JAMES S.

GUSEH
Shaw University
Raleigh, North Carolina

Government Size and Economic

Growth in Developing Countries:
A Political-Economy Framework *
Many authors have examined the impact of growth in government size on economic growth.
These studies, however, have not distinguished the impact among political and economic sys-
tems. This paper presents a model that differentiates the effects of government on economic
growth across political and economic systems in developing countries. The results show that
growth in government size has negative effects on economic growth, but the negative effects
are three times as great in nondemocratic socialist systems as in democratic market systems.

1. Introduction
Does a large government size promote or hinder economic growth?
Although the issue is an important one, a variety of conflicting theoretical
explanations has been advanced that can only be resolved through empirical
investigations. Yet the results of the investigations conducted to date have
been diverse and contradictory. Ram (1986, 1989) and Rubinson (1977) con-
cluded that a large government size promotes economic growth, while Lan-
dau (1983, 1986) and Barro (1991) concluded that it depresses growth of
per capita income. Conte and Darrat (1988) reported that changes in eco-
nomic growth are not affected by public sector expansion, but Gemmell
(1983) found that nonmarket sector growth has adverse macroeconomic ef-
fects that vary strongly from country to country. Bairam (1990) found posi-
tive effects for some countries and negative effects for others. Grossman
(1988, 1990) concluded that government contributes both positively and
negatively to economic growth, but the net effect appears to be marginally
negative. The diversity of results, combined with the fundamental impor-
tance of the subject, necessitates not only further research but also the use
of alternative methodologies.

*An earlier version of this paper was presented at the Southwestern Economic Association
Conference. I would like to thank Brian J. Berry, Irving J. Hoch, and Wim Vijverberg for their
helpful comments.

Journal of Macroeconomics, Winter 1997, Vol. 19, No. 1, pp. 175–192 175
Copyright 䉷 1997 by Louisiana State University Press
0164-0704/97/$1.50
James S. Guseh

This paper proposes an alternative theoretical framework based on the

conventional neoclassical production function and tests it using a fixed effects
model on fifty-nine middle-income developing countries over the period
1960–85. Structural differences, such as natural resource and human capital
endowments, among countries can cause their levels of economic perfor-
mance to differ significantly. These differences usually warrant the use of a
separate regression equation for each country. However, the fixed effects
model improves on this technique by controlling for the intertemporal dy-
namics and individuality of the entities being investigated. None of the pre-
vious studies controlled for both factors.1
To further extend the perspective of prior work, this study assesses the
differential effects of government on growth among various political and
economic systems. Although other studies have examined the relationship
between politico-economic systems and economic performance (Barro 1991;
Pourgerami 1988; Scully 1988), none has considered the dynamics of these
systems over time. Instead, they have implicitly assumed that the political
and economic systems of each country are constant. This study challenges
this assumption, because over the years some countries have changed from
one system to the other. To address this concern, the political and economic
systems of each country in each year over the period 1960–85 are included
in the analysis. Thus, a beginning is made of the study of economic growth
that considers the intertemporal dynamics of political and economic systems.
Finally, one debate in the literature centers on determining the ap-
propriate specification of government size in assessing its impact on eco-
nomic growth. Several studies have specified government size as G/Y, the
share of government consumption expenditure (G) in gross domestic prod-
uct (Y) (Landau 1983, 1986; Rubinson 1977). The impact of this specification
on growth has generally been negative. Ram (1986), however, has argued
that the appropriate specification of government size is the growth rate of
government consumption expenditure, dG/G (or growth in the relative size
of government expenditure, dG/Y). Its impact on growth has been found to
be positive. Conte and Darrat (1988) have shown that both specifications
are appropriate, with Ram’s specification measuring the short-run impact of
government and the other specification measuring the long-run impact. Fol-
lowing the distinction made by Conte and Darrat, this study will focus on
assessing the long-run impact of government, but will also test the impact
of Ram’s specification.
Such a richer model, it is hoped, will provide further insights into the
role of government in economic growth, as well as provide information on

1
Landau (1985) attempted to control for the intertemporal dynamics, but only limited it to
years that were either the contraction or recovery phase of a business cycle.

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 Government Size and Economic Growth

optimal development strategies. The study concludes that growth in govern-

ment size is negatively associated with economic growth, but the negative
effects are greater in nondemocratic socialist systems than in democratic
market systems.
Section 2 outlines the theoretical framework. Section 3 presents the
empirical results. Some specification issues are discussed in Section 4. The
summary and conclusions are presented in Section 5.

2. The Theoretical Framework

The basic model is an adaptation of the neoclassical production func-
tion and is derived as follows. Let an economy be described by the aggregate
production function which is homogeneous of degree one, with only two
factors of production, so that

Y ⳱ f (K, L) , (1)

where Y is national economic output measured as gross domestic product

(GDP); K is the stock of capital; and L is the labor force.
Dividing Equation (1) by population (P), the production function
becomes

Y´ ⳱ f (K,
´ L)
´ , (2)

where Ý is GDP per capita, Ḱ is the capital-labor ratio, and Ĺ is the labor
force participation rate. Since data on the labor force in developing countries
are difficult to obtain, by convention population is used as a proxy for the
labor force.
Adapting the function in (2) to include government-size (G), measured
as the share of government consumption expenditure in GDP2, yields

Y´ ⳱ f (K,
´ L,
´ G) . (3)

Differentiating the function in (3), dividing by Ý, manipulating the

2
Government consumption expenditure is defined as the sum of (i) purchases, less sales, of
consumer goods and services by central, regional and local governments, reduced by the value
of the own-account production of fixed assets, (ii) compensation of employees, (iii) compensa-
tion of fixed assets, and (iv) any payments of indirect taxes (World Bank 1989).

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James S. Guseh

results, and letting the results reflect pooled cross-sectional and time-series
data yields the growth equation for the basic model as3

yit ⳱ b1kit Ⳮ b2git , (4)

where the lower case letters denote the growth rates of the relevant variables
for country i in year t; and b1 and b2 are the elasticities of GDP per capita
with respect to capital-labor ratio and government size, respectively. The lag
of per capita income growth is also included in the model to address any
partial adjustment in the economy, such as inertia.
The variable used to measure capital in the capital-labor ratio is gross
domestic investment since data on the growth rate of capital stock are more
difficult to find for developing countries. Moreover, this variable is used only
as a control variable since the focus of the study is to assess the impact of
government on economic growth.4
To test for the differential effects of government across political and
economic systems, this study adapts Gastil’s (1973, 1986) country rank-
ings of political and economic systems. Gastil annually publishes country
rankings of political and civil liberties, types of economic systems, and other
measures of freedom. He derives his classification of political institutions
from political rights and civil liberties. Political rights are rights to participate
meaningfully in the political process. In a democracy, this means the right
of all adults to vote and compete for public office, and for elected represen-
tatives to have a decisive vote on public policies. Civil liberties are rights to
free expression, to organize or demonstrate, as well as to a degree of auton-
omy such as provided by freedom of religion, education, travel, and other
personal rights. Political rights and civil liberties are both rated on a seven-
point scale with 7 being the least free or least democratic and 1 being the
most free or most democratic. From these two ratings, Gastil derives the
annual status of political freedom for each country as either free, partially
free, or not free.
With respect to economic institutions, Gastil ranks countries from cap-
italist to socialist, with various mixtures of capitalism and socialism in be-

3
This specification can also be obtained by writing the neoclassical production function (Y
⳱ K, L) in the intensive form: Ý ⳱ f (Ḱ), where Ý ⳱ Y/L, and Ḱ ⳱ K/L. Adapting the function
to include government size (G) yields: Ý ⳱ f (Ḱ, G). Differentiating the function and manipu-
lating the results yields: yit ⳱ b1kit Ⳮ b2git, where lower case letters denote the growth rates
of the relevant variables.
4
The difficulty in obtaining data on the growth rate of capital stock is sometimes dealt with
by specifying the growth model to include the share of gross domestic investment in GDP (i.e.,
I/Y). This specification is also estimated to compare the results with those obtained from the
model employed. See note 8.

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 Government Size and Economic Growth

tween, such as mixed capitalist and mixed socialist economies. For this study,
the categories at the extremes are classified as either capitalist or socialist
economies, and those in between are classified as mixed economies.
This study transforms Gastil’s classifications of political freedoms and
economic systems into dummy variables and applies these indices to each
country over the entire sampling period.
By way of summary, the variables for political systems are free, partially
free, and unfree societies; the variables for economic systems are market,
mixed, and socialist economies; k is the growth of the capital-labor ratio; g
is the growth rate of government size; y is the growth rate of per capita
income; and ytⳮ1 is the lagged value of the growth rate of per capita income.
The classifications of the political and economic systems of the countries
over the sampling period are reported in Appendix A.

3. Empirical Evidence
The model is estimated by ordinary least-squares regression method
using annual time-series data for the period 1960–85 for fifty-nine middle-
income developing countries, as classified by the World Bank (1984: xxxiii–
xxxv).5 All annual rates of growth are approximated by first differencing the
logarithms of the variables for successive years. Unless stated otherwise, data
are derived from the World Bank (1989). Monetary variables are in constant
1980 prices.
To determine the extent to which the parameter estimates of the vari-
ables, especially the government-size variable, are influenced by the time
and cross-sectional units of the fixed effects model, the model is estimated
first without, and then with, these unit effects. The results are reported in
Table 1. The coefficient of the linear term of the government-size variable
in each equation is negative. Its absolute value decreases from 0.180% with-
out any unit effects to 0.175% with only the time effects, to 0.148 with only
the cross-sectional effects, and to 0.143% with both unit effects. Each co-
efficient is statistically significant at the 1% level. Clearly, the coefficient of
government size is influenced by the effects of the year and country dum-
mies.6 This is to be expected, because inclusion of these time and cross-

5
The World Bank (1984: xxxiii–xxxv) has classified developing countries into two categories,
based on GNP per capita in 1981 U.S. dollars. Low-income countries have a GNP per capita
of $405 or less, and middle-income countries have a GNP per capita between $405 and $6,900.
The sample of countries was determined by the availability of data over the sample period.
6
The hypotheses of whether the time effects, country effects, or both effects taken together,
are jointly equal to zero were tested. F-tests yielded F values of 2.27, 5.00, and 2.92, respectively,
which are significant at the 1% level. Thus, we reject the hypotheses that the unit effects are
jointly equal to zero.

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James S. Guseh

TABLE 1. Regression Results of the Impact of Government Size on

Economic Growth
Dependent Variable: Growth Rate of Per Capita GDP ( y)
With No With With With
Unit Time Country Both
Variable Effects Effects Effects Effects
Constant 1.6356c 0.0663 0.8172 ⳮ1.1592
(11.598) (0.109) (0.847) (1.055)
k 0.1027c 0.0955c 0.1005c 0.0913c
(16.794) (15.412) (16.609) (14.945)
ytⳮ1 0.2514c 0.2349c 0.1741c 0.1459c
(11.499) (10.629) (7.641) (6.341)
g ⳮ0.1797c ⳮ0.1754c ⳮ0.1481c ⳮ0.1434c
(7.246) (7.185) (5.863) (5.809)
First order interaction with g1:
Free 0.0899b 0.0855b 0.0759b 0.0696b
(2.543) (2.466) (2.131) (2.007)
Not Free ⳮ0.0075 ⳮ0.0183 ⳮ0.0386 ⳮ0.1518a
(0.247) (0.613) (1.254) (1.725)
Market ⳮ0.0146 ⳮ0.0181 ⳮ0.0337 ⳮ0.0368
(0.485) (0.608) (1.116) (1.243)
Socialist ⳮ0.1121c ⳮ0.1099c ⳮ0.1372c ⳮ0.1336c
(3.124) (3.133) (3.738) (3.749)
R-SQUARE 0.3748 0.4195 0.4265 0.4755
ADJ R-SQ 0.3714 0.4060 0.3968 0.4380
DW 2.05 2.03 2.05 2.03
Durbin h ⳮ0.97 ⳮ0.97 ⳮ1.06 ⳮ1.06
NOTES: Estimates of the year and country effects are reported in Figure 1 and the Ap-
pendix, respectively, to save space. The t-statistics are in parentheses.
1
Partially free and mixed economy are the base categories.
a ⳱ Significant at the 0.10 level.
b ⳱ Significant at the 0.05 level.
c ⳱ Significant at the 0.01 level.

sectional units affects the other variables in the X vector (Hoch 1962; Sayrs
1989), as seen in the reduced coefficients of the government-size variable.
These results suggest that growth in government size has a significantly
negative impact on the underlying rate of economic growth. Using the es-
timated model with both the time and cross-section effects in Table 1, the

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coefficient of the additive term of the government-size variable indicates

that a 1% increase in government size decreases the rate of economic growth
by 0.143%, ceteris paribus.
We now investigate whether the impact of government size on growth
differs among the various political and economic systems. Interaction terms
for the government-size variable and the Gastil indices for political and eco-
nomic systems allow us to test these hypotheses. Using estimates in the
model with both the time and country effects in Table 1,7 the interaction
variable for government size and free status is positive and statistically sig-
nificant. This suggests that the negative impact of government on growth is
lower in free societies than in partially free societies. On the other hand, the
interaction term for government size and unfree status is negative and sta-
tistically significant. This suggests that the negative impact of government
on growth is greater in unfree societies than in partially free societies.
The interaction term for government size and market economy is neg-
ative but not significant, while the interaction term for government and so-
cialist economy is negative and highly significant. These results indicate that
the impact of government does not differ significantly between market and
mixed economies, but differs significantly between mixed and socialist econ-
omies, with the negative impact being greater in socialist economies.
The differential effects of government across political and economic
systems are combined to arrive at a matrix of the impact of government size
on growth across the spectrum of political economies. The results are re-
ported in Table 2. The matrix allows us to compare the impact of government
size among various combinations of political and economic systems. The
results show a clear and consistent pattern as a country moves from one
system to another. As a society moves from a politically free to an unfree
status, the negative impact of government increases. Similarly, as a society
moves from a market economy to a socialist economy, the negative impact
increases. Thus, countries with political and economic freedoms have the
lowest adverse effects of government, while countries without these free-
doms have the highest adverse effects. Moreover, among the three economic
systems, the mixed economic system appears to consistently perform well.
As shown in Table 2, mixed economies that are politically free have the least
adverse effects of government. Overall, the negative impact of government
in countries with nondemocratic socialist institutions is three times that of
countries with democratic market institutions. For example, a 10% increase

7
It is hypothesized that the parameter estimates of the additive terms of the political-economy
variables are simultaneously equal to zero. An F-test of this hypothesis yielded F(4, 1286)
⳱ 1.89, which is insignificant. We therefore failed to reject the null hypothesis and proceeded
to estimate the model without the additive terms.

181
James S. Guseh

TABLE 2. Political-Economy Matrix of the Impact of Government Size

on Economic Growth (Percent)
Status of Freedom
Free Partially Free Not Free
Economic System
Market ⳮ0.111 ⳮ0.180 ⳮ0.232
Mixed ⳮ0.074 ⳮ0.143 ⳮ0.195
Socialist ⳮ0.207 ⳮ0.277 ⳮ0.329
NOTE: These effects are obtained from the estimated model in the last column of Table 1
by differentiating the growth rate of per capita GDP ( y) with respect to government size (g),
⳵y/⳵g, and substituting therein the values of the relevant political-economy variables.

in government size yields a 0.74% decline in economic growth in democratic

mixed economic systems, a 1.11% decline in democratic market systems,
and a 3.29% decline in nondemocratic socialist systems, ceteris paribus.
Thus, greater government size takes not only a toll on economic growth, but
the type of political and economic systems present in a country affects the
magnitude of the toll.
These results indicate that growth of government retards economic
growth. According to economic theory, government is inefficient in the pro-
vision of Pigovian goods and services and creates distortions in the economy
through its taxing and spending mechanisms and unproductive rent-seeking
activities. These inefficiencies and distortions retard economic growth in any
political economic system, but the greatest slowdown is in socialist and non-
democratic systems. Thus, we see the current quest in Eastern Europe for
political and economic liberties and the benefits that are likely to be
achieved, as well as the drive toward privatization of state-owned enterprises
in many developing countries.
These conclusions are consistent with Scully’s (1988) finding that po-
litically open societies with market economies grow at three times the rate
experienced by countries in which these freedoms are circumscribed. Scully
compares how efficiently capital and labor are employed among various po-
litical and economic systems. Differences in the rates of economic growth
across politico-economic systems found in Scully’s work seem to reflect the
differences in the adverse effects of government on growth found in this
study. Growth in government size seems to interfere with the efficient al-
location of resources leading to a slowdown in economic growth.
Both studies, however, differ in several respects. This study compares
the impact of government size on growth among political and economic

182
 Government Size and Economic Growth

systems. It also employs the political and economic systems of each country
in each year over the period 1960–85. Scully, on the other hand, compares
how efficiently capital and labor are employed among these systems. His
variables for political and economic systems are the averages of Gastil’s rank-
ings for the period 1973–80.
The fixed effects model yields additional information in the form of
estimates of the time- and country-effect parameters. Appendix B presents
these estimates. The parameter estimates for the 1960s and 1970s are greater
than those for the 1980s, indicating that growth in per capita income was
higher in the 1960s and 1970s than in the 1980s.
With respect to the cross-sectional units, about a third proved signifi-
cant coefficients, meaning that the model fits quite well for most of the
countries. The countries for which the model does not fit include Egypt,
Jordan, South Korea, Kuwait, Libya, Malta, Portugal, Singapore, Thailand,
and Yemen. They appear to be countries that have prospering manufacturing
sectors or are endowed with natural resources, such as oil. Major oil pro-
ducing countries, such as Kuwait and Venezuela, seem not to have done as
well as one would expect over the period of our study based on common
perception, as indicated by their negative coefficients relative to the base
category, Liberia.

4. Specifications Tests
Preliminary econometric tests of the assumptions of no autocorrelation
and heteroscedasticity reveal that the estimates are robust. With a lagged
dependent variable as an independent variable, the Durbin-Watson statistic
is biased toward accepting the null hypothesis of no autocorrelation. Using
the appropriate Durbin-h test, we also fail to reject the hypothesis. Addi-
tionally, an examination of the residuals did not reveal heteroscedasticity of
the error term. Should this assumption be violated in a pooled data set, one
of the best ways to address it is by introducing a fixed value that represents
the variance unique to the cross-section and conditional on the sample. One
way to condition the variance in least squares is by using a dummy variable
(Sayrs 1989), as in the model employed in this study.
Finally, a debate in the literature centers on the appropriate specifi-
cation of government size. Besides the share of government consumption
expenditure in GDP, the measure of government size employed in this study,
another specification is the growth rate of government spending, dG/G, pro-
posed by Ram (1986). We test this specification to determine its impact on
growth across political and economic systems. All variables in the model
employed in Table 1 are retained, except the government-size variable g,

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James S. Guseh

TABLE 3. Regression Results of the Impact of Government Size on

Economic Growth Using Ram’s Specification
Dependent Variable: Growth Rate of Per Capita GDP ( y)
With With With
No Unit Time Country Both
Variable Effects Effects Effects Effects
Constant 1.0036c 0.0574 ⳮ0.1865 ⳮ1.4441
(5.948) (0.088) (0.179) (1.209)
k 0.1040c 0.1018c 0.1007c 0.0968c
(15.702) (15.192) (15.336) (14.589)
dG/G 0.0300 0.0234 0.0365 0.0276
(1.218) (0.960) (1.328) (1.018)
ytⳮ1 0.2398c 0.2339c 0.1557c 0.1398c
(10.148) (9.762) (6.328) (5.588)
First-order interaction with dG/G1:
Free 0.0650c 0.0619c 0.0582 0.0538
(1.946) (1.880) (1.571) (1.476)
Not Free 0.0698c 0.0606c 0.0730c 0.0596c
(2.367) (2.082) (2.226) (1.846)
Market 0.0072 0.0064 ⳮ0.0058 ⳮ0.0057
(0.251) (0.227) (0.175) (0.175)
Socialist 0.0196 0.0283 0.0358 0.0465
(0.566) (0.830) (0.867) (1.151)
R-SQUARE 0.2812 0.3236 0.3403 0.3849
ADJ R-SQ 0.2774 0.3079 0.3062 0.3410
NOTE: The estimates for the year and country effects are not reported to save space.
1
Partially free and mixed economy are the base categories.
a ⳱ Significant at the 0.10 level.
b ⳱ Significant at the 0.05 level.
c ⳱ Significant at the 0.01 level.

which is replaced by Ram’s specification, dG/G. The results are presented

in Table 3.
Using the results of the model with both time- and country-effect
parameters, as done in the previous analysis, the coefficient of the linear
term of government size, dG/G , is positive, but is not statistically significant.
The effect of government also does not differ significantly among political
and economic systems, except in the case of unfree societies where the effect
is marginally higher (b ⳱ 0.06, t ⳱ 1.8) than in partially-free societies. The
implications of these results are discussed next.

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 Government Size and Economic Growth

It has been reported that Ram’s specification is suitable for testing

short-run growth effects, while the specification employed in this study as-
sesses the effects of public sector expansion on the underlying growth rate
(Conte and Darrat 1988). Growth and development is a long-run concept,
while management of aggregate demand, a Keynesian prescription, is basi-
cally a short-term concept and thus is not economic growth. Therefore, while
short-term measures of government spending through management of ag-
gregate demand have a positive impact on an economy, the impact of gov-
ernment on the underlying growth rate is negative and differs significantly
among political and economic systems as found in this study.8

5. Summary and Conclusions

Many authors have investigated the relationship between growth in
government size and economic growth. These studies, however, have not
distinguished the differential effects of government size on growth across
political and economic systems.
This paper therefore examines this issue in the case of middle-income
developing countries. A model which differentiates the effects of govern-
ment on growth across political and economic institutions is developed and
tested using annual time-series data for fifty-nine middle-income developing
countries over the period 1960–85. The results suggest that growth in gov-
ernment size has adverse effects on economic growth in developing coun-
tries, but the adverse effects are three times as great in countries with non-
democratic socialist systems as in countries with democratic market systems.
8
Ram’s model has been challenged for being biased in the specification of government (Carr
1989) and for omitted variables (Rao 1989). According to Ram’s (1989, 284) reply, “richer
models or additional evidence could certainly lead to different results.” This is confirmed by
our study.
Another specification issue involves the use of gross domestic investment instead of capital
in the capital-labor ratio. As stated in note 4, this issue is often dealt with by specifying the
growth model to include I/Y, the share of gross domestic investment in GDP. We estimate this
specification to compare the results with those obtained from the model employed in this study.
The estimation results, with the corresponding absolute values of the t-statistics in parentheses,
are as follows:

y ⳱ ⳮ2.8315 Ⳮ 0.1037(I/Y) ⳮ 0.5475p Ⳮ 0.1408ytⳮ1 ⳮ 0.1582g Ⳮ 0.0530g*free

(1.939) (5.123) (2.136) (5.596) (5.938) (1.399)
ⳮ 0.0604g*not free ⳮ 0.0448g*market ⳮ 0.1280g*soc.
(1.852) (1.391) (3.300)

ADJ R-SQ: 0.3468 F Value: 8.887

The effects of government on growth from this model and the one employed in this study
are comparable. Thus, the results of the model employed in our study are robust.

185
James S. Guseh

Thus, greater government size takes not only a toll on economic growth, but
the type of political and economic systems present in a country affects the
magnitude of the toll.
In light of what we have discovered, it appears that an appropriate
policy prescription for economic growth and development should include a
reduction in government size and the promotion of economic and political
liberties.

Received: January 1993

Final version: January 1996

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———. World Tables. Baltimore: John Hopkins, 1989.

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Appendix A
Country Ratings of Political and Economic Systems: 1961–85
Code 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

ARG P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X F/X P/X P/X N/X N/X N/X N/X N/X N/X P/X F/X F/X
BOL P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X N/X N/X P/X P/X P/X P/X N/X N/X F/X F/X F/X
BRA P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S F/S
BWA P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M
CHL F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M N/M N/M N/M N/M N/M N/M P/M P/M P/M P/M P/M P/M
CIV N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M P/M P/M P/M P/M P/M P/M
CMR P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M N/M N/M N/M N/M N/M N/M N/M N/M N/M
COG N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S P/S P/S P/S P/S N/S N/S N/S N/S N/S N/S N/S N/S
COL F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M
CRI F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M
DOM F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M P/M P/M P/M P/M F/M F/M F/M F/M F/M F/M F/M
DZA N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S
ECU P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M N/M N/M N/M P/M P/M P/M F/M F/M F/M F/M F/M F/M
EGY N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S
FJI F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M
GAB N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M
GRC N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X F/X F/X F/X F/M F/M F/M F/M F/X F/X F/X F/X
GTM F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M P/M P/M P/M P/M P/M P/M P/M N/M N/M P/M P/M
HND P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M F/M F/M
HUN N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S P/S P/S
IDN P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X
ISR F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X
JAM F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X
JOR N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M P/M P/M
KEN P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M
KOR N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M P/M P/M P/M N/M P/M P/M P/M P/M P/M P/M P/M P/M
KWT P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X N/X P/X P/X P/X P/X P/X P/X P/X P/X
LBR N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M P/M P/M P/M P/M P/M P/M N/M N/M P/M P/M P/M
LBY N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S
MAR P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/M P/M P/M P/M P/X P/X P/X P/X
MEX P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X
MLT F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X P/X P/X P/X
MRT N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X
MUS F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M P/M P/M P/M F/M F/M F/M F/M
MYS F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M
NGA P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X F/X F/X F/X F/X N/X N/X
NIC P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X
PAN N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X P/X P/X P/X P/X P/X P/X
PER N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X P/X P/X P/X P/X P/X F/X F/X F/X F/X F/X
PHL P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/M P/M P/M P/M P/X P/X P/X P/X
PNG P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M F/M F/M F/M F/M F/M F/M F/M F/M F/M
PRT N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X P/X P/X F/X F/X F/X F/X F/X F/X F/X F/X F/X
PRY P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S N/S N/S P/S P/S P/S P/S P/S P/S P/S
SEN N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S
SGP P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X
SLV F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M F/M P/M P/M P/M P/M P/M P/M P/M P/M P/M
SWZ P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M P/M
SYR N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S P/S P/S P/S N/S N/S N/S N/S N/S
THA N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M P/M P/M F/M N/M N/M P/M P/M P/M P/M P/M P/M P/M
TTO F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/M F/M F/M F/M F/X F/X F/X F/X
TUN N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X P/X P/X P/X P/X P/X P/X
TUR P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X F/X F/X F/X F/X F/X F/X P/X P/X P/X P/X P/X
URY P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X N/X N/X N/X N/X P/X P/X P/X P/X F/X
VEN F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X F/X
YEM N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S
YUG N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S N/S P/S P/S P/S
ZAF P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X P/X N/X P/X P/X P/X
ZMB P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S P/S
ZWE N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X N/X P/X P/X P/X P/X P/X P/X P/X

Sources: Adapted from Gastil (1973, 1986).

NOTES: Country codes are defined in Appendix 8. For political systems, F ⳱ free; N ⳱ not free; and P ⳱ partially free. For economic systems, M ⳱ market; S ⳱ socialist; and X ⳱ mixed economy.
Appendix B
TABLE 1. Time-Effect Parameters
Variable Parameter Estimate Absolute t-value
1962 0.9424 0.977
1963 2.9376 3.386
1964 3.3958 3.926
1965 1.0888 1.257
1966 2.1600 2.512
1967 0.9952 1.163
1968 3.8704 4.532
1969 2.9350 3.417
1970 3.1678 3.672
1971 2.8391 3.336
1972 3.9386 4.686
1973 1.8589 2.200
1974 2.4851 2.917
1975 1.5792 1.890
1976 3.9291 4.734
1977 0.6894 0.827
1978 2.5894 3.126
1979 2.3196 2.762
1980 0.4197 0.503
1981 0.3735 0.451
1982 ⳮ0.3828 0.462
1983 0.0623 0.075
1984 0.4975 0.599
NOTE: The year 1985 is the base category.

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Appendix B
TABLE 2. Cross-Sectional Unit Effects
Country
Code Country Parameter Estimate Absolute t-value
DZA ALGERIA 1.5745 1.209
ARG ARGENTINA ⳮ0.1080 0.083
BOL BOLIVIA 0.3002 0.231
BRA BRAZIL 1.5575 1.181
BWA BOTSWANA 4.5619 3.461
CHL CHILE ⳮ0.1602 0.123
CMR CAMEROON 1.1188 0.847
COG CONGO 2.2624 1.733
COL COLOMBIA 1.2927 0.992
CRI COSTA RICA 0.8625 0.662
CIV COTE d’IVOIRE 1.1885 0.913
DOM DOMINICAN REP. 0.3402 0.260
ECU ECUADOR 2.4335 1.757
EGY EGYPT 3.4569 2.096
SLV EL SALVADOR 0.0975 0.075
FJI FIJI 0.9554 0.726
GAB GABON 1.7094 1.312
GRC GREECE 2.4521 1.877
GTM GUATEMALA 0.4390 0.337
HND HONDURAS 0.1459 0.112
HUN HUNGARY 2.1544 1.449
IDN INDONESIA 1.6197 1.239
ISR ISRAEL 1.9308 1.479
JAM JAMAICA 0.3323 0.252
JOR JORDAN 2.9043 1.907
KEN KENYA 1.3110 0.997
KWT KUWAIT ⳮ6.1223 4.050
LBY LIBYA 4.0456 2.957
MAR MOROCCO 1.0877 0.834
MEX MEXICO 1.6897 1.294
MLT MALTA 3.9434 3.008
MRT MAURITANIA ⳮ1.0158 0.779
MUS MAURITIUS 1.0351 0.786
MYS MALAYSIA 2.2645 1.715
NGA NIGERIA 0.1587 0.121
NIC NICARAGUA 0.0355 0.027
PAN PANAMA 1.8529 1.421

191
Appendix B
TABLE 2. Continued
Country
Code Country Parameter Estimate Absolute t-value
PNG PAPUA NEW GUINEA 0.2019 0.153
PRY PARAGUAY 0.8134 0.617
PER PERU 0.4178 0.321
PHL PHILIPPINES 0.4835 0.371
PRT PORTUGAL 2.6376 1.998
SEN SENEGAL ⳮ0.6757 0.519
SGP SINGAPORE 4.0952 3.112
ZAF SOUTH AFRICA 0.5513 0.419
KOR SOUTH KOREA 2.8328 2.152
SWZ SWAZILAND 0.9468 0.718
SYR SYRIA 2.2094 1.650
THA THAILAND 2.6458 2.026
TTO TRINIDAD & TOBAGO 0.5371 0.407
TUN TUNISIA 2.3242 1.763
TUR TURKEY 1.3535 1.037
URY URUGUAY 0.1683 0.129
VEN VENEZUELA ⳮ1.3750 0.838
YEM YEMEN 4.4678 2.927
YUG YUGOSLAVIA 1.2595 0.962
ZMB ZAMBIA ⳮ0.7751 0.587
ZWE ZIMBABWE 1.1431 0.836
NOTE: LBR LIBERIA is the base category.

192