Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 872: Income Inequality, Competitiveness of Political Systems and the Distance to the Efficient Frontier of Economic Growth

Lilit Hakobyan ()
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Lilit Hakobyan: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden

Abstract: This paper investigates whether and under which conditions democracy renders economic performance more efficient. Efficiency, measured by the ratio of (mean)/ (standard deviation) of output growth, becomes an important indicator of the relative goodness of economic performance when countries face a trade-off between development scenarios with high-mean and low-volatility of output growth. This seems to be a case when economies approach the efficient frontier. However, when countries are far away from the frontier economic efficiency may be improved by simultaneously increasing the mean and decreasing the volatility of growth. This study differs from others on the topic in three basic ways: (i) asymmetric (G)ARCH models are employed to simultaneously estimate the mean and volatility of output growth conditional on the factors of interest; (ii) variations in within-country effects of democratisation on the mean, variance and efficiency of economic growth conditional on cross-country variations of income inequality are analysed; (iii) the asymmetry of deviations from the mean is investigated. The results suggest (do not suggest) that in countries with no (with) military dictatorship history democratisation moves economies towards the efficient frontier. The positive effect of democratisation on the efficiency of economic performance seems to be systematically stronger in countries with lower (higher) income inequality in the countries with (without) consolidated civil governments.

Keywords: Mean and volatility of output growth; efficient frontier; political system competitiveness; income inequality; weak institutions; asymmetric GARCH model

JEL-codes: E02; E32; O43; P16

56 pages, January 23, 2014

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