power parity tests in cointegrated panels. Rev Econ Stat 83(4): 727–731

    Article  Google Scholar 

  • Pedroni PL (2004) Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the purchasing power parity hypothesis. Econom Theory 20(3): 597–625

    Article  Google Scholar 

  • Pennar K, Brady R, Lindorff D, Rossant J, Smith G (1993) Is democracy bad for growth? Business Week, June 7. http://www.businessweek.com/archives/1993/b332260.arc. htm. Accessed 16 July 2012

  • Perron P (1989) Great crash, the oil price shock, and the unit root hypothesis. Econometrica 57(6): 1361–1401

    Article  Google Scholar 

  • Pesaran MH (2004) General diagnostic tests for cross section dependence in panels. Cambridge Working Papers in Economics, No. 0435, Faculty of Economics, University of Cambridge. http://www.econ.cam.ac.uk/faculty/pesaran/CDtestPesaranJune04.pdf. Accessed 16 July 2012

  • Pesaran MH (2007) A simple panel unit root test in the presence of cross-section dependence. J Appl Econom 22(2): 265–312

    Article  Google Scholar 

  • Przeworski A, Limongi F (1993) Political regimes and economic growth. J Econ Perspect 7(3): 51–69

    Article  Google Scholar 

  • Rodrik D (1997), Democracy and economic performance, mimeo, Cambridge, Massachusetts, John F. Kennedy School of Government, 1997. http://homepage.ntu.edu.tw/~kslin/macro2009/Rodrik_1997.pdf. Accessed 16 July 2012

  • Roodman D (2006) How to Do xtabond2: an introduction to ”difference” and ”system” GMM in Stata, Working Papers 103 Center for Global Development. http://repec.org/nasug2006/howtodoxtabond2.cgdev.pdf. Accessed 16 July 2012

  • Roodman D (2009) A note on the theme of too many instruments. Oxf Bull Econ Stat 71(1): 135–158

    Article  Google Scholar 

  • Romero-Ávila D (2008) A confirmatory analysis of the unit root hypothesis for OECD consumption income ratios. Appl Econ 40(17): 2271–2278

    Article  Google Scholar 

  • Sargan J (1958) The estimation of economic relationships using instrumental variables. Econometrica 26(3): 393–415

    Article  Google Scholar 

  • Strauss J, Yigit T (2003) Shortfalls of panel unit root testing. Econ Lett 81(3): 309–313

    Article  Google Scholar 

  • Sirowy L, Inkeles A (1990) The effects of democracy on economic growth and inequality: a review. Stud Comp Int Dev 25(1): 126–157

    Article  Google Scholar 

  • Sobhee SK (2009) The economic success of Mauritius: lessons and policy options for Africa. J Econ Policy Reform 12: 29–42

    Article  Google Scholar 

  • Sul D, Phillips PCB, Choi C-Y (2005) Prewhitening bias in HAC estimation. Oxf Bull Econ Stat 67(4): 517–546

    Article  Google Scholar 

  • Tavares J, Wacziarg R (2001) How democracy affects growth. Eur Econ Rev 45(8): 1341–1378

    Article  Google Scholar 

  • Toda HY (1995) Finite sample performance of likelihood ratio tests for cointegrating ranks in vector autoregressions. Econ Theory 11(5): 1015–1032

    Article  Google Scholar 

  • Toda HY, Yamamoto T (1995) Statistical inference in vector autoregressions with possibly integrated processes. J Econom 66(1–2): 225–250

    Article  Google Scholar 

  • Vanhanen T (2004) Struggle for democracy in Sub-Saharan Africa. Acta Polit 39(3): 207–247

    Article  Google Scholar 

  • Westerlund J (2007) Testing for error correction in panel data. Oxf Bull Econ Stat 69(6): 709–748

    Article  Google Scholar 

  • Windmeijer F (2005) A finite sample correction for the variance of linear efficient two-step GMM estimators. J Econom 126(1): 25–51

    Article  Google Scholar 

  • Wooldridge JM (2002) Econometric analysis of cross section and panel data. MIT Press, Cambridge

    Google Scholar 

  • World Bank (2009) http://siteresources.worldbank.org/DATASTATISTICS/Resources/ssa_wdi.pdf. Accessed 16 July 2012

Download references

Author information

Authors and Affiliations

  1. Centre for Energy Policy and Economics, ETH Zürich, Zürichbergstrasse 18, 8032, Zurich, Switzerland

    Vishal Chandr Jaunky

Authors
  1. Vishal Chandr Jaunky
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Vishal Chandr Jaunky.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Jaunky, V.C. Democracy and economic growth in Sub-Saharan Africa: a panel data approach. Empir Econ 45, 987–1008 (2013). https://doi.org/10.1007/s00181-012-0633-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-012-0633-x

Keywords

  • Democracy
  • GDP
  • SSA
  • Panel data

JEL Classification

  • C33
  • O40