On Institutions, Economic Growth and the Environment

University dissertation from Göteborg University

Abstract: This thesis analyzes economic growth and the environment by including institutional aspects and specific innovation mechanisms. It contains an introduction and five separate studies. Paper 1: The Effect of Democracy on Different Categories of Economic Freedom Many empirical studies conclude that democracy increases economic freedom. However, these studies use highly aggregated indices of economic freedom, which eliminate interesting information and obstruct policy conclusions. The purpose of this paper is to empirically study how different categories of economic freedom are affected by democracy, measured either as political or civil freedom, in developing countries. Democracy seems to increase the economic freedom categories Government Operations and Regulations and Restraints on International Exchange, but not affect the categories Money and Inflation and Takings and Discriminatory Taxation. The result for all variables except Restraints on International Exchange passes robustness tests without major changes. Paper 2: Effects of Economic Freedom on Growth and the Environment: Implications for Cross-Country Analysis The purpose of this paper is to discuss the effects of specific economic freedom categories on both economic growth and the environment, and present some important considerations for cross-country regressions. First, there is a survey of arguments for positive as well as negative effects of economic liberalization. Measurement problems are then considered followed by a number of model specification issues. Sensitivity tests and potential econometric problems are also discussed. The main conclusion is that decomposition is important since different economic freedoms may have different effects on growth and the environment, and may be dependent on different interacting factors. Theoretical insights have a crucial role when it comes to selecting what empirical issues to take into account since there is a limit to the number of issues possible to consider. Sensitivity teats also are important due to the complexity of the links. Paper 3: Economic Freedom and Growth: Decomposing the Effects (co-author Fredrik Carlsson) Most studies of the relation between economic freedom and growth have found a positive relation. However, a single measure of economic freedom does not reflect the complex economic environment and a highly aggregated index makes it difficult to draw policy conclusions. In this paper we investigate what specific types of economic freedom measures that are important for growth. The robustness of the results is carefully analyzed since multicollinearity may be one of the negative effects of decomposing an index. The results show that economic freedom does matter for growth. This does not mean that increasing economic freedom, defined in general terms, is good for economic growth since some of the categories in the index are insignificant and some of the significant variables have negative effects. Paper 4: The Effects of Economic and Political Freedom on CO2 emissions (co-author Fredrik Carlsson) In this paper we investigate the effects of political and economic freedom has CO2 emissions. Economic freedom is measured in several ways. We find that increased price stability and legal structure decrease emissions in countries with a small industry share of GDP, but increases emissions in countries with a large industry share of GDP. The decreasing effect from increased use of market is significant but non-robust, and increased freedom to trade does not have any significant effect. The effect of political freedom on CO2 emissions is also insignificant, most probably since CO2 emissions is a global environmental problem and hence subject to free-riding by the individual countries. Paper 5: Technological Opportunities and Growth in the Natural Resource Sector Both technological and natural resource possibilities seem to evolve in cycles. The "Resource Opportunity Model" in this paper introduces the technological opportunity thinking into natural resource modeling. The natural resource industries' choice between incremental and drastic innovations, will give rise to long-run cycles in the so-called familiar resource stock, which is the amount of natural resources determined by the prevailing paradigm. Incremental innovations will increase the exhaustion of the stock, and drastic innovations will create a new paradigm and, thereby, new technological opportunities and a new stock of familiar resources. Drastic innovations are endogenously affected by the knowledge level and induced either by scarcity of technological opportunities or resources. Generally, increased innovation ability increases the knowledge stock and cumulative income over time, but does not affect the sustainability of the resource stock even though the intensity of the resource cycles increases. However, too low innovation ability might drive the sector into technological stagnation, and resource exhaustion in the long run; and too high innovation ability might drive the sector into extraction stagnation, and resource exhaustion in the short run.

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