The impact of political stability on economic growth

1. Students:
Georgiou Flοra
Katsikas Alexandros
Kountourogiannis Athanasios
Matsouka Aikaterini
Tsouka Maria
June 2017Supervisor: Oikonomidou Claire

3.  We selected the top 10 countries which seem
to have the lowest political stability rate
globally.
-.4-.2
0
.2
AFG BDI YEMCAF COD IRQ LBN PAK SDN UKR
Names of the countries
Growth of GDP per capita ave_grGDP
-3-2-1
0
AFG BDI CAF COD IRQ LBN PAK SDN UKR YEM
Names of the countries
Political Stability Index averagePSI
Data:
Time span : 2005-2014
Source:http://www.theglobaleconomy.
com/rankings/transparency_corruption

4. 1)Afghanistan 6)Libya
2)Burundi 7)Pakistan
3)C. A. Republic 8)Sudan
4)D. R. Congo 9)Ukraine
5)Iraq 10)Yemen
Syria is excluded from our sample due to
lack of data.

5. Variable name : Description :
Growth GDP  Growth of GDP per capita
Trade  “ the openness ” (%GDP)
Debt  The central Government debt(%GDP)
grL  Growth of Labor force (%)
GFCF  Gross Fixed Capital Formation(investments)% GDP
PSI  Political Stability Index

6.  Should we add it in the model?
-.4-.2
0
.2
0 50 100 150 200 250
The central goverment debt as % GDP
As we notice no
correlation between
the dependent and
independent
variable, we don’t
add Debt2.

7. _cons -.022388 .0326614 -0.69 0.495 -.0873388 .0425628
PSI -.005904 .0118178 -0.50 0.619 -.029405 .0175969
trade -.00006 .0002871 -0.21 0.835 -.0006309 .0005109
Debt .000227 .0001757 1.29 0.200 -.0001223 .0005763
grL -.7999446 .5073365 -1.58 0.119 -1.808839 .2089497
GFCF .002364 .0007654 3.09 0.003 .0008418 .0038861
growthGDP Coef. Std. Err. t P>|t| [95% Conf. Interval]
Total .353566467 89 .003972657 Root MSE = .06003
Adj R-squared = 0.0928
Residual .302735757 84 .003603997 R-squared = 0.1438
Model .050830711 5 .010166142 Prob > F = 0.0210
F(5, 84) = 2.82
Source SS df MS Number of obs = 90
. reg growthGDP GFCF grL Debt trade PSI
Observations=90
R2=0,1438
Prob>F=0,0210 (the probability of estimating
wrong is 0,0210)

8.  Autocorrelation
_cons -.001642 .0068771 -0.24 0.812 -.0153334 .0120493
laggeduhat .0992124 .1156011 0.86 0.393 -.1309317 .3293566
uhat Coef. Std. Err. t P>|t| [95% Conf. Interval]
Total .297295455 79 .003763234 Root MSE = .06145
Adj R-squared = -0.0033
Residual .294514334 78 .003775825 R-squared = 0.0094
Model .002781121 1 .002781121 Prob > F = 0.3934
F(1, 78) = 0.74
Source SS df MS Number of obs = 80
. reg uhat laggeduhat
-.4-.3-.2-.1
0
.1
Residuals
-.4 -.3 -.2 -.1 0 .1
laggeduhat
P>|t|=0,393
There is no autocorrelation.

9.  Multicollinearity
Gross Fixed
Capital
Formtion(investments)
%GDP
Growth of
Labor
Force(percent)
The
central
goverment
debt as %
GDP
The
openess
(%GDP)
Political
Stability
Index
0
20
40
60
0 20 40 60
0
.05
.1
0 .05 .1
0
100
200
0 100 200
0
50
100
150
0 50 100 150
-3
-2
-1
0
-3 -2 -1 0
PSI -0.0625 -0.4437 -0.0850 0.3939 1.0000
trade 0.1126 -0.0104 0.3025 1.0000
Debt -0.1845 0.2418 1.0000
grL -0.1403 1.0000
GFCF 1.0000
GFCF grL Debt trade PSI
. pwcorr GFCF grL Debt trade PSI
There is no
multicollinearity
between the
independent
variables.

10.  Heteroscedasticity
 Breusch-Pagan Test
 p= 0,5481 > 0,05 accept Ho there is no
heteroscedasticity
Prob > chi2 = 0.5481
chi2(1) = 0.36
Variables: fitted values of uhat
Ho: Constant variance
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
. hettest

11. PSI 100 -1.9229 .7063769 -2.82 .15
trade 100 64.57294 27.78404 19.45883 133.5484
Debt 100 64.24225 48.07182 7.71 226.407
grL 90 .0294518 .0147605 -.0112162 .0673209
GFCF 100 18.18943 8.930917 4.338242 55.856
growthGDP 90 .0178748 .063029 -.3792516 .1800239
Variable Obs Mean Std. Dev. Min Max
. sum growthGDP GFCF grL Debt trade PSI

12. Depended variable: growthGDP
F 4.126194 7.7621093 7.7621093
r2 .21573524 .21573524 .21573524
N 90 90 90 90 90 90
_cons .00402904 .00402904 .16781959 .16781959 .00402904 .16781959
PSI .00036392 .00036392 .04268509 .04268509 .00036392 .04268509
trade -.00019676 -.00019676 -.0004952 -.0004952 -.00019676 -.0004952
Debt .00025632 .00025632 .0002284 .0002284 .00025632 .0002284
grL -1.0521334 -1.0521334 -2.7636455 -2.7636455 -1.0521334 -2.7636455
GFCF .00238094 .00238094 .00183424 .00183424 .00238094 .00183424
Variable pooled_d~t pooled_rob FE_default fe_rob re_default re_rob
. estimates table pooled_default pooled_rob FE_default fe_rob re_default re_rob, stats (N r2 F)

13.  FE vs RE using Hausman Test :
 p=0,0297 < 0,05 Accept H1 : Fe
Prob>chi2 = 0.0297
= 12.40
chi2(5) = (b-B)'[(V_b-V_B)^(-1)](b-B)
Test: Ho: difference in coefficients not systematic
B = inconsistent under Ha, efficient under Ho; obtained from xtreg
b = consistent under Ho and Ha; obtained from xtreg
PSI .0426851 .0003639 .0423212 .0160919
trade -.0004952 -.0001968 -.0002984 .0004904
Debt .0002284 .0002563 -.0000279 .000239
grL -2.763645 -1.052133 -1.711512 .5730798
GFCF .0018342 .0023809 -.0005467 .0007597
FE_default re_default Difference S.E.
(b) (B) (b-B) sqrt(diag(V_b-V_B))
Coefficients
. hausman FE_default re_default

14.  FE vs Pooled
(Prob > F ) = 0,0187 < 0,05 and we accept H1 : FE
F test that all u_i=0: F(9, 75) = 2.40 Prob > F = 0.0187
rho .54748454 (fraction of variance due to u_i)
sigma_e .05596885
sigma_u .06156241
_cons .1678196 .0646106 2.60 0.011 .0391087 .2965305
PSI .0426851 .0209575 2.04 0.045 .0009356 .0844346
trade -.0004952 .0006012 -0.82 0.413 -.0016928 .0007024
Debt .0002284 .0003171 0.72 0.474 -.0004034 .0008602
grL -2.763645 .803051 -3.44 0.001 -4.363405 -1.163886
GFCF .0018342 .0011591 1.58 0.118 -.0004748 .0041433
growthGDP Coef. Std. Err. t P>|t| [95% Conf. Interval]
corr(u_i, Xb) = -0.8102 Prob > F = 0.0023
F(5,75) = 4.13
overall = 0.0372 max = 9
between = 0.0000 avg = 9.0
within = 0.2157 min = 9
R-sq: Obs per group:
Group variable: country Number of groups = 10
Fixed-effects (within) regression Number of obs = 90
. xtreg growthGDP GFCF grL Debt trade PSI,fe

15. FE-default or FE-robust ?
F test that all u_i=0: F(9, 75) = 2.40 Prob > F = 0.0187
rho .54748454 (fraction of variance due to u_i)
sigma_e .05596885
sigma_u .06156241
_cons .1678196 .0646106 2.60 0.011 .0391087 .2965305
PSI .0426851 .0209575 2.04 0.045 .0009356 .0844346
trade -.0004952 .0006012 -0.82 0.413 -.0016928 .0007024
Debt .0002284 .0003171 0.72 0.474 -.0004034 .0008602
grL -2.763645 .803051 -3.44 0.001 -4.363405 -1.163886
GFCF .0018342 .0011591 1.58 0.118 -.0004748 .0041433
growthGDP Coef. Std. Err. t P>|t| [95% Conf. Interval]
corr(u_i, Xb) = -0.8102 Prob > F = 0.0023
F(5,75) = 4.13
overall = 0.0372 max = 9
between = 0.0000 avg = 9.0
within = 0.2157 min = 9
R-sq: Obs per group:
Group variable: country Number of groups = 10
Fixed-effects (within) regression Number of obs = 90
. xtreg growthGDP GFCF grL Debt trade PSI,fe
rho .54748454 (fraction of variance due to u_i)
sigma_e .05596885
sigma_u .06156241
_cons .1678196 .0575636 2.92 0.017 .0376017 .2980375
PSI .0426851 .0160087 2.67 0.026 .0064708 .0788993
trade -.0004952 .0007138 -0.69 0.505 -.0021099 .0011195
Debt .0002284 .0001038 2.20 0.055 -6.33e-06 .0004631
grL -2.763645 .8790018 -3.14 0.012 -4.752086 -.7752053
GFCF .0018342 .0010266 1.79 0.108 -.0004881 .0041566
growthGDP Coef. Std. Err. t P>|t| [95% Conf. Interval]
Robust
(Std. Err. adjusted for 10 clusters in country)
corr(u_i, Xb) = -0.8102 Prob > F = 0.0044
F(5,9) = 7.76
overall = 0.0372 max = 9
between = 0.0000 avg = 9.0
within = 0.2157 min = 9
R-sq: Obs per group:
Group variable: country Number of groups = 10
Fixed-effects (within) regression Number of obs = 90
. xtreg growthGDP GFCF grL Debt trade PSI,fe vce(robust)

16. Fe-default
(-0,82) (2,04)
(2,60) (1,58) (-3,44)
(0,72)
Note: Numbers in parentheses are t-values
Diagnostics:
N=90
F(5,75)= 4,13
R-squared (overall) = 0,0372

17. As we examine the graph ,we notice that there are no
observations up in the right corner and therefore no
observations have to be deleted.
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.1.2.3.4.5
Leverage
0 .1 .2 .3 .4 .5
Normalized residual squared
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Leverage
0 .1 .2 .3 .4 .5
Normalized residual squared

18. A dummy variable is one that takes the value 0 or 1 to indicate the
absence or presence of some categorical effect that may be expected to
shift the outcome.
As the subject of our research focuses on Political Stability ,we have
chosen to enforce our model with a dummy which will separate our
countries to UNSTABLE(A) and VERY UNSTABLE (B) during 2005-2014.

19. So now, we have reached a spot , where we are able to add our
dummy variable to our model. Hence, using our final regression:
As we see ,the dummy
variable is statistically
significant ( p>|z|)
=0.025 expressing
affection on our
dependent variable,
which is the growthGDP.
Averagely, countries A
have 0.510388 more
growth than countries B.
F test that all u_i=0: F(9, 74) = 3.07 Prob > F = 0.0036
rho .59177723 (fraction of variance due to u_i)
sigma_e .0544578
sigma_u .0655678
_cons .10478 .0686549 1.53 0.131 -.0320179 .2415778
dummyPSI .0510388 .0223395 2.28 0.025 .0065264 .0955512
PSI .0175713 .0231657 0.76 0.451 -.0285874 .06373
trade -.0005202 .0005851 -0.89 0.377 -.001686 .0006456
Debt .0002788 .0003094 0.90 0.370 -.0003376 .0008953
grL -3.080095 .7935516 -3.88 0.000 -4.661281 -1.498909
GFCF .0017297 .0011287 1.53 0.130 -.0005194 .0039788
growthGDP Coef. Std. Err. t P>|t| [95% Conf. Interval]
corr(u_i, Xb) = -0.8048 Prob > F = 0.0006
F(6,74) = 4.50
overall = 0.0324 max = 9
between = 0.0228 avg = 9.0
within = 0.2674 min = 9
R-sq: Obs per group:
Group variable: country Number of groups = 10
Fixed-effects (within) regression Number of obs = 90
. xtreg growthGDP GFCF grL Debt trade PSI dummyPSI,fe

20.  GFCF ( Fixed Investments) : Positive effect ( statisticly insignificant)
In accordance with Magnus Blomstrom,Robert E.Lipsey Mario
Zejan(August 1993)
 Employment : Negative effect
In contrast to Steven Kapsos (December 2005)
 Debt : Positive effect ( statistically insignificant )
In accordance with Christina Checherita Westpha, Phillip Rother(
Octomber 2012)
 PSI : Positive effect
In accordance with Ari Aisen, Francisco Jose Veiga (January 2011)
 Trade : Negative effect ( statistically insignificant )
In contrast to Oscar Afonso (May 2001)

21.  Is fixed investment the key of economic growth?
http://www.nber.org/papers/w4436.pdf
 The employment intensity of growth: Trends and macroeconomic
determinants
http://www.oit.org/wcmsp5/groups/public/---ed_emp/---emp_elm/documents/publication/wcms_143163.pdf
 The impact of high government debt on economic growth and its
channels: An empirical investigation for the euro area
http://www.sciencedirect.com/science/article/pii/S0014292112000876
 How Does Political Instability Affect Economic Growth?
https://www.imf.org/external/pubs/ft/wp/2011/wp1112.pdf
 The impact of international trade on economic growth
http://wps.fep.up.pt/wps/wp106.pdf

24. 0
204060
0
204060
0
204060
-.4 -.2 0 .2 -.4 -.2 0 .2
-.4 -.2 0 .2 -.4 -.2 0 .2
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Density
kdensity growthGDP
normal growthGDP
Density
Growth of GDP per capita
Graphs by Names of the countries

25. 0
.1.2.3
0
.1.2.3
0
.1.2.3
0 50 100 150 0 50 100 150
0 50 100 150 0 50 100 150
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Density
kdensity trade
normal trade
Density
The "openess" (%GDP)
Graphs by Names of the countries

26. 0
.05
.1
0
.05
.1
0
.05
.1
0 100 200 300 0 100 200 300
0 100 200 300 0 100 200 300
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Density
kdensity Debt
normal Debt
Density
The central goverment debt as % GDP
Graphs by Names of the countries

27. 0
100200300400
0
100200300400
0
100200300400
-.05 0 .05 .1 -.05 0 .05 .1
-.05 0 .05 .1 -.05 0 .05 .1
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Density
kdensity grL
normal grL
Density
Growth of Labor Force(percent)
Graphs by Names of the countries

28. 0
.2.4
0
.2.4
0
.2.4
0 20 40 60 0 20 40 60
0 20 40 60 0 20 40 60
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Density
kdensity GFCF
normal GFCF
Density
Gross Fixed Capital Formtion(investments) %GDP
Graphs by Names of the countries

29. 024602460246
-3 -2 -1 0
-3 -2 -1 0 -3 -2 -1 0 -3 -2 -1 0
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM Total
Density
kdensity PSI
normal PSI
Density
Political Stability Index
Graphs by Names of the countries

31. 0
.005
.01
.015
.02
.025
Density
20 40 60 80 100 120
The "openess" (%GDP)

32. 0
.005
.01
.015
Density
0 50 100 150 200
The central goverment debt as % GDP

33. 0
10203040
Density
-.02 0 .02 .04 .06
Growth of Labor Force(percent)

34. 0
.02.04.06
Density
0 10 20 30 40 50
Gross Fixed Capital Formtion(investments) %GDP

35. 0
.2.4.6.8
Density
-3 -2 -1 0
Political Stability Index

36. 05
1015
Density
-.4 -.2 0 .2
Growth of GDP per capita

37. 0
.005
.01
.015
.02
.025
Density
0 50 100 150
The "openess" (%GDP)

38. 0
.005
.01
.015
Density
0 50 100 150 200 250
The central goverment debt as % GDP

39. 0
10203040
Density
-.02 0 .02 .04 .06
Growth of Labor Force(percent)

40. 0
.02.04.06
Density
0 20 40 60
Gross Fixed Capital Formtion(investments) %GDP

41. 0
.2.4.6.8
Density
-3 -2 -1 0
Political Stability Index

42. -.4-.2
0
.2-.4-.2
0
.2-.4-.2
0
.2
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM Total
Graphs by Names of the countries

43. 0
50
100150
0
50
100150
0
50
100150
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM Total
Graphs by Names of the countries

44. 0
50
100150200250
0
50
100150200250
0
50
100150200250
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM Total
Graphs by Names of the countries

45. -.02
0
.02.04.06-.02
0
.02.04.06-.02
0
.02.04.06
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM Total
Graphs by Names of the countries

46. 0
204060
0
204060
0
204060
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Graphs by Names of the countries

47. -3-2-1
0
-3-2-1
0
-3-2-1
0
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM Total
Graphs by Names of the countries

48. -.4-.2
0
.2
2004 2006 2008 2010 2012 2014
YEAR
AFG BDI
CAF COD
IRQ LBN
PAK SDN
UKR YEM

49. 0
50
100150
2004 2006 2008 2010 2012 2014
YEAR
AFG BDI
CAF COD
IRQ LBN
PAK SDN
UKR YEM

50. 0
50
100150200250
2004 2006 2008 2010 2012 2014
YEAR
AFG BDI
CAF COD
IRQ LBN
PAK SDN
UKR YEM

51. -.02
0
.02.04.06
2004 2006 2008 2010 2012 2014
YEAR
AFG BDI
CAF COD
IRQ LBN
PAK SDN
UKR YEM

52. 0
204060
2004 2006 2008 2010 2012 2014
YEAR
AFG BDI
CAF COD
IRQ LBN
PAK SDN
UKR YEM

53. -3-2-1
0
2004 2006 2008 2010 2012 2014
YEAR
AFG BDI
CAF COD
IRQ LBN
PAK SDN
UKR YEM

54. -.4-.2
0
.2
0 50 100 150
The "openess" (%GDP)

55. -.4-.2
0
.2
0 50 100 150 200 250
The central goverment debt as % GDP

56. -.4-.2
0
.2
-.02 0 .02 .04 .06
Growth of Labor Force(percent)

57. -.4-.2
0
.2
0 20 40 60
Gross Fixed Capital Formtion(investments) %GDP

58. -.4-.2
0
.2
-3 -2 -1 0
Political Stability Index

59. -.4-.2
0
.2-.4-.2
0
.2-.4-.2
0
.2
0 50 100 150 0 50 100 150
0 50 100 150 0 50 100 150
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
The "openess" (%GDP)
Graphs by Names of the countries

60. -.4-.2
0
.2-.4-.2
0
.2-.4-.2
0
.2
0 100 200 0 100 200
0 100 200 0 100 200
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
The central goverment debt as % GDP
Graphs by Names of the countries

61. -.4-.2
0
.2-.4-.2
0
.2-.4-.2
0
.2
-.02 0 .02 .04 .06 -.02 0 .02 .04 .06
-.02 0 .02 .04 .06 -.02 0 .02 .04 .06
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Growth of Labor Force(percent)
Graphs by Names of the countries

62. -.4-.2
0
.2-.4-.2
0
.2-.4-.2
0
.2
0 20 40 60 0 20 40 60
0 20 40 60 0 20 40 60
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Gross Fixed Capital Formtion(investments) %GDP
Graphs by Names of the countries

63. -.4-.2
0
.2-.4-.2
0
.2-.4-.2
0
.2
-3 -2 -1 0 -3 -2 -1 0
-3 -2 -1 0 -3 -2 -1 0
AFG BDI CAF COD
IRQ LBN PAK SDN
UKR YEM
Political Stability Index
Graphs by Names of the countries

64. -.4-.2
0
.2
Residuals
-.4 -.2 0 .2
Growth of GDP per capita

65. -.4-.2
0
.2
Residuals
0 50 100 150
The "openess" (%GDP)

66. -.4-.2
0
.2
Residuals
0 50 100 150 200 250
The central goverment debt as % GDP

67. -.4-.2
0
.2
Residuals
-.02 0 .02 .04 .06
Growth of Labor Force(percent)

68. -.4-.3-.2-.1
0
.1
Residuals
0 20 40 60
Gross Fixed Capital Formtion(investments) %GDP