Economic Growth and Political Survival

Transcription

1 Economic Growth and Political Survival Paul J. Burke July 2011 Arndt-Corden Department of Economics Crawford School of Economics & Government Australian National University

2 Research question Does a strong economy increase the likelihood that national leaders will remain in office? 2

3 Leader motivation Leaders try to do many things Staying in power is a key objective What affects their ability to stay in power? 3

4 Context Prior studies of democracies indicate that incumbents are more likely to win election if the economy is strong But: Many leaders leave office for reasons other than election loss Kevin Rudd (replaced by party), Thaksin Shinawatra (ousted by coup), President Suharto Many countries do not have free and fair elections Little evidence on broader relationship between state of the economy and short-term political survival prospects of national leaders Very little evidence on importance of state of economy for short-term political survival prospects of autocrats 4

5 Why might slower economic growth increase the likelihood of leader exit? Selectorate may use the economic growth rate as a proxy for leader competence Weaker economy may reduce the ability of incumbent leaders to maintain patronage networks, buy-off opposition, and meet promises Recession likely to reduce opportunity cost of time (reduce wages, increase unemployment, increase number of students) Making it easier for oppositions to organise political resistance e.g. protests Counter-arguments exist: e.g. economic growth leads to increased inequality, straining social harmony 5

6 The lead-up to leader exits 3 2 Per capita GDP growth rate (%) years of leader exits 160 countries Year 0 = year of leader exit Leader change average Full sample average 6

7 Potential endogeneity of economic growth Negative association between leader exits and economic growth could be due to: 1. Negative causal impact of growth on leader exits 2. Negative causal impact of leader exits on growth Via protests, uncertainty, leaders allowing economy to falter on their way out, etc 3. Impact of other factors 4. A combination of above 7

8 Estimation model Leader exit=1; 0 otherwise D = αg + x β + I + I + c, t c, t 1 c, t j c t c, t GDP per capita real growth rate Vector of timevarying control variables Vector of country fixed effects Vector of year fixed effects ε Error term, clustered at country level Estimate using: Linear probability model Logit model Hazard models IV estimation May include: expectations of leader change, leader competence, protests and these variables may be correlated with growth -> potential endogeneity bias 8

9 Instrumental variables approach needed to obtain a consistent estimate IV approach will allow identification of causal impact of growth on likelihood of leader exits Also overcome bias due to measurement error in GDP data Need instruments that: 1. Act as exogenous shocks to economy 2. Are correlated with economic growth 3. Are not correlated with the error term 9

10 Instruments Four instruments used. Shocks from (changes in): 1. Commodity export prices 2. Export partner growth 3. Precipitation 4. Temperature Builds on IV strategy in Burke and Leigh (AEJ: Macro 2010) Allows estimation of different local average treatment effects Not without limitation Happy to discuss in Q&A if time 10

11 IV 1: changes in commodity export prices I constructed a country-specific export price index for a bundle of 50 commodity exports To construct the index, deflated world commodity prices are weighted by each commodity s share in a country s commodity export bundle in 1995 I use differenced log of the index, multiplied by the share of exports of the 50 commodities in GDP in 1995 Most important commodities in the index are oil, fish, natural gas, aluminium, and coal Vietnam: oil, coffee, fish Thailand: fish, rubber, rice Indonesia: oil, natural gas, plywood Sri Lanka: tea, rubber, fish 11

12 Data Panel data Source for leader exits: Archigos countries 4,742 observations Leader exits in 773 of these observations 12

13 LPM, logit, and hazard model results GDP growth rate in year t-1 negatively correlated with leader exit in year t Holds when include many controls e.g. Leader characteristics (age, tenure, gender, entry method, number of times in office) Country characteristics (democracy, education, election years, term limit dummies) Party fixed effects 13

14 Results on controls Older leaders more likely to lose office Leaders who have previously held (and lost) the national leadership less likely to lose office No evidence of gender effect Democratic transitions increase frequency of leader change Leaders more likely to lose office in years of elections (unsurprisingly) 14

15 IV results Large negative impact of (instrumented) economic growth on likelihood of leader exit Percentage point increase in growth reduces probability of leader change in the next year by 1.3 percentage points, a large effect (=8 percent reduction in likelihood) Driven by impacts of shocks from Commodity export prices Export partner growth 15

16 IV results (results on controls not shown) Dependent variable: Exit of leader in year t (1) (2) (3) (4) (5) (6) Estimation LPM IV(F1) IV(F1) IV(F1) IV (F1) IV(F1) Instrument/s None All Commodity Export partner Precipitation Temperature price growth instrument t-1 instruments t-1 instrument t-1 instrument t-1 GDP per capita growth t *** ** * * (0.001) (0.006) (0.011) (0.007) (0.012) (0.012) Country and year fixed effects Yes Yes Yes Yes Yes Yes F statistic on excluded instruments Stock-Yogo critical value / / / / /13.46 Partial R 2 on excluded instruments Observations 4,742 4,742 4,742 4,742 4,742 4,742 16

17 Democracies vs autocracies Leader change more frequent in democracies (3/decade) than autocracies (1/decade) Surprisingly, economic growth has a similar marginal effect on the short-run likelihood of leader exit in democracies and autocracies Test of parameter restriction: cannot reject null hypothesis that the effect of GDP growth on the short-run likelihood of leader change is the same in democracies and autocracies 17

18 Similar results obtained for Equal-sized sub-samples of low-income and high-income countries Regular leader exits and irregular leader exits (e.g. coups) Point estimate for irregular exits is smaller 18

19 Do leaders respond? I use Databanks International data on purges Evidence that purges of political oppositions are more likely at times of negative economic shocks Suggests that leaders attempt to outflank opposition at such times May partly explain longevity of some leaders (e.g. Mugabe) despite large negative shocks 19

20 Conclusions Strong causal impact of economic growth on short-term political survival prospects of national leaders National leaders more likely to lose job when economy is weak I ve termed it an economic political cycle effect Mirrors the much-researched political business cycle Result similar across countries with different institutions (democracies/autocracies), suggesting a general relationship 20

21 Conclusions (cont.) Results highlight importance of economic fortune/luck for political longevity Because IVs are outside a leader s sphere of influence Government interventions to bolster economic growth, where effective, have positive externalities for the incumbent national leaders of trade-linked partners, including autocratic leaders 21

22 Policy implications Leaders should realise importance of state of economy for their political survival prospects Leaders served well by synchronising strong economy and elections, if possible External actors can influence political change E.g. if crisis assistance only provided to countries with benevolent national leaders 22

23 Thanks Paul J. Burke Arndt-Corden Department of Economics Crawford School of Economics & Government Australian National University 23

24 Additional controls used in main results Log GDP per capita t -2 Tenure of leader in power at start of year t (years) Age of leader in power at start of year t (years) Female leader dummy (leader in power at start of year t ) Previous times in office (leader in power at start of year t ) Irregular entry to office dummy (leader in power at start of year t ) Democracy dummy t Transition dummy t Election dummy t Election dummy t -1 Term limit dummy t 24

25 Magnitude of effect A 1 SD increase in per capita GDP growth reduces likelihood of leader change in next year by 52% Results imply global slowdown cost 9 national leaders their jobs during

26 25 Leader exits and world economic growth, Percent of countries with leader exits (bars, left hand axis) World GDP per capita growth in percent (line, right hand axis) 26

27 Instruments not without limitations Commodity prices, export partner incomes may not be exogenous for all countries I exclude large countries and commodity exporters; result still holds Exclusion restriction may be violated E.g. rainfall may affect protests, although I find no evidence of this Similar results using commodity price and export partner growth instruments increase confidence in results Instruments are of most relevance (and provide the strongest first-stage identification) for poorer countries 27

28 Weak instruments An issue of concern I use Fuller 1 IV estimator Provides the most unbiased estimates for inference purposes when instruments are potentially weak Using all instruments, estimates safely pass the strictest Stock-Yogo test Export partner growth and temperature changes are strong instruments for GDP growth Weak first-stage a particular problem for precipitation instrument in world sample 28

29 IV tests Wooldridge endogeneity test performed Suggests that economic growth can t be treated as exogenous Sargan overidentification test also performed Does not suggest instruments are not valid 29

30 Direction of endogeneity bias Sign of omitted variable if included in estimation Correlation between explanatory variable and omitted variable Positive Negative Positive Positive bias Negative bias Negative Negative bias Positive bias (Story gets more complicated in multivariate setting) 30

31 Expected direction of bias Simple model: Exit = a + bgrowth + (ε 0 +Competence) Simple model: negative positive Exit = a + bgrowth + (ε 0 +Protests) positive negative Error term Error term Expect OLS to have negative bias Expect OLS to have negative bias 31

32 Why are IV estimates larger than LPM estimates? (in abs. val. terms) Several possibilities: Political implications of changes in export-sector growth rate are indeed particularly large Perhaps because political elites are disproportionately involved in export activities LPM estimates suffer from attenuation bias due to measurement error in the GDP data Leaders in crisis put pressure on their statistical offices to inflate the growth figures 32

33 Are results using exogenous variation in growth of relevance for endogenous component of growth? Focus of paper is presenting internally valid estimates of impact of GDP growth on political survival Results on exogenous shocks are of inherent interest, so the IV results are of direct value Whether results have external validity is of interest Potential for heterogeneous partial effects means results need to be interpreted with caution Reason would suggest that the effect of leader-induced recessions would be comparable Imbens: better LATE than nothing I have no direct identification strategy for impact of leader-affected GDP growth on own political survival prospects 33

34 IV 2: weighted export partner growth rate I constructed a weighted export partner growth rate using the share of each export market in a country s total exports in 1995 as weights This growth rate is interacted with the share of exports in GDP in 1995 so that the instrument reflects that export partner growth is of greater importance to GDP growth in more exportoriented economies Largest export market is most commonly the US (23% of countries), Germany (14%), the UK (8%), and Japan (7%) Vietnam: Japan, Singapore, China Thailand: US, Japan, Singapore Indonesia: Japan, US, Singapore Sri Lanka: US, UK, Germany 34

35 IV 3: change in precipitation % change in precipitation from previous year Interacted with the 1995 percentage of the labor force in agriculture IPCC data sourced from Mitchell et al. 35

36 IV 4: change in temperature 1. Change in temperature from previous year (ºC) 2. Change in temperature from previous year * cold country dummy (Cold country: average temperature less than 12ºC) Interacted with the 1995 percentage of the labor force in agriculture IPCC data sourced from Mitchell et al. 36

37 Democracies vs autocracies Dependent variable: Exit of leader in year t (1) (2) (3) (4) Estimation LPM IV (F1) LPM IV (F1) Instrument/s None All None All Sample Democracies Autocracies GDP per capita growth t ** * (0.002) (0.011) (0.001) (0.006) Country and year fixed effects Yes Yes Yes Yes F statistic on excluded instruments Stock-Yogo critical value / /6.42 Partial R 2 on excluded instruments Observations 2,100 2,100 2,635 2,635 37

38 Type of leader exit (1) (2) (3) (4) Estimation LPM IV (F1) LPM IV (F1) Instrument/s None All None All Dependent variable: First exit of leader in year t is due to Regular reasons Irregular reasons GDP per capita growth t (0.001)** (0.005)* (0.001)** (0.003)* Country and year fixed effects Yes Yes Yes Yes F statistic on excluded instruments Stock-Yogo critical value / /6.42 Partial R 2 on excluded instruments Observations 4,742 4,742 4,742 4,742 38

39 Purges (1) (2) (3) (4) Estimation LPM IV (F1) LPM IV (F1) Instrument/s None All None All Dependent variable (Number of ) Purges t Purges t -1 GDP per capita growth t * * (0.001) (0.010) (0.002) (0.011) Country and year fixed effects Yes Yes Yes Yes F statistic on excluded instruments Stock-Yogo critical value / /6.42 Partial R 2 on excluded instruments Observations 4,660 4,660 4,624 4,624 39

40 The potential endogeneity of growth: anti-suharto protests in Indonesia 40