Words speak louder than actions: The impact of politics on economic performance

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10092.pdf Non-technical summaryIn this paper, we present a new approach to disclose the impact of policy preferences of parties on economic growth. We derive policy preferences of parties, such as political ideology and preferences restricted to single policy dimensions, from the content analysis of party manifestos. This data is obtained from the Comparative Manifesto Project (CMP), an international large scale project in political science that has collected the wording of thousands of election manifestos. These are coded according to the frequency of sentences devoted to 56 different policy issues, which comprise economic and non-economic issues and are regarded as proxies for the party preferences in the related political science literature. Based on this data, it is possible to calculate indices for the general left-right position as well as concerning specific policy areas that represent the political preferences of the parties or legislatures.In the empirical section, we analyse per capita GDP growth in a panel of 23 OECD countries for the period 1971-2004. We estimate several models containing a set of typical control variables; fixed effects control for time-invariant country-specific influences. First, we follow an approach which is typical for the empirical political economics literature and employ dummy variables for the differentiation of left-wing and right-wing governments.However, we are not able to detect a significant impact of partisanship on growth rates.This implies that partisanship defined according to the broad distinction between leftwing and right-wing governments cannot be proven to affect economic growth.Then we proceed with analyses based on 7 indices that account for the political preferences concerning different policy areas. These indicators are first tested individually in our empirical model, and then jointly in a model averaging procedure, the weighted averaged least squares (WALS) method. A strong and robust negative impact on economic growth can be detected for parties that support market interventions, whereas a positive impact can be found for parties that aim at setting incentives for business as well as those which promote technology and infrastructure. Welfare state policies are also found to have a significant negative effect in our classical estimations, but show a much weaker impact in our WALS analysis. These results are robust to...

How Is the Pro‐capitalist Mentality Globally Distributed?

“…Using econometrics, Jäger (2007) shows that political ideology matters even among such relatively homogeneous countries as the members of the OECD, in spite of claims about the constraining role of globalisation. In his study of the OECD, Osterloh (2012) also shows that ideology has had an impact on economic growth, just as do Facchini and Melki (2014) for France.…”

The Evidence on Globalisation

“…Some panel data studies use five-year averages of per capita GDP growth as dependent variables and show that globalisation was positively correlated with economic growth but hardly in OECD countries (Bergh and Karlsson, 2010;Villaverde and Maza, 2011;Osterloh, 2012;Ali and Imai, 2013). Bergh and Karlsson (2010) investigate the nexus between government size and growth.…”

“…Osterloh (2012) and Potrafke (2012a) examine, for example, how electoral cycles and government ideology have influenced economic performance in OECD countries. Osterloh (2012) includes the overall KOF index in levels. The results show that the overall KOF index in levels was negatively correlated with economic performance in a panel of 23 OECD countries over the period 1971.…”

Robustness of the KOF index of economic globalisation

“…Indeed, policymakers can target enhancing the level of globalisation to provide a higher rate of economic growth or level of income, since our results from all regressions indicate that there is a positive effect of economic globalisation on the economic growth. These results are based on globalisation–growth nexus relate to a policy debate, whether globalisation is good or bad for economic performance (Osterloh, ). Our findings illustrate that globalisation spurs economic growth, and the findings are in line with the results of Dreher () and Villaverde and Maza ().…”

“…There are also several globalisation indices in international economics literature, but the KOF indices of globalisation are the most used globalisation measures (Potrafke, ). Indeed, the KOF index of globalisation is widely used as a benchmark measure of globalisation in international economics literature (e.g., Eppinger & Potrafke, ; Osterloh, ; Quinn, Schindler, & Toyoda, ; Villaverde & Maza, ).…”