Growth Determinants for Colombia: National and Regional Panel Data Evidence, 1964-2002

ABSTRACT The purpose of this paper is to empirically test the growth factors for the Latin American country of Colombia over the last half century. Fixed effects panel data estimation for all thirty-three Colombian states indicate a significantly positive relationship between labor growth and international trade on income growth. However, crimes against private property rights and significantly reduce income growth over the time-series, indicating that protection of property rights are an important determinant of economic growth and prosperity as discussed by North and Thomas (1973) and De Soto (1990, 2000). The results also show that institutional instability reduces economic growth. INTRODUCTION Nobel Laurete Douglas North and Robert Thomas (1973) were one of the initial researchers to argue that institutions are prerequisites for economic growth. Institutions are considered social norms, educational and political systems, religion(s) of a country, and openness to trade and outside ideas among other things. De Soto (1990, 2000) argues that property rights are a particularly important economic institution because of their role as an engine of economic growth. Property rights include: ownership of resources, including titles and deeds, intellectual property rights, including patents, copyrights, and trademarks and independent and impartial legal systems. Proper institutions and secure property rights give individuals incentives to innovate and produce something of value rather than trying to enrich themselves by some other inefficient method (i.e. rent-seeking activity, theft, arbitrary confiscation and/or taxation). Continuous economic growth through innovation and human formation is conditional on the existence of enforceable property rights. De Soto (1990, 2000) observes great disparity in formal private property protection between developed and developing countries, and believes this to be the main determinant of divergence over the last 100 years. That is, property rights are secure in successful countries and unsecure and/or unclear in developing countries. The De Soto hypothesis suggests that economic growth is significantly related to the security of property rights in a country. For example, he argues that in developing countries most property is unproductive and dead because ownership rights are not adequately recorded or trusted. He states, Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, can not be traded outside of narrow circles where people know and trust each other, can not be used as collateral for a loan, and cannot be used as a share against investment (De Soto, 2000, p. 6). But developed countries have been able through agreed upon legal frameworks to secure private property so that it can be productive and provide a source of funding to entrepreneurs and other business activities. He argues, In the West, by contrast, every parcel of land, every building, every piece of equipment, or store of inventories is represented in a property document that is the visible sign of a vast hidden process that connects all these assets to the rest of the economy. Thanks to this representational process, assets can lead an invisible, parallel life alongside their material existence. They can be used as collateral for credit. The single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur's house ... By this process the West injects life into assets and makes them generate capital (De Soto, 2000, p. 6). Essentially, what De Soto is saying is that property is more productive in developed countries because it serves as collateral to capital, investment, and other business activities. This secure and dual serving property is the primary reason why some countries have grown quickly, and the lack of secure property is one primary reason why some countries have lagged behind. …