We conducted some diagnostic statistics on our results. Specifically, we tested for serial correlation and heteroscedasticity, as well as multicollinearity and parameter stability. These tests were applied to the results in Table 7. Table 9 shows the test for serial correlation and heteroscedasticity. We fail to reject the null hypothesis of no serial correlation and homoscedasticity. Table 10 shows the coefficient variance decomposition. We follow the recommendations of Belsely et al (2004).
According to Belsely et al (2004), we should look out for the lowest condition number (s) and examine their associated eigenvalues. If the eigenvalues of two or more variables are greater than 0.5, then it means there is high collinearity between/among those variables; suggesting a multicollinearity problem. From Table 10, the lowest condition number is 9.63E-10. So we check the corresponding eigenvalues for the set of regressors. We only have the eigenvalue of population growth exceeding 0.5 with the rest of the variables having eigenvalues of less than 0.1. Therefore, we conclude that there is no collinearity between/among the set of independent variables, which
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suggests no multicollinearity problem. CUSUM and CUSUM of squares plot also confirm stability of the parameters (see Figure 4).
Table 9: Residual Diagnostics
Test Type F-Statistic Probability
Serial correlation Breusch-Godfrey 1.1196 0.3422
Heteroscedasticity ARCH 0.0310 0.9695
-16 -12 -8 -4 0 4 8 12 16
86 88 90 92 94 96 98 00 02 04 06 08 10 12
CUSUM 5% Significance
-0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
86 88 90 92 94 96 98 00 02 04 06 08 10 12
CUSUM of Squares 5% Significance
Figure 4: CUSUM and CUSUM of Squares plot
30 Table 10: Coefficient variance Decomposition
Eigenvalues 0.126106 0.041338 0.002146 0.000365 0.000278 0.000133 3.92E-06 1.15E-06 1.21E-10 Condition 9.63E-10 2.94E-09 5.66E-08 3.33E-07 4.37E-07 9.11E-07 3.10E-05 0.000105 1.000000
Variance Decomposition
Proportions
Associated Eigenvalue
Variable 1 2 3 4 5 6 7 8 9
Debt 0.012399 0.236444 0.000548 0.115679 0.036990 0.596271 0.000454 0.001215 9.53E-11 Debt2 0.018255 0.292489 0.004649 0.059528 0.097305 0.476411 0.007874 0.030313 0.013176 Democracy 0.010556 0.987901 0.001534 2.94E-06 8.17E-07 4.76E-06 7.16E-08 7.20E-10 2.74E-18 Debt*Democracy 0.000459 0.719740 0.067460 0.034266 0.000441 0.103624 0.073670 0.000339 2.94E-11 Economic openness 0.007227 0.119960 0.054993 0.009014 0.343211 0.446404 0.002977 0.016215 3.47E-10 Population growth 0.766855 0.097535 0.135455 0.000154 8.31E-07 6.26E-07 1.57E-07 1.67E-07 1.20E-15 Gross Investment 0.001122 0.031731 0.022167 0.264138 0.672335 0.008169 1.65E-05 0.000321 4.50E-12 Regime Durability 0.000622 0.000296 0.025862 0.778064 0.180845 0.014280 3.43E-06 2.67E-05 5.78E-14 Constant 0.998376 8.93E-06 0.001613 2.03E-06 2.28E-09 1.47E-08 2.47E-09 3.06E-09 2.32E-17
31 5. CONCLUSION AND RECOMMENDATION
This study investigates the tripartite relationships of economic growth, democracy and public debt using data from Ghana. We derive an extension of the original contributions of Barro (1996) and Pumper and Martin (2003). We posit that democracy and debt move hand in hand. Therefore, the following phenomenon are possible. First, the initial debt ratio level will act as an important constraint to the growth enhancing effect of democracy. Second, the quality of institution determines the capacity of a country to tolerate higher debt. Contrary to previous attempts that used economic growth/GDP per capita growth with cyclicality, we used the trend economic growth/trend GDP per capita growth. First of the reasons is to deal with the issue of reverse causality, and second is to capture the true/actual long-run effect. Our models were estimated using the fully modified OLS and Canonical cointegration regression since these methods are known to deal effectively with the second-order bias problem, which often plagues ordinary least squares estimate. Several robustness checks were conducted. We found the following results.
Debt and democracy have a nonlinear (i.e. concave) effect on economic growth; the latter confirming what is called the Barro effect in the literature. Democracy does promote economic growth, but this has implications for the debt position of the economy since the size of the government grows proportionally as claimed by Pumper and Martin. Debt and democracy move together, and their interaction generates negative effects on economic growth. We found two interesting results in this regard. On one hand, high initial debt ratio limits/restraints the growth enhancing effect of democracy. On the other hand, the quality of institution affects the capacity of the country to tolerate higher debt. We found an inverse relationship between the quality of institution and the capacity of the economy to tolerate higher debt. Further, our results revealed that economic openness, population growth, investment, and political stability promote economic growth in the country. Several robustness checks confirmed these results.
Our results have the following implications for policy direction. Democracy is not cheap, and developing countries that follow this process must be aware of the indirect consequences such a move can have like raising debt levels and subsequent reduction in the capacity to tolerate higher debt. Though democracy is taking roots in the Ghanaian economy, there are so many loopholes that needs to be fixed such as the non-centralisation of authority in the minister of finance and lack of effective and efficient check and balances in the system. For example, there is a case in Ghana where the National Democratic Congress (NDC) paid huge sums of judgement debt to an individual without following the due processes of the land. Also, there have been cases of
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corruption in the Judiciary which is expected to act as the overseer and enforcement of law and justice in the country. Such acts cannot continuously be encouraged if the capacity of the country to tolerate high debt levels is to be improved. Government has to be very proactive in equipping institutions charged with the responsibilities to ensure law and order and accountability.
Interferences from government in these institutions should be highly discouraged if we are to make significant progress as a country. Could this result be seen as only applicable in the case of Ghana or extended to other developing countries in Africa? The answer to this question requires further research that seeks to test for what we call the DDT effect of democracy in other economies.
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