Introducing Regime Types

As a final exercise, we introduced a country's regime type into the analysis since the extent of democracy may influence economic growth. More democratic countries may attract investment and may also limit government spending shares through accountability, transparency, and good governance. Past results on democracy's influence on growth has been mixed. In an interesting study, Tavares and Wacziarg (2001) examined the pathways through which democracy may affect growth. They found that democracy promotes growth by increasing human capital accumulation and income equality while democracy limits growth by lowering physical capital investment and bolstering government spending, with a net negative effect.¹⁰

For regime types, we used the Polity IV Dataset (Marshall and Jaggers 2004) for each sample country and year. The polity variable reflected three interdependent elements: amount of political participation, restraints (if any) on executive power, and the extent of government-backed civil liberties (e.g., freedom of association, freedom of speech, protection against unwarranted search and seizure, and due process under the law). These three elements were aggregated into a single score that varies from –10 (strongly autocratic) to +10 (strongly democratic). The average score of polity for our Asian sample was +0.758, with a standard deviation of 7; hence, the extent of democracy varied greatly across our sample countries. We had to, however, reduce the sample countries by nine (i.e., Brunei; Hong Kong, China; Kiribati; Maldives; Micronesia; Palau; Samoa; Tonga; and Vanuatu) owing to regime data limitations. This exclusion meant that over 300 observations were left out, which could affect some coefficients when the new results in Table 9 [ PDF 14.1KB | 1 page ] were compared with those in Tables 3–5.

We dropped the general terrorist attacks (from the GTD data), given their general insignificance in earlier runs without the polity variable. The new estimating equations were identical to those in Equations (1)–(3), except for the addition of a polityit term in each equation. We again performed the same tests. Once again, a two-way, fixed-effects estimator applied to the growth and investment equations, while a one-way (country) fixedeffects estimator applied to the government equation. The results are displayed in Table 9.

Generally, the polity variable added precision to the estimates. For the growth equation, the convergence term and the investment share possessed similar coefficients to those for Model 5 in Table 3. Openness was now statistically significant, which was attributable to the altered sample. When we re-estimated Model 5 from Table 3 without the polity variable, excluding the above nine sample countries, the results were almost identical for openness. Transnational terrorism's impact on growth was slightly higher in Table 9, but this was again due to the exclusion of some sample countries. The democracy (polity) variable was not significant in the growth equation, but democracy improved investment and limited government spending shares as anticipated. All three conflict variables crowded in government spending. The significance of many coefficients improved with the inclusion of the polity variable when compared with Model 5 of Tables 3–5—thus, our remark about precision.

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