Part II: Economic Rights Necessitate Political Rights: An Empirical Examination

In order to better explain the “Dissonant View”, the technical aspect of Barro’s findings should be explained. To explain his findings I will be referring to Table 1 (in Appendix 1). He lists a series of variables he looked at and the correlation between those variables and growth (Barro, 1996: pg. 5-6). For this paper only the “black-market premium,” “rule of law index” and “democracy” variables will be relevant. These variables best serve as proxies for measuring economic and political freedoms. The “black-market premium” indicates the level of economic freedom within a country. The logic is that if there is more economic freedom then there will be less of a need for a black market. The “rule of law index” helps to indicate the level of political freedoms by highlighting the extent to which institutions keep strong government in check and allow for individual political expression. The strength of “rule of law” may also highlight the strength of private property laws as well by showing how much individuals have control over their personal property relative to the government. The stronger the rule of law, the higher the political and economic freedoms will be because it can be assumed that more people will be part of the government’s decision making and more in control of their collective outcomes. Lastly, the “democracy” variable indicates the level of political freedoms by showing how much control people have over the government and vice versa. If democracy is stronger then it is assumed that people control the government; if it is weaker then it is assumed government has more control over the people.

Now that the relevant variables have been explained, the regression results can be provided. The first variable to be examined is the “black-market premium,” which had a coefficient of (­­-0.022). This would indicate that there is a strong negative correlation between the presence of a black market and economic growth (Barro, 1996: pg. 8). If there is a large black market it can be assumed that people are being suppressed from making certain economic transactions that they would like to make and are instead turning to the unofficial economy to do so (Barro, 1996: pg. 8). Next there was the “rule of law” variable which had a positive coefficient of (0.0043) (Barro, 1996: pg. 8). A positive coefficient makes sense because it indicates that there is a positive correlation between rule of law and economic growth; as one factor improves so does the other. In fact Barro highlights the that countries that were ranked the lowest for rule of law also tended to exhibit the worst economic performance and countries that ranked near the middle or higher had strong economic growth.

The findings become a bit more controversial when the democracy variable is examined. The regression chart shows a value of (-0.074) indicating a negative correlation between democracy and growth, meaning more democracy leads to weaker growth (Barro, 1996: pg. 12). Although the coefficient is negative Barro finds it is statistically insignificant at conventional critical values from 0, meaning that there may be no relationship between democracy and growth. However, these hopes are put to rest when Barro increases the democracy variable by one standard deviation (by 0.3) and sees a reduction of the growth rate by 0.002% per year, a stronger negative correlation that is statistically significant.

Barro’s findings on democracy are the more interesting aspect of his analysis because they contradict the positive correlation that other economists have found. A possible explanation for this anomaly could be that there is an issue of omitted variable bias (Barro, 1996: pg. 12). Omitted variable bias occurs when a model incorrectly leaves out one or more important factors.  The bias is created when the model attempts to compensate for the missing factor by over or underestimating the effect of one of the other variables. In Barro’s case he assumes that there are other variables that affect growth, which are in turn affected by democracy. Such variables may include schooling and fertility and if they are included with respect to democracy then the democracy coefficient becomes significantly positive at (0.0141) (Barro, 1996: pg. 12). An explanation of this could be that if there are more political freedoms people may use them to get more female education which lead to reduced fertility and ultimately economic growth. By omitting the fertility and schooling coefficient the democracy variable may be underestimated. It seems to be that the role of democracy with respect to growth is still unclear as illustrated in the graph below (Barro, 1996: pg. 15). There seems to be no obvious relationship between the two variables, which reflects the conflicting views that economists have on the role of democracy on growth.

Figure 1:

Econ vs Political Figure 1.jpg

 

Ultimately, Barro concludes that the overall effect of democracy on growth is weakly negative if seen in isolation (Barro, 1996: pg 23). However, this is not to say that the relationship between democracy and growth is a linear one. In fact, Barro argues that the relation between the two variables could be non-linear (Barro 1996: pg. 13). At very low levels of political freedoms (like in dictatorships), increasing democracy may actually lead to growth. However, if a nation has medium to high levels of political freedoms then an increase in democracy may lead to a deceleration of development. In essence, the argument is that at low levels of political freedom gaining one extra unit of political rights may lead to some growth whereas if the level of political freedom is higher then you may see diminishing marginal returns on growth from democracy. As a result, Barro’s findings go against Sen’s argument that political and economic rights go together. Based on his findings an increase in political freedoms may lead to people making choices, such as implementing income redistribution schemes that could slow growth and ultimately delay development. Instead what Barro argues is that economic freedoms must be implemented before political freedoms, as political freedoms are a luxury (Barro, 1996: pg. 24). His reasoning is that rich nations can consume more democracy because they can afford any potential adverse effects on their growth.

By,

Abhishek Chaudhry

Works Cited

Picture titled, "Haymaking", taken by Bernard Spragg on January 21, 2008, obtained through Creative Commons (https://flic.kr/p/fA1Kou)