A Simultaneous Equation Globalization, Corruption, Democracy, Human Development and Social Progress

This study builds a simultaneous equation model that establishes inter-connections among themeasures of globalization, measures of democracy, human development, corruption perception indexand per capita income, which in turn jointly influence social progress. The model has elevenequations in which the response variables and the predictor variables are log-linearly related. Theempirical data used for estimation of the model pertain to the period 2006-2016 for 116 countriesdistributed over all the continents. The model has been estimated by the conventional Two-StageLeast Squares (2-SLS) and alternatively by a modified 2-SLS in which, at the second stage, Shapleyvalue regression has been used to ameliorate the detrimental effects of collinearity among thepredictor variables. It has been found that the modified 2-SLS outperform the conventional 2-SLS.Empirically, it has been established that globalization, democracy, human development and low levelof corruption are reinforcing each other and they together explain social progress quite well.Key words: Globalization, democracy, corruption, human development, social progress,simultaneous equation model, Two-Stage Least Squares, collinearity, Shapley value regression.

JEL Codes: C30, C36, C51, C57, C61, C71, D73, F62, F63, O1511. Introduction:This study investigates into the debated inter-relationships among globalization, politicalregimes, corruption, human development and social progress in a simultaneous model framework. Itrecognizes that a school of scholars hold that globalization and democracy uphold each other andthey jointly hold back corruption, endorse human development and finally promote social progress.Globalization also positively responds to democratic practices, human development and strongsocial capital. Nevertheless, it is acknowledged that the opponent school of scholars relateglobalization to limiting the scope of democracy, promoting corruption, misaligning human and nonhumancapital with globalization sponsored development and consequently thwarting socialprogress. In what follows, an attempt has been made to put together the views and most importantempirical findings of various scholars and drawing upon the same build as well as estimate asimultaneous equation model that may reveal the structural relationships among the said variables.

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2. A Literature Survey on Relationships among Globalization with other Socio-economic VariablesIn this section we put together the views and empirical findings of various scholars on therelationship between globalization, political regime, human capital, social capital and social progressas visualized by Stiglitz et al. (2009) and Social Progress Imperative. Human capital is summarilymeasured by the human development index and corruption perception index has been used as aprototype measure of social capital.2.1. Relationship between Globalization and Political RegimeNumerous studies have been carried out to investigate into the relationship between regimetype (democracy to authoritarian) and globalization with the causal arrow indicating towards eitherdirection. A good number of studies investigate into the relationship between regime type anddevelopment (Przeworski and Limongi, 1993) that cluster around the Lee thesis and in view ofglobalization being considered as a means to development have a discernible bearing on therelationship between regime type and globalization.

Among such studies, Huntington and Jorge(1975), Marsh (1979), Weede (1983), Landau (1986), Kohli (1986) and Helliwell (1992) provideempirical evidences that indicate negative to inconsequential impact of democracy (or positive toinsignificant impact of authoritarianism) on development. On the contrary, Dick (1974), Kormendiand Meguire (1985), Pourgerami (1988), Scully (1988; 1992), Barro (1989), Pourgerami (1991),Remmer (1990), Leblang (1997), Halperin et al. (2005) and Knutsen (2008a; 2008b; 2010) provideempirical evidences of a favourable impact of democracy (or unfavourable impact ofauthoritarianism) on development. A number of studies assert that there is no direct relationshipbetween regime type and development.

There are intermediate factors such as the (already)attained development level (Przeworski, 1966; Adelman and Morris, 1967), type (whetherbureaucratic or traditional) of authoritarian regime (Sloan and Tedin, 1987), attributes andinclination of the authoritarian ruler (Barro, 1997), regional factors with the historical, institutional,cultural and geographic specificities that vary over the continents (Grier and Tullock, 1989), degreeof entrenchment of the political elite class and political competition that they face (Acemoglu andRobinson, 2006a), etc that modify the relationship between regime type and development and,therefore, one cannot relate them unconditionally. A number of empirical studies establishconnection between the regime type and the factors determining development. Boix (2003) andKnutsen (2007) found a positive impact of democracy on rule of law and consequentially the2protection of property rights. Knutsen (2008b) and Hegre and Fjelde (2008) found that democraticgovernments perform better on control of corruption. Rodrik (1998) found that democracy helpsincrease real wages of workers leading to increase in consumption, which may have efficiencypromotingeffects leading to development (Myrdal ,1972: p. 54).

Sen (1999) stresses on freedom andsocial progress, rather than economic development, and favours democracy for that reason.A number of studies assess the impact of trade and development on the regime type(especially democratization). Schumpeter (1950), Lipset (1959) and Hayek (1960) hold that free tradeand capital flows foster demands for democracy via (and also in favour of) enhancement of theefficiency of resource allocation and consequent economic development. Eichengreen and Lebang(2006) find a bi-directional causality that mutually reinforce democracy and globalization. Kollias andPaleologou (2016) find a positive impact of globalization on democracy, although it is not true forthe countries of all income groups.

Globalization hardly promotes democracy in poor economies.Acemoglu and Robinson (2006b) shows that key democratizing forces associated with tradeopenness depend on country’s relative factor endowment. Rudra (2005) observes that economicglobalization leads to improvements in democracy only if safety nets are used simultaneously as astrategy for providing stability and building political support.

Milner and Mukherjee (2009) find thatdemocracy fosters trade and capital account liberalization, but not all the aspects of globalization. Liand Reuveny (2003) find that different constituents of globalization affect democracy in differentmanner not conformal to each other. Haffoudhi and Bellakhal (2016) find that the efforts ofglobalization in poor countries suffering from famines, chronic under-nutrition, poor state of humandevelopment, low efficiency and poor state of resource allocation would not promote democracy.There are a number of studies that point out undesirable effects of globalization on thepolitical sphere of less developed countries. Schwartzman (1998) observes that globalization anddemocracy reinforce each other to facilitate the fulfilment of the interest of the dominant worldeconomic system. Sobhan (2003) observes that the countries with weak democratic institutions andundiversified or externally dependent economies are often exploited.

Turyahikayo (2014) observesthat globalization has been used as a tool by the established democracies/economies forexploitation of cheap labour and dumping the industrial waste in poor countries. Steiner (2015)observes that globalization may have a negative effect on public participation in the political domain.Stein (2016) opines that a sovereign state system, democratic governments, and an integrated globalmarketplace cannot coexist. It is most likely therefore that globalization will affect the sovereignty ofless developed countries adversely.

2.2. Relationship between Globalization and Non-Material CapitalScholars are divided on the relationship of globalization with human development.Sirageldin (2002) recognises the complex character of human development which is an outcome ofthe historical process of symbolic cultural evolution. Globalization with fits and starts that moveswith the oscillatory forces of the international economy cannot uphold human development.Globalization has affected the education sector to turn against the poor.

The Human DevelopmentReport 1999 tooke note of the adverse consequences of unregulated globalization on humandevelopment and recommended stronger global governance (Naqvi, 2002). Rabbanee et al. (2010)observe that while globalisation has often gone along with privatization and reduction ofgovernment help to the poor, it affects human development adversely. Diametrically opposite tothis, Sapkota (2011) studies a large number of countries and finds that all components ofglobalization (economic, social and political) have positive and statistically significant effect onhuman development.3Huynen et al. (2005) analyse various pathways in which globalization may affect publichealth (an important ingredient of human development) and highlights the need to regulate theimpacts of globalization so that they do not go against public health. Globalization idealizes andromanticizes “the private”, while the bureau-professional regime of public welfare provision isconsistently and unthinkingly demonised (Ball, 2005).

Yang (2006) points out that the privatization“movement has profound implications, from primary schools to universities. Its impact is particularlydamaging to education in countries with a substantial population of poor people. ..

. Tragic storiesoften make headlines in the press regarding the despair of working parents that they can neverafford to pay their child’s education fees.” In China, India and many other less developed countrieswhere a rapid transition is undergoing from free education to a fee-based system, it takes a heavytoll on poor families, of whom many see education as their only way out of poverty.

As Lake andBaum (2001) point out, democracy is often instrumental in looking into the interest of the weakersection through public provisioning. Globalization may affect government aided public provisioningand affect social welfare, especially of the deprived class, adversely.There are many research studies that observe the impact of globalization on humandevelopment conditional or partial. Sabi (2007) finds that impact of globalization on humandevelopment is not appreciable in developing countries at low or low-middle income groups.Globalization may be important for human development only after certain level of income growth.Figueroa (2014) finds that in Central and South American countries overall globalization as well associal and political components of it has positive effect, but economic globalization has a negativeeffect on human development. Asongu (2012) studies African countries and finds that while tradeglobalization improves human development, financial globalization has the opposite effect. Lee andVivarelli (2006) hold that levels of economic and human development are crucially important todetermine the direction and the scope to globalization forces.

Bottlenecks in the supply of educatedand skilled labour and in public and private investments may condemn a country to marginalisation,exploitation and high levels of domestic unemployment and income inequality.Along with the human capital, the social capital is crucially important for development.Social capital (Durkheim, 1997) is made up of “goodwill, fellowship, mutual sympathy and socialintercourse among a group of individuals and families who make up a social unit … potentialitysufficient to the substantial improvement of living conditions in the whole community.” (Hanifan,1916; pp. 130-131). Social capital not only generates internal economies, it also attracts materialcapital from abroad and helps in globalization. In this study we use ‘corruption’ as a prototype torepresent social capital.

It is well acknowledged that corruption and malpractices erode away socialcapital and discourage inflow of foreign capital while a strong legal framework to check corruptionenhances the inflow of foreign capital (Bayer and Alakbarov, 2016).Knutsen (2008b) and Hegre and Fjelde (2008) found that democratic governments performbetter on control of corruption. This control may support globalization. Lalountas et al. (2011)observe that globalization is a powerful weapon against corruption only for middle and high incomecountries, while for low income countries globalization has no significant impact on corruption. Dasand DiRienzo (2009) find a nonlinear relationship between globalization and corruption. The effectof globalization on corruption is dependent on the level of globalization. The highest corruptionlevels are realized at moderate or transitioning levels of globalization.

Globalization has brought government officials and international businesses and tradeagents into a close relationship and consequentially increased the opportunities for rent-seeking.4Eisner (1995), Gould (1991) and Jreisat (1997) argue, therefore, that globalization has increased theopportunity of the use of official position for personal gain. Globalization has also made thedetection of corrupt practices more difficult (Leiken, 1997; Elliott, 1997).

Ewoh et al. (2013) find thatwhile globalization of assets and capital markets has promoted corruption worldwide, it affectsdeveloping nations negatively more than it impacts advanced countries. Ades and Di Tella (1997;1999), Brunetti and Weder (1998), Treisman (2000) and Herzfeld and Weiss (2003) find thatglobalization leads to reduction in corruption mainly due to openness. Badinger and Nin (2014) findthat globalisation (trade and financial openness) has a negative effect on corruption, which is morepronounced in developing countries, while inequalities increase corruption. Golden (2002) foundthat in Italy globalization led to decrease in corruption levels.2.3. Relationship between Globalization and Social ProgressGlobalization necessarily favours a market-based economy because it means economicintegration of economies through markets.

Economic liberalism is its guiding spirit and it is assumedthat unrestricted self-interest would bring about the best material results. However, as Keynes(1926) observed long back, it is not a correct deduction from the Principles of Economics thatenlightened self-interest always operates in the public interest. Nor is it true that self-interestgenerally is enlightened.

Unrestricted self-interest can be operational only if the society hasdeveloped and internalized a strong sense of social obligation because morality of the minimumorder is necessary for the functioning of the market system. Further, it requires a mixed-economyframework because market capitalism has never been the basis of political economy in any country,at any time (Hirsch, 1977: p. 190; Naqvi, 2002). Singer (1950) argues that structural differencesbetween developed and developing economies interacting with each other on market principles mayintroduce a systemic bias in which trans-border trade and investment hinder the growth-promotingprocess of structural transformation in the developing economy. Streeten (1998) shows howglobalization has posed a threat to developing countries by arousing several kinds of social tensionsleading to impoverishment, inequalities, work insecurity, a weakening of institutions and socialsupportsystems and an erosion of established identities and values (Naqvi, 2002).

As Stiglitz et al.(2009) have pointed out globalization (in the way it has proceeded) has contributed to theweakening of a sense of community. Moreover, globalization is a market-based concept. Thecorrespondence between market-based concepts and non-market based concepts is not yet wellestablished, but it is important to understand more fully the links between various measures ofmarket and non-market activities and of leisure and the quality-of-life metrics such as the socialprogress index.

Empirically, it has been found that the social progress index responds positively toglobalization index (Mishra, 2017).From the literature cited above, it is understandable that there is no direct relationshipamong globalization, political regimes, corruption, human development and social progress; they arerelated with each other through a complex network of institutions, historical precedents, resourceendowments, socio-economic class structure and a host of other country-specific attributes.However, when such relationships are investigated for a large number of countries together, thecountry-specific attributes may be cancelled out to a large extents and some clear pattern might bediscernible. The present investigation begins with such an optimistic presupposition.53. A Simultaneous Equation Model of Globalization, Non-material Capital, Regime Type and SocialProgressIn the light of the literature cited above as well as the reasoning that guides an empiricalresearch in economics, the present study hypothesizes a bi-directional causal relationship betweenthe two sets of variables; the first set incorporating the measures of (economic, social and political)globalization and the second set consisting of the measures of democracy (political regime type) andthe measures of non-material capital (human development as a measure of human capital andcorruption perception as a measure of social capital). Additionally, the measures of globalizationand the measures of non-material capital are directly or indirectly influenced by the economicprosperity of a country (summarily measured by per capita income).

Finally, it is visualized that socialprogress (which is a more comprehensive or wider concept encompassing economic developmentand welfare and is summarily measures by the social progress index) is influenced by globalization(especially the trans-border flow of goods, services and information), non-material capital, politicalregime type as well as economic development (represented by per capita income). Alternatively,economic development (as measured by per capita income) could be substituted for social progressbut in our considered opinion the latter is the output of the former (if moving on the right track)and, therefore, it is a preferred choice. The model does not include other variables (such as physicaland financial capital) explicitly since it assumes that per capita income and the level of humandevelopment incorporate them indirectly. Similarly, institutions are indirectly represented bypolitical regime and corruption perception index.The model is schematically presented below. It is a system of eleven structural equations ofwhich the first ten make three stimulator and/or moderator blocks while the last one (the eleventhequation) makes the fourth or final impact or response block. The first three blocks formulate howthe different aspects of globalization are self-concordant and how they are influenced by nonmaterialcapital (human and social capital), political organization and economic performance (percapita income) of a nation. Per capita income is a stimulant to globalization.

Globalization and themeasures in the third block (non-material capital and political regime) are mediator or moderators.They conceptualize how different aspects of globalization influence as well as are influenced by nonmaterialcapital and political organization. The fourth block formulates how globalization, nonmaterial(human and social) capital, political regime and economic development influence theoverall social welfare or social progress of a nation.