ECONOMETRIC EXERCISE

Axel Andersson (21229) Johanna Ahlin Ludvigsson (21636) Henrik Nilsson (21667) Sten Trnbro (21699) Markets and Institutions 28/09/12

Questions: 1) See summary statistics for the variable of interest below. We see that the average polity is 45.8 in the sample. This is, according to the definition in the article, clearly below the threshold for democracy, which is 85. The variable fiscal reliance is only measured for eighteen countries due to the criteria used to calculate the variable. The standard deviation for total oil income per capita and total fuel income per capita is large compared to the mean. This since there is a large difference in oil and fuel related income between the participating countries due to some countries having large oil reserves and production.

Table 1
Variable | Obs 14213 14729 12406 12218 10689 11161 10646 1817 Mean 45.79469 343.042 19.60036 55.51091 543.0002 48.22378 595.4127 21.46709 Std. Dev. 34.94814 2645.721 65.86743 422.543 3223.437 138.4678 3228.968 29.61937 Min 0 0 0 0 0 0 0 0 Max 100 78588.8 1075.53 14226.54 81161.85 2592.4 81161.85 97.82412 polity_s | Total_Oil_~C | Coal_Incom~C | natural_ga~C | Total_Fuel~C | metals_inc~C | Total_Reso~C | Fiscal_Rel~e |

2)

See summary table below for correlations. When plotting simple correlations we see a negative relationship between polity and the variables total oil income per capita, total fuel income per capita, total resources income per capita and fiscal reliance. That is, a high income from these resources corresponds to low values of polity, i.e. less democracy.

Table 2
| polity_s T~Oil_~C Coal_I~C natura~C T~Fuel~C metals~C T~Reso~C Fiscal~e polity_s | Total_Oil_~C | Coal_Incom~C | natural_ga~C | Total_Fuel~C | metals_inc~C | Total_Reso~C | Fiscal_Rel~e | 1.0000 -0.1698 0.3169 0.1087 -0.1538 0.1181 -0.1496 -0.1811 1.0000 -0.0821 0.2278 0.9951 -0.0878 0.9946 0.5050 1.0000 0.0851 -0.0703 0.3665 -0.0560 -0.1111 1.0000 0.3226 -0.0921 0.3200 0.2129 1.0000 -0.0944 0.9992 0.5124 1.0000 -0.0551 -0.0969 1.0000 0.5101 1.0000

3) We first plot the correlations of polity on total oil income per capita, coal income per capita, fiscal reliance and GDP per capita. The scatter plots below (Figure 1) include all data points in the sample, i.e. for all countries and years. We have an unbalanced panel data set and we probably have high serial correlation within countries and lower correlation between countries. We have observed that specific regions have less data than others and we therefore conclude that the missing data is non-random and probably have region/country specific effects. The missing data in our case creates a problem of biasness in the results. Figure 1
100 150 0
0 20000 40000 60000 80000 Real value of petroleum produced per capita Fitted values Polity2 normalized 0-100

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0 20 40 60 80 100 Percentage of govt revenues from oil, gas, and minerals Fitted values Polity2 normalized 0-100

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50000 100000 Real Per Capita GDP Fitted values

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Polity2 normalized 0-100

To remove the correlation within country effect we focus on one year (year 2000) and look at the correlation between countries within this given year. The result is shown in Figure 2 and is clearly improved, compared to the scatter graph above, due to a more balanced panel data and the elimination of within country correlation. In the scatter plots we observe signs of an exponential relationship between polity and the natural resources variables. The relationship between polity and fiscal reliance looks more linear.

Figure 2

Scatter year 2000

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0 5000 10000 15000 Real value of petroleum produced per capita Fitted values Polity2 normalized 0-100

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Polity2 normalized 0-100

4)

In the first regression we test the relationship of polity on fiscal reliance and total resources income (reg1). We run this regression to measure the effect of the combined natural resources and fiscal reliance on the democracy level. The coefficient for both of the variables is negative and statistically significant at a 1 % level. This regression supports the result, from question 2, of a negative relationship between polity and the variables fiscal reliance and total resources income per capita. The impact of the variables is questionable because of the small coefficients, especially total resources per capita. We have previously studied the combined effect of the natural resources. However, it could be that different natural resources have different effects on the democracy level. To address this problem we include control variables on different kinds of resources. In the second regression (reg2) we include metals income per capita and total fuel income per capita as we remove total resources income per capita. In this regression, the coefficient for fiscal reliance is still negative but smaller compared to the first regression; its significant at a 1 % level. The coefficient for metals income per capita is positive and significant (1 %) but small in number and could be considered economically insignificant. Total fuel income per capita is negative and significant (1 %) but the number is very small making the impact on democracy questionable. We have now a mixed result on polity depending on the type of natural resource income per capita.

In the third regression (reg3) we include total oil income per capita, coal income per capita and natural gas income per capita as we remove total fuel income per capita. We have thereby further divided the resources into more distinctive variables. Fiscal reliance is still negative and significant but the variable decreases further as more of the effect on polity is explained by the additional variables. The coefficient of total oil income is negative, small and significant (1 %) as expected. This since it is highly correlated with total fuel income per capita. The variable coal income per capita is positive and significant (1 %) with a coefficient that is larger than the other resource variables observed. Natural gas income per capita is positive and significant (1 %) with quite a small number indicating low economic significance. Metals income per capita is insignificant at all satisfactory levels. Generally for the three regressions we observe a negative relationship between polity and oil related income, i.e. both oil and fuel. However, the other resources yield a positive relationship with regards to the democracy level. Fiscal reliance is negative in all of the regressions as expected because of the relatively high correlation with oil observed in Table 2. Its also decreasing through the regressions possibly because the inclusion of other variables that steals some power. The negative value of fiscal reliance could in part be explained by the theory that governments with high natural resources income are less depend on the inhabitants and the tax base they provide, resulting in less democracy. We also observe a mixed effect with regards to the type of natural resources. This suggests that some types of natural resources have a positive effect, e.g. metals and coal, on the democracy level while others have a negative effect, e.g. oil. Table 3
VARIABLES Fiscal_Reliance Total_Oil_Income_PC Coal_Income_PC natural_gas_income_PC metals_income_PC Total_Fuel_Income_PC Total_Resources_Income_PC Constant -0.000567*** (0.000168) 44.52*** (1.379) 0.0182*** (0.00527) -0.000561*** (0.000169) (1) reg1 polity_s -0.154*** (0.0334) (2) reg2 polity_s -0.143*** (0.0333) (3) reg3 polity_s -0.131*** (0.0312) -0.000882*** (0.000146) 2.506*** (0.220) 0.00994*** (0.00167) 0.00116 (0.00626)

42.86*** (1.430)

38.22*** (1.374) 1,235 0.146

Observations R-squared

1,240 1,240 0.037 0.047 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

In regression 4 (reg4) in Table 4, we now include region specific dummy variables in order to remove region specific effect that could potentially lead to a bias result in the regressions. The most obvious change in this regression is the fact that fiscal reliance now has a positive impact on polity but its still significant (1 %). However, total oil income per capita and metals income per capita are essentially unchanged. When including these dummy variables, coal income per capita has a clearly less economically significant effect on polity but its still statistically significant at a 1 % level. Another effect is that natural gas income per capita has changed sign from positive to negative, but the coefficient is still small. Moreover, its significance has level has decreased from 1 % to 5 %. Western Europe & North America (including Australia & New Zeeland) is the only positive regional dummy and its significant at a 1 % level. All the other regional dummies are negative with varying size on coefficients. The main conclusion is that when including regional dummies the previously observed results of fiscal reliance is changed. The negativity previously observed seems to be completely captured by the regional dummies. This contradicts the theory proposed in the previous section that governments with a high reliance on natural resources income are less democratic. We finally conclude that regional characteristics seem to be important in explaining the democracy level. Table 4
VARIABLES Fiscal_Reliance Total_Oil_Income_PC Coal_Income_PC natural_gas_income_PC metals_income_PC region_dummy2 region_dummy3 region_dummy4 region_dummy5 region_dummy7 Civil_War Constant 38.22*** (1.374) 1,235 0.146 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 (1) reg3 polity_s -0.131*** (0.0312) -0.000882*** (0.000146) 2.506*** (0.220) 0.00994*** (0.00167) 0.00116 (0.00626) (2) reg4 polity_s 0.145*** (0.0255) -0.000852*** (0.000142) 0.774*** (0.221) -0.00167** (0.000780) 0.00622 (0.00498) -46.26*** (2.040) -81.69*** (1.189) -69.95*** (2.216) 5.789*** (1.646) -67.37*** (2.765) 4.561* (2.490) 91.43*** (1.173) 1,224 0.619

Observations R-squared

For the last two regressions in Table 5 (reg5 and reg6), we include natural logarithms of the resource variables. As previously observed in the scatter plots, there seems to be an exponential relationship between the resrouce variables and polity. To account for this we take logarithms of the resource income variables. We also include lag variables in the last regression, i.e. the present value of polity depends on previous values which seems plausible (both 1 and 2 years lags are included). The coefficient on fiscal reliance stays positive in both regressions. Generally, the resource variables becomes less significant; logOil is only significant at the 5 % level and logCoal is significant at the 1 % level in regression 5 (reg5). Neither of them are significant in reg6. In the last regression (reg6), we have introduced the lagged variables of polity and civil war. In this regression the 1 year lagged variable of polity is significant at the 1 % level while the other two lagged variables are insignificant (civilwar is unexpectadly positive). The last regression (reg6) clearly weakens the hypothesis that natural resources lead to less democratic countries. Table 5
VARIABLES Fiscal_Reliance logOil logCoal logGAS logMetal logGDP Total_Oil_Income_PC Coal_Income_PC natural_gas_income_PC metals_income_PC lagpolity lagpolity2 lagcivilwar Constant 38.22*** (1.374) 1,235 0.146 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 -154.5*** (33.55) 389 0.369 -0.000882*** (0.000146) 2.506*** (0.220) 0.00994*** (0.00167) 0.00116 (0.00626) 1.012*** (0.0639) -0.0954 (0.0642) 0.000175 (0.000135) -7.911 (15.33) 387 0.937 (1) reg3 polity_s -0.131*** (0.0312) (2) reg5 polity_s 0.256*** (0.0848) -2.484** (1.157) 2.451*** (0.899) -0.497 (1.613) 0.704 (1.386) 24.38*** (4.838) (3) reg6 polity_s 0.0683** (0.0318) -0.420 (0.462) 0.214 (0.285) 0.0861 (0.414) 0.580 (0.418) 1.070 (2.153)

Observations R-squared

5)

Time series plots over the average of selected variables are plotted in the graph below. We observe a peak in the income of the resources after 1950 and all of the resource incomes have increased during the time period. At least for the oil income related income, the spike after 1950 could be attributable to the price shocks in wake of the two oil crises during 1970s. Figure 3

Time series
2379.353 7.563087 39.32292 Mean Mean 380.4332

Total_Oil_Income_PC

Coal_Income_PC

natural_gas_income_PC
Mean 0

1800 1850 1900 1950 2000 Year

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1800

1850 1900 1950 Year

2000

15.41019 2484.721

9.545417 109.7715

32.38416 2581.321

Total_Fuel_Income_PC
Mean Mean

metals_income_PC
Mean

Total_Resources_Income_PC

1800 1850 1900 1950 2000 Year

1800 1850 1900 1950 2000 Year

1800

1850

1900 1950 Year

2000

65.31537

Fiscal_Reliance
Mean 0
1800 1850 1900 1950 2000 Year

6)

In the previous model we have only accounted for fixed effects within regions. We could also have fixed effects that are both country specific and time specific, that results in a bias of we dont account for this effect. By including country and time fixed effects we remove this bias and allow for specific factors, e.g. climate, location, culture etc. In the final regression (reg9) we limit the time period to after 1980 mainly due to the large amount of missing data before this time period. By excluding this time period we hopefully limit the effect of the potential nonrandom data. The results from the regressions are shown below. The variable of civil war and oil are negative but neither is statistically significant. Only logCoal is statistically significant among the natural resource variables and is as before positive. The results are generally similar to the regression 6 (reg6) which again weakens the link between the effect of natural resources income on the democracy level.

Table 6
(1) reg7 polity_s (2) reg8 polity_s (3) reg9 polity_s (after 1980) 0.106 (0.142) -3.893 (3.064) 2.173** (1.054) 2.369 (3.691) 2.256 (3.330) 0.188 (13.46) 0.889*** (0.0888) -0.0292 (0.0913) -0.000418 (0.00102) 2.620 (107.4) 106 0.967 YES YES

VARIABLES

Fiscal_Reliance logOil logCoal logGAS logMetal logGDP lagpolity lagpolity2 lagcivilwar Constant

0.0846* (0.0479) -1.406 (0.887) 0.209 (0.305) 0.0105 (0.430) 0.392 (0.603) 5.246* (2.773) 0.975*** (0.0663) -0.111* (0.0659) 0.000133 (0.000168) -34.80* (18.10)

0.137** (0.0549) -0.405 (0.889) 0.0300 (0.366) -1.238 (0.841) 0.923 (0.783) 6.781** (3.283) 0.933*** (0.0645) -0.0706 (0.0596) -5.48e-05 (0.000235) -49.09** (21.35)

Observations R-squared Country Fixed Effect Time Fixed Effect

387 387 0.939 0.952 YES YES NO YES Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

7)

In the final regression we cannot conclude that there is a general causal relationship between the democracy level and the income per capita from natural resources. However, we find a positive relationship between coal income per capita and the democracy level. For the other resources the result is not statistically significant. Potential pitfalls are that we could still have reverse causality, i.e. the level of democracy affects coal resource income rather than the other way around. In addition, the relationship could be purely descriptive i.e. correlation between the variables but no causality.