In nternational Journal J of Soocial Science Research ISSN 2327-5510 2 2014, Vol. 2, No. 1

Politiical Insstabilityy and Growth: G : Case oof the Develop D ping Co ountriees Said S JAOUA ADI (Correesponding author) Membber of URM MOFIB: Ressearch Unit in monetary y, finance annd Banking g College of Businesss and Adminnistration & Departmen nt of Financce and Bank king Jazan U University, Saudi S Arabiia Tel: 21-652-249-163

E-mail: said.econom mie@gmail .com

L Lamia ARF FAOUI Memberr of URMOF FIB: Researrch Unit in monetary, finance f and Banking El Manaar University y, Tunisia

A Azza ZIED DI Memberr of URMOF FIB: Researrch Unit in monetary, finance f and Banking El Manaar University y, Tunisia

Receiveed: July 9, 2013 2

Acccepted: Sepptember 30, 2013

doi:10.55296/ijssr.vv2i1.3973

Pu ublished: Noovember 10 0, 2013

URL: http://dx.do oi.org/10.52 296/ijssr.v2ii1.3973

Abstract The paaper attempted to exam mine the c ausal relatiionship between politiical instabiility and growth.. Currently, the world continues tto record hu uge numberr of popularr revolution ns in the region MENA, too improve the social environment and to consolidatee implemen nting an effectivve governannce. Althoug gh, the uprissing has harrmed the fin nancial and economic situation s in thesee countries, and becamee a threat foor the stabiliity of the co ountries, in ooverall. The maanuscript accounts a fo or the imppact of pollitical instaability on tthe growth h of the developping countriies, in the shadow of the widesp pread of thee revolutionns since 20 011. The paper aattempted too illuminatee the realityy of the rellationship between b poolitical envirronment 19

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and groowth throughh the estimaation of pannel, comprissing 69 deveeloping couuntries 1985 5-2012. In the ccurrent papeer, the autho ors conductted an empiirical investtigation, in which we bore b out the claiims raised in i many su urveys and tthe conclussions drawn n by several al authors ab bout the harmfull impact of political in nstability onn the fundam mental bases of the ecoonomy, in countries c recordinng political instability. Keywords: politiccal instabilitty, war, goodd governancce, growth 1. Introoduction Recentlly, we couldd consider political p insstability, waars and insttitutions weeakness as common c and funndamental feature f of developing d countries, these latter remain uunable to fo ormulate approprriate policiees that enco ourage long--term growtth, under su uch conditioons. This sttatement could pprovide expllanation forr the under developmeent of the Sub-Saharann African co ountries, which hhave recordded several political vioolence or ciivil wars. In n fact, moree than half of these countriees had regisstered politiical conflictts in 2000 against a 11% % in 1999. T The tendenccy of the rise of tthe politicaal instability y could be ccarried out by the ineq quality of reevenue distrribution, the econnomic decline, the falll of the statte, the legaccy of Europ pean coloniialism and the t Cold War… The currrent article attempts to o examine thhe nature of the causall relationshiip between political instability and economic grow wth in develloping coun ntries. Thuss, we begin by putting forward w that highllight that coonnection. Then, T we will reveal thhe findings from f the the literrature review empiriccal study connducted on the period sstretching from f 1985 to o 2008. 2. Literrature Reviiew The liteerature abouut the political stabilitty and grow wth is abund dant, severaal empiricaal papers relied on explorring the relationship r p between political environmennt and ecconomic developpment. Thee bulk of the empirrical investtigations reevealed thaat strong political institutiions tend to t raise th he growth. Generally, countries in sub-Sahharan Africca have experiennced high levels of political innstability since s the 1950s that could explain the reductioon of their economic e peerformance . 2.1 Poliitical Instabbility and Growth G According to manyy definition ns, the politiical instabillity is consiidered as a “complex concept” c and “coovers two distinct d reallities: changges in polittical power through viiolence and d regular changess in the duee process off law”. Fos u (1992) deemonstrated d, through ccross-sectio onal data on thirtty-one Afriican countrries, the neegative corrrelation between politiical instabiility and econom mic growth as a the directt result of deeteriorating g the efficien ncy of capittal accumulation. It’s obvvious to idenntify the neg gative effeccts of politiccal instabilitty on econoomic growth h, which 1 remain in accordannce with thee statementss raised by several s auth hors. Mead ((1990) con nsidered the poliitical uprisiing as an in ncreasing faactor of pov verty. For Alesina A et aal. (1992), political instability is also regarded as a a decreaasing elemeent of the rate r of ecoonomic grow wth and 1

Mead, L L. (1996), “Poverty and political theory”, Am merican Politicall science association.

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accordinng to Devvreux and Wen (19966) and Gu upta (1986)), it is a ccommon cause c of deteriorration of thee investmen nt. The expplaining off the inversee connectioon between growth and d political iinstability relies r on the folllowing mecchanism. An n increase oof the likelihood of up prisings andd violence tends to rise thee uncertaintyy and in retturn, it thre ats the fund damental baases for anyy economic activity …). In similar politicaal environm ment, the (propertty right, ruule of law, corruptionn, security… investm ment is affected negatively and hhence the grrowth. According to A Alesina and d Perotti (1996) and Barro (1996), th he democraccy plays a pivotal rolle in achievving the ecconomic growth,, for the authors, a bu uilding stroong democcracy shoulld avoid ppolitical insstability, corruptiion and unncertainty in n the econoomy, and in n return, it leads to reealize a susstainable econom mic developm ment. Alesinaa and Perottti (1994) haave demonsstrated the negative efffect of pollitical instab bility on econom mic growth. Their resultts bore out tthe finding about the harmful imppact of instab bility on econom mic growth. The autho ors highlighhted and cllassified the harmful effects of political instability into direectly and indirectly. Thhe direct efffect comes out o through the impact on total factor pproductivityy and the in ndirect effecct appears through t the accumulatiion of physsical and human capital. Similarly, Laline (2010) ( has shown thatt during a fiscal f year in i Haiti, thee economicc growth rate waas 0.0013%, the decrease noted waas essentially due to th he political iinstability occurred o monstrated the t crucial role r of propperty rights and the in the ccountry. Muurphy et al. (1993) dem rule of llaw in imprroving the economic e grrowth. In ad ddition, they y revealed a poverty traap in the absencee of propertyy rights and d laws. Hall and Jones (19999) have sh hown the piivotal role of o institution ns and goveernment pollicies on mic growth. Several em mpirical pappers bore ou ut the statem ments raisedd by many authors, econom such as: Hall and Jones J (1999 9), Knack annd Kefer (1995), Acem moglu et al. (2001), Accemoglu, Johnsonn and Robinnson (2001, 2002), Doollar and Kraay K (2003), Easterly and Levinee (2003) and Gleeaser et al. (2004). ( Collier (2006) carrried out thaat the low degree of political p ressponsibilityy of the autthorities, he failure of governmeent is often n due to vis-à-viis their citizens, is haarmful for ggrowth. Th misplacced prioritiees, overspeending, missmanagemen nt of invesstments, proojects and policies adoptedd, affecting public prop perty, a meddiocre qualitty of servicees, and corru ruption. 2.2 Poliitical instabbility, Goverrnance and Growth We couuld define “good “ goveernance” as “the exerccise of auth hority, econo nomic, polittical and adminisstrative to manage m thee affairs of a country at all levells”. It compprises mech hanisms, processses and insttitutions thrrough whicch citizens and groupss articulate their intereests and differennces, exerciise their rights and fulffill their ob bligations. Governance G e includes th he state, 2 but trannscends it by including g the privatee sector and d civil socieety organizaations” . It is i in this sense thhat the repport of the World Bannk in Africaa in 1989 stressed s thaat the development 2

Unitedd Nations (22006), “Defin nition of bassic concepts and termino ologies in goovernance an nd public administrration”, Econoomic and social council. 21

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problem ms in Africaa are due to a crisis of ggovernance. Kaufmaann, Kraay and Lobatton (1999) have identtified six go overnance iindicators that t are: “voice and accountability”, “governm ment effecttiveness”, “regulatoryy burden”, “law”, “corrupption” and “political instability i aand violencce”. These indicators include so ome sub indicatoors that meaasure the faall of goverrnment thro ough non-in nstitutional and/or viollence. In sum, alll these globbal indicato ors of goverrnance dem monstrated the t strong ccorrelation between b good goovernance and a econom mic perform mance, such as higher literacy, l low wer infant mortality m and incrreasing per capita income. Severall studies have dem monstrated the cruciial politicaal stabilityy in maintaining macroeconomic staability. Akaagul (2005) found that political staability is a nnecessary condition for maccroeconomiic stability, to realize a long-term m growth. Similarly, Knack and d Keefer (1997) have show wn the impo ortance of cconfidence in governm ment to incrrease the ecconomic growth.. We shoould note thhat the bulk k of Africaan countriess continue to record ppermanent political instability, le last is i the direct result of tthe adversee socioecono omic impacct on the co ontinent. Thus, E Egolote (20002) illustratted the harm mful effects of politicall instabilityy on many countries c of Africca. The autthor stressed that instaability produ uces exclussion, racial discriminattion and violence and has leed to the inccrease of thee number off refugees, which w has cconsiderablee impact on hum man developpment of thee countries.. It appearss that politiccal instabiliity is an im mmediate consequuence of arrmed confliicts, which plague in most Africcan countriies and a brake b on econom mic growth: “In West Africa A a seriees of violent internal co onflict sets sstability thrroughout the regiion since 19989. These conflicts arre not only human h disaasters and soources of ecconomic and pollitical instabbility. They thwart a sttrong and su ustained gro owth in the sub region n and the delay inn the countrries where th hey are ram mpant, comp pared with th hose who arre relatively y stable”. In this regard, the former Secretary Genneral of thee United Naations, Annnan (2001), reports: “many African coountries are heading toowards a po otential con nflict while others are already involveed in a confl flict” and hee adds that: “These con nflicts bring g only devaastation. Theey cause untold ssuffering annd cause co onsiderable loss of lifee in most so ocieties to ffragment an nd cause the colllapse of ecoonomies”. Similarly, T. N'Guessan n (2005) notes that: "Thhe impact off war on the divvestment, thhe destruction of physsical infrasttructure and the deterrioration off human capital through dissability, deaath and dispplacement, is difficult to quantify fy." It appeaars from these sstudies thatt political instability reduces in nvestment and a negativvely affect growth throughh harming thhe institutio ons. 3. Emp pirical Anallysis In this paper, we attempted to carry ouut an econo ometric mo odel to illusstrate the effect e of politicaal instabilityy on growth of countriees. 3.1 Metthodology The em mpirical investigation focuses f on panel estim mation to acccount for the significcance of some ppolitical varriables on growth. g Thee panel is made m up off 69 countrries. Then, we will proceedd to segmeent the pan nel into twoo componeents: and ree-estimate the model for the 22

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developping countriies solely. We W could puut forward th he estimated d model likee following g: λ Where: Groowth is the growth of th he country. Xit: group of explanatory y variables covering th he economiic field: poppulation ratt, public transferrs, consumpption as sh hare of GD DP, privatee investment, secondaary education and expensees on educaation. Yit: group of explanatory y variables covering th he political stability an and the institutional quality:: political rights, r civil liberties annd revolutio on number to find outt the impacct of the politicaal instabilityy. µ eet λ : represeent respectiv vely specifiic effects by y country an nd time. i, t : represent respectively y the countrry and the period. p ε : is the error term. ucted in thhe current paper p is The daata used in the empirical investiigation thatt we condu coverinng the periodd 1985-2012 2. The authhors retrieveed the data from f the Woorld Bank database: d World D Developmeent Indicators 2012. Thhe empiricaal investigaation carriedd out in the article relies prrimarily on determinin ng the impacct of some economic e an nd political factors on growth. g According to the econometric e c literature, we should d apply som me empiricall tests to deetermine First, we ap pplied the poolability p ttest to assess if the the apppropriate finnal form to estimate. F model iis pooled orr should be estimated e bby considering the preseence of fixeed effects. And A then, we appplied the Hausman H tesst to assesss if the mo odel is prop perly estim mated with fixed or random m effects (Annnex). In the ccurrent emppirical inveestigation, w we finished d by finding g that the aappropriate form to estimatee is the fixeed effects model, m accoording to th he obtained tests, whichh means th hat every countryy has speciffic factors th hat affect itts growth th han others in i the samee group, beccause of the paneel heterogenneity, containing: deve loping and developed countries. c 3.2 Thee Results The ressults foundd from estim mating the model for the panel for the peeriod 1985-2012 as followinng:

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Table 1. The effectt of politicall and econoomic factorss on growth Variables Poopulation ratee Puublic transferss conssumption share consum mption share(-1) consum mption share(-2) Privvate investmen nt Revoolution numb ber C Civil liberties Seconndary educatiion Poolitical rights Educcation expensses C growth(-1) R2

All counttries

Developing countries

Cooefficient

t-stat

Coefficient C

t-stat

0.017 0.66 -0.31 0.42 -0.12 0.06 -2.21 -0.78 0.01 0.04 -0.18 -1.33 0.28

0.15 2.34 -10.6 15 -4.68 2.44 -2.77 -3.71 0.13 0.28 -1.36 -0.43 11.32

0.58 0.84 -0.07 --0.066 -2.45 -0.93 0.002 0.19 -0.10 0.89 0.16

5.33 2.36 -3.06 --2.38 -2.78 -4 0.02 1.09 -0.65 0.22 5.80

0.32

0.199

3.3 Inteerpretation Despitee of segmennting the paanel into tw wo sampless, to carry out if theree is some common c effects related to the development deegree of th he countries, includedd in the em mpirical investiggation, and to find out o the imppact of pollitical variaables for a group containing developping countrries solely, we found similar reesults to th he outcomee obtained through estimatiing the heteerogeneous panel. Thee similarity authorizes us to infer the significcance of the num mber of deeveloping countries inn the samplle estimated. In fact, the whole sample contains 60 develooping countrries and 9 ddeveloped co ountries. The em mpirical research demo onstrates thhat an increease in the public connsumption tends t to reduce the growthh, it enabless us to poinnt up the major m ineffecctiveness off the goverrnmental expensees that seem ms not targetting producttive field. In fact, to illustratte the harmful impact of public consumption c n, we couldd refer to ecconomic literaturre, which consider the public connsumption could c affectt positively the growth h in long run soleely, for exaample: the expenses oon health an nd educatio on. What beear out thee current reasoninng, the inccluding of lagged term ms of publlic consumption in thhe model, revealed r positivee coefficiennts for laggeed public coonsummatio on. The imp pact of publlic consump ption on 3 the periiod t-1 is staatistically siignificant att 1%. Accorrding to Novales et al. (2012) : “u under the Markovv policy, pubblic consum mption increeases to about 10% of output.” o For the public trannsfers, it app pears that ann increase in i the transffers is assocciated with a rise in the grow wth of the countries, c itt enabled uus to infer th hat governm mental transsfers are efffectively 3

Novalees, A., Pérez, R. and Ruiz, J. (2012), « O Optimal time--consistent fiscal policy in an endogenou us growth economyy with public consumption c and a capital ». 24

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targetinng the wealtth of populaation. Thereefore, referrring to the paper p of Roochoux (199 97)4, the author cconcluded similar s findiings: “goodd macroecon nomic resultts due to siggnificance of o public transferrs from Euroopean union n”. The possitive coeffi ficient of priivate investtment point out similarr deduction to the effecct of the public ttransfers. Inn fact, acco ording to thhe economic literature, the privatte investment plays pivotal role in econnomy, it con ntributes in the job creaation and in n the producction of the country, in overaall. The privvate investm ment remainns a significcant factor th hat allows aan effective catalyst 5 for grow wth. Referrred to Ghu ura (1997) : “private in nvestment plays p a cruucial role in n output expansiion”. Observiing the signn of the vaariable « revvolution nu umber », it shows the harmful im mpact of politicaal instabilityy on growtth. We couuld illustratte the negaative impacct of revolu ution on growth by the envvironment of risk createed after eveery revolutiion. Under tthe environ nment of r political p insstability, to find an uncertainty, investtors prefer to leave thhe country recording g security annd guaranteeeing less exposure e to risk. Acco ording to approprriate climate providing 6 the mulltilateral invvestment gu uarantee aggency (2009 9) : “these perceptionss are influeenced by broad ggeopolitical and econom mic trends”.. For the variable « civil c libertiees », it tendss to reduce the growth of the counntries of the sample. The obttained resullt enabled us u to infer th that develop ping countriies are not iimproving the civil libertiess in their territories, t they recordd decrease in econom mic growth.. In fact, the t civil libertiess reflect thee social and d the instituutional qualiity of the co ountry, so aany deteriorration in these libberties is inndicating an n increase inn the risk ex xposure for business annd private property, p and in rreturn, it harrms the cap pital accumuulation and then t the gro owth. For thee educationn, it tends to improvee the grow wth of coun ntries but iits impact remains statisticcally non-ssignificant. In the buulk of deeveloping countries, c eeducation remains inapproopriate withh the demaand of the employmeent market and the reequirement of new econom mies, recruitting highly y qualified labor in teechnology. In several empirical surveys, educatioon is reflectting human n capital quaality, it seem ms that the capital hum man quality remains insufficcient in deveeloping cou untries to stim mulate grow wth. For thee political rights, it teends to im mprove the growth of countries but this im mpact is statisticcally non-siignificant. This T impactt reflects th hat the bulk k of countrries studied d in this empiriccal investigation are not n adoptingg political system enccouraging tthe contribu ution of populattion in the political p env vironment. So, the outccome refleccted the badd governancce of the developping countriies, and finished necesssarily by haarming grow wth. Concernning the edducation exp penses, it apppears that it tends to harm h the grrowth, but its i effect is not statistically significant. We could iillustrate th he result by the huge am amount of reesources n, appropriaate with the future requirement of tthe econom my. Thus, to buildd an effectivve education 4

Rochouux Jean-Yves (1997), « Transferts finannciers publicss et développement régionnal le cas d’u une région d’outre-m mer : la réunioon », Revue réégion & Dévelloppement n°5 5. 5 Ghura D D. (1997), “Prrivate investm ment and endoogenous growtth: evidence frrom Cameroon on”, IMF work king paper WP/97/165. 6 Multiatteral investmeent guarantee agency a (2009)), « World inv vestment and political p risk »», World Bank k group. 25

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we couuld explain the harmfu ful impact oof the educcation expeenses by thhe weak sy ystem of educatioon in the bulk b of dev veloping couuntries. In fact, the ed ducation shhould be th he prime factor too create quaalified labor, and in retturn it contrributes to im mprove the competitiv veness of the econnomy. How wever, consiidering the obsolete manners and the weak ssystem of ed ducation in deveeloping couuntries, defiinitely, it shhould harm m the capitaal accumullation and then t the growth.. Accordingg to Goodnig ght (2006): “education n and trainin ng have emeerged as key y drivers of comppetitivenesss ensuring th hat the labo r force has access to neew technoloogy…”. For thee variable representing g the lagg ed growth,, it has po ositive impaact and sig gnificant statisticcally. It seem ms evident in economiic literaturee that record ded richnesss affect direectly the future w wealth of anny country. In additionn, many au uthors adoptt the autoreegressive models m to carry ouut growth. 4. Concclusion The currrent manusscript shed the t light onn the pivotaal role of po olitical stabiility on grow wth. We could sum up the main objecct of the paaper in attem mpting to reveal r the nnature of the causal g Prim marily, receently, the word w has relationnship betweeen the poliitical instabbility and growth. recordeed a widesppread of political revo lutions occurring in Arabic A counntries, and it i seems crucial to carry outt their impact on the grrowth of thee developing g countries. The papper attempteed to provid de explanattion for the harmful im mpact of pollitical instab bility on growth.. The authhors carrieed out an empirical investigation that rrelied on rigorous r methoddology, baseed on estim mating a pannel containing develop ped and devveloping co ountries. The issuue debated in the curreent paper reemains interresting and in accordannce with thee current politicaal events in the t Arabic countries. c The em mpirical inveestigation off the articlee enabled uss to reveal the significaance of the political stabilityy as determ minant and prime p factorr to stimulaate the grow wth in deveeloping coun ntries. It illustrattes the harm mful impactt of the unccertain environment an nd security on growth h, thus it bear ouut the claimss raised in su urveys attem mpting to ex xplore the topic of poliitical instability. Althouggh, no one can deny or o bear out if the future effects of o revolution ons will imp prove or harm thhe growth, but, the main m contribbution of th he paper rellies on connsidering th he prime significcance of goovernance highly h invoolved with growth in developingg countries, it was summarrized in thee sign of thee variables: political riights and th he civil libeerties. Howeever, the paper ccould underlline solely the harmfull impact off revolutionss on the groowth of dev veloping countriees. Referen nces Abessolo, Y. (2003). Instabillité politiquue et perforrmances éco onomiques: une évalua ation du Tchad. Univversité de Yaoundé Y II, C Cameroun. cas du T Acemogglu, D., Johhnson S., & Robinson,, J. A. (2001). The Colonial Origiins of Com mparative Developpment: an Empirical Investigatioon. The Am merican Economic Reeview, 91(5)), 13691401. hhttp://dx.doi.org/10.125 57/aer.91.5.11369

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Aisen, A A., & Jose,, V. F. (2011). How dooes politicall instabilityy affect econnomic grow wth. IMF workingg paper. Alesinaa, A., & Perootti, R. (199 94). The Po litical Econ nomics of Growth: G A Seelective Surrvey and some New Results. World Bank Economic review,, 8, 351-71. http://dxx.doi.org/100.1093/wber/8.3.351 Alesinaa, A., Ozlerr, S., Roubin ni, N., & S Swagel, P. (1996). ( Poliitical instabbility and ecconomic growth.. NBER worrking paperr, 4173. Aron J.. (2000). Growth and Institutionss: A Review w of the Ev vidence. Woorld Bank Research R Observeer, 15(1), 999-135. http://dx.doi.orgg/10.1093/w wbro/15.1.99 9 Barro, R. J. (19966). Institutio ons and Grrowth, an Introductory y Essay. Jouurnal of Ecconomic Growthh, 1(2), 145--48. http://dx.doi.org/100.1007/BF0 00138860 Brunettti, A. (1997)). Political variables v inn cross-coun ntry growth analysis. Joournal of Ecconomic Surveyss, 11(2), 1633-190. http:///dx.doi.orgg/10.1111/14 467-6419.00 0029 Dixit, A A. K., & Piindick, R. S. S (1994). IInvestment under Unccertainty. Prrinceton Un niversity Press. Dollar, D., & Krraay, A. (2 2003). Instiitutions, traade, and growth. g Jouurnal of Monetary M Econom mics, 50(1), 133-162. htttp://dx.doi..org/10.1016/S0304-39 932(02)002006-4 Easterlyy, W., & Ross, R L. (2003) Tropiics, germs, and crops: how endoowments in nfluence econom mic devellopment. Journal of Mo onetary Economics, E 50(1), 3-39. http://dxx.doi.org/100.1016/S030 04-3932(022)00200-3 Fosu, A A. K. (1992). Political Instability and Econom mic Growth h: Evidencee from Sub--Saharan Africa. mic Devvelopment and Cultural C Change, 40, 829-841. 8 Econom http://dxx.doi.org/100.1086/4519 979 Hall, R R. E., & Jones, C. I. (19 999). Why Do Some Countries C Prroduce So M Much Moree Output Per W Worker Thaan Others? The Quaarterly Jou urnal of Economics,, 114(1), 83-116. http://dxx.doi.org/100.1162/0033 3553995559954 Jaouadii, S., & Kheemiri, S. (20 013). Finanncial instabillity in Tunisia. Global advanced research r journall of managem ment and bu usiness studdies, 2, 044--049.. Mead, L L. (1996). Poverty P and d political thheory. Amerrican Politiccal science aassociation..

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Append dix We couuld sum up the t several tests t appliedd on the estiimated paneel, as follow wing: Poolability teest

H1 : Panell non Pooled

H0 : Pooled Panel

Hausm man test

H1: P Panel with fixeed effects

H0: Paneel with random eeffect

Fig gure 1. Emppirical tests in panel mo odel

Copyriight Disclaiimer Copyrigght reservedd by the auth hor(s). This arrticle is ann open-acceess article ddistributed under the terms andd conditionss of the Creative Commonss Attribution n license (hhttp://creativ vecommonss.org/licensees/by/3.0/).

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