The democracy and economic growth nexus: empirical evidence from cote d'Ivoire.

• Author: Djezou, Wadjamsse B.
• Position: Case study

1. Introduction

   The determinants of economic growth continue to be central to the debate among economists. According to the neoclassical view about the theory of growth, key factors for economic growth are labor, physical and human capital. Empirical studies, however, suggest that these factors are inadequate to understand growth and provide many instances where countries with similar per capita levels of physical and human capital realize very different rates of economic growth.

   Thus, other factors need to be accounted for. Many authors since Douglas North's early work (summarized in North, 1990) stressed that the main missing factors are 'institutions'. The key institutional factor considered in the literature is the political regime, notably the degree of democracy. Many developing countries in general and Sub-Saharan African countries in particular have a complex history of regime changes, where the pressures of international organizations and other aid donors for democratization play an important role.

   In the empirical literature, there is no consensus about the relationship between democracy and economic growth. This divergence of views on the relationship between these two variables is related either to the data and variables used in the study, the characteristics of the countries under study or the model specification (Gundlach and Paldam, 2008). Moreover, establishing the causal effect of economic growth on democracy is challenging because of endogeneity problems like omitted variables and reverse causality issues.

   This paper intends to contribute to this literature by a case study of Cote d'Ivoire spanning the time period from 1960 to 2012, which has experienced three decades of single party (1960-1990) and two decades of multipartism (1990-2012). It contains a set of formal tests analyzing the direction of causality between democracy and economic growth. More specifically, the objective of this paper is to investigate the existence of a long-run relation and the direction of causality between economic growth and democracy in Cote d'Ivoire. To this end, we first perform a multivariate cointegration test with regime durability as a control variable on the country dataset running from 1960 to 2012 and cross-check this long-run relationship with an autoregressive distributed lag (ARDL) model approach to cointegration. Next, we use the Granger causality test within a vector error correction model (VECM) and estimate three different models using a non-linear specification: Ordinary Least Squares (OLS) estimation, Fully Modified OLS (FM-OLS) and Dynamic Ordinary Least Squares (DOLS).

   The rest of the paper is arranged as follows: Section 2 analyses briefly the political and economic process in Cote d'Ivoire, Section 3 describes the data sources and outlines the econometric methodology. Section 4 presents and discusses the results. Section 5 concludes the paper by drawing some policy implications.

2. Brief review of the literature

   The statistical association between income and democracy is widely investigated by political economy scholars. Many studies have reported a positive association between income per capita and the degree of democracy supporting the modernization theory according to which the level of economic development drives the implementation and consolidation of democracy (Lipset, 1959; Barro, 1997, 1999; Przeworski, 2005; Papaioannou and Siourounis, 2008; Paldam, & Gundlach, 2008; Heid et al., 2012; Che Yi et al., 2013, Benhabib et al., 2013). Indeed, as the gross domestic product (GDP) per capita increases poor countries are more prone to change their institutions (Moral-Benito et al., 2012). Benhabib et al. (2011) argued that citizens of wealthier countries, who generally have high levels of human capital and income, are more effective at creating and sustaining democratic institutions. These hypotheses are related to the exogenous and endogenous theory of democracy. This view contrasts with another approach that supports a reverse causality in the sense that good democratic institutions that limit government actions and protect property rights generate economic growth (Scully, 1988, 1996; Levine, 1991; Alesina and Perotti, 1994; Rodrik, 1999, Acemoglu, et al., 2001; Easterly and Levine, 2003; Rodrik et al., 2004). However, there is a threshold beyond which freedom has a negative impact on economic growth (Barro, 1989).

   Contrary to this strand of literature, some authors have not found a robust link between democracy and economic growth (Helliwell, 1994; De Hann and Siermann, 1995; Alesina et al., 1996; Acemoglu et al., 2008). Moreover, a number of scholars have pointed out the adverse effects of democracy on economic growth (Lowi, 1969; Crosier et al., 1975; Buchanan and Wagner, 1977; Barro, 1989). Indeed, many low-income countries with a large proportion of less educated people are governed by democratic institutions, which have been imposed by former colonialists (Barro, 1999, Huntington, 1968). According to Keefer (2007), democratic regimes discourage investment, as governments tend to give priority to current consumption in order to ensure their reelection. They forgo long-run investments by privileging short-run ones that are not development-oriented.

   In this way, other authors revealed that dictatorship as the lack of democracy has a positive effect on the economic performance (Weede, 1983; Kohli, 1986; Sloan and Tedin, 1987), even if some authors recognized its limited effect (Barro, 1989; Grier and Tullock, 1989). The autonomy of decision makers is the key argument explaining the success of this developmental dictatorship.

   It follows from above that no consensus has been reached to date on the relationship between democracy and economic growth. The diverse evidence can be explained by the nature of data and variables, the geographic characteristics and the methodologies used in the studies (Gundlach and Paldam, 2008). This last issue includes endogeneity problems among which the reverse causality from economic growth to democracy is most prominent.

   In this context, the present paper intends to contribute to the literature by testing the direction of causality between democracy and economic growth in Cote d'Ivoire.

3. Political process and economic growth in Cote d'Ivoire

   The political and economic history of Cote d'Ivoire can be analyzed by considering two main time periods. The first phase is running from 1960 to 1980 and a second phase from 1980 to 2010.

   During the first phase that is the period 1960-1980, state intervention has concerned indicative planning (quinquennium plans) and "state capitalism". This control of the state over the economy was inherited from the colonial period. Indeed, although economic liberalism has been adopted since political independence, Cote d'Ivoire evolved until 1980 without effective enforcement of liberal principles. In the political framework, this full presence in the economy took the form of a one-party system (2) that has contributed to a political stability and has boosted economic growth over the period 1960-1970. Indeed, the annual growth rate of GDP was on average 7% in real terms and the production per capita was increasing at a rate of 5% per year during the same period of time.

   The second phase from 1980 to 2010 saw the economy collapse. This collapse could partly be traced to external shocks especially the oil crises of the 1970s. In fact, the oil crisis of 1973-1974, which was basically at the origin of the global economic crisis of that era, has strongly affected the Ivorian economy through the deterioration of its terms of trade. The rise in oil price caused a fall in the external demand for commodities and an increase in prices of imported goods. Similarly, the increase in international interest rates following the rise in the dollar exchange rate led to excessive external indebtedness. In addition, there was a severe drought in 1983, which caused losses of about 50% in agricultural production. All these internal and external imbalances led to a gradual deterioration of the Ivorian economy. As a result, poverty and inequality increased during the 1980s, 1990s and 2000s. According to the National Institute of Statistics (INS), absolute poverty has almost quadrupled in Cote d'Ivoire over the period 1981-2000 as the incidence of poverty increased from 10% in 1985 to 32.3% in 1993, 36.8% in 1995 and 38.4% in 2002. In 2008, it has even reached 48.9%. This situation led to social unrest and widely questioned the long single-party reign of the Democratic Party of Cote d'Ivoire (PDCI) under its founder Houphouet-Boigny. In this context, the Ivorian Popular Front (FPI) was clandestinely created in 1982 as the main opposition party and brought the regime of Houphouet-Boigny to officially accept a multiparty system in 1990. Yet, the mismanagement of this new system resulted in a military coup in 1999 which was the first coup d'etat in the history of Cote d'Ivoire. Indeed, despite the adoption of a multiparty system in 1990, democratic principles were poorly enforced, which prompted the opposition forces to boycott presidential elections in 1995. Despite the boycott...