A Structural M odel of Social and Econom ic Developm ent

In this paper we estimate a model of the determinants of economic and social development that takes seriously three of the criticisms of panel data models in the existing growth literature: that long run coefficients are biased because the lagged dependent variable is not strictly exogenous; that they are biased because of slope coefficient heterogeneity; and that they are biased because of explanatory variable endogeneity. The model indicates that there are strong causal relationships in both directions between on the one hand, economic development, and on the other, social and political development. JEL categories: O1, O4 11. Econom ic Growth and Social Developm ent The interaction between social and economic development is of interest both to economists and to social scientists in other disciplines. However, there has not as yet been that much cross-fertilisation between the two groups. This paper models economic and social development in a way that draws on insights from several areas of development studies. Recent contributions by economists to the interaction of social and economic development have been dominated by the estimates of cross-country growth models surveyed by Levine and Zervos (1993) and Temple (1999). These models employ international panel data to estimate regression equations of the form: ∆yi t = a0- a1⋅yi t-1 + a2⋅xi t + ui t (1) whereyi t is per capita income in country i in period t, xi t is a set of social and economic variables, andui t a residual. These "growth " models are really dynamic models of the level of income, since they can be re-parameterized as: yi t = a0 + [1- a1]⋅yi t-1 + a2⋅xi t + ui t (1a) The components of xi t vary widely across different studies. Physical capital usually enters in some form, as the neoclassical core to a production function that also includes variables intended to capture the determinants of factor efficiency. These determinants can include measures of or proxies for "social capital", such as ethnic homogeneity, measures of civic spirit and education (Knack and Keefer, 1997; Johnson and Temple, 1998). They can also include measures o