Investigating The Factors Of Growth Within The

Commonwealth Of Nations: An Empirical Analysis

TAYLOR, Walter Terence David

Lancaster University Management School

Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

Introduction
During recent times there has been debate on whether the United Kingdom should alter their focus from
the European Union and start trade with Commonwealth countries. Some within this country have been
sceptical of the benefits of EU membership and for whatever reason feel the economic benefits are
outweighed by the loss of sovereignty. Some have called for a return to commonwealth preference trade
(Lea, 2012) or even a commonwealth union but until now this has been pure fantasy as the
commonwealth was nowhere near the EU in terms of GDP. Slowly but surely we are seeing the
commonwealth catch up to the EU, especially during the financial crisis in Europe, but there must be
other factors for this growth. In this piece we will investigate the factors that affect growth within the
commonwealth, measuring how its GDP growth is consistently high and the variables that meant the
Commonwealth percentage of world Gross Domestic Product (GDP) exceeded that of European Union
for the first time last year (Northcott, 2012).

The graphs above (Waterson, 2012) show GDP growth from 1970 to the present day with the
commonwealth growing on average at 5% a year compared to 2.5% for the European Union.

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

Literature review
To investigate the growth of the commonwealth, we must investigate other empirical studies of growth in
order to help form our hypothesis. The topic of growth within the commonwealth, whilst being a
common debate within Britain, doesnt have many empirical studies so we will have to look at a broader
range of material to determine factors of growth. As this is a cross sectional analysis of 54 different
countries, we must not get the subject confused with time series analysis, we are looking for factors of
growth within the given years of 1990 and 2010 as two separate analyses.
One empirical study which is related is Economic Growth In A Cross Section Of Countries by Barrow
(1991) where the GDP per capita growth was inversely linked to the government consumption of GDP
in percentage terms. He also noted that Political stability being key to growth, with instability leading to
market distortions.
Cervellati & Sunde (2011) is an interesting study titled Life Expectancy And Economic Growth: The
Role Of The Demographic Transition where they speculate that high life expectancy is associated with
high income per capita. They did this by accounting for demographic transition using variables such as
life expectancy, population growth and a measure of individuals education against a countries GDP.
Whilst there results were inconclusive, another study called Death And Development (Lorentzen et al.,
2008) goes further to exploit exogenous variation in morality across countries and finds that increased
life expectancies casually lead to faster economic growth.
Sources Of Growth In African Economies by Sachs and Warner (1997) investigates into sub-Saharan
Africa to determine why GDP growth is so low compared to other economic regions. This piece is useful
as a significant proportion of our variable will come from African countries. They look at physical
features of a country as well as political factors, noting that countries near the sea or with a proportion of
water around them have grown quicker than other African countries in the last thirty years. They also
make an interesting albeit obvious point that countries with liberal economies seem to grow at a quicker
rate, this is interesting as there is evidence that Foreign Direct Investment normally increases a countries
growth rate, as we discussed earlier.
Robert Lucas (1988) discussed On The Mechanics Of Economic Development and looked into how
the accumulation of human capital lead to a rise in per capita growth. He stated that schooling could
have a positive effect on growth, which whilst being theoretically correct is difficult to prove using
statistical analysis. He also studied the advancement of technology and noted the rapid physical capital
growth associated with countries which used advanced equipment.
Fernandez et al. (2001) stated in Model Uncertainty In Cross-Country Growth Regressions that the
variables used in a regression analysis can be anything from religion to blackmail, with the need for
numeric data only part of an analysis. They used this wider scope to form a Bayesian model which charted
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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

the growth of former European colonial countries, with results that showed variables such as military
revolution and coups, religion and blackmail as statistically significant. Whilst there model may have been
successful in some respects, the amount of regressions preformed was into the million mark, and the
weightings of these variables are unknown.

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

Data Acquisition
To retrieve our data we have used the World Bank database which has a large selection of variables which
could prove useful in this study. The world bank is one of the only data collectors who translate
information in terms of percentages instead of monetary dollar values, this was the primary advantage
over the International Monetary Fund (IMF). Whilst monetary values are good for determining GDP
factors in other empirical studies, we are looking at growth and dont want inflation or deprecation of
currencies to undermine our results. By excluding monetary values and determining growth on GDP
percentage changes, we will be able to chart the change in variables from different time periods in our
cross sectional analysis.
When selecting the commonwealth countries for our dataset we encountered two problems, one being
that both the World Bank and IMF databases did not have any data for the country of Nauru, which is
the smallest nation on earth covering only eight square miles. As this nation is only small with less than
10000 inhabitants, we have omitted this country from the study as it will have minimal significance on our
final results. The second problem encountered was the nation of Fiji, which is currently suspended from
the commonwealth because of a military coup (Campbell, 2006). A country under military dictatorship is
very unlikely to join a commonwealth union and its data may also be unreliable because of the widespread
corruption within the country, thus Fiji has also been omitted. The fifty-two remaining countries included
are listed in the table below.
Commonwealth Countries Included In Dataset
Antigua and Barbuda

Kenya

Singapore

Australia

Kiribati

Solomon Islands

Bahamas, The

Lesotho

South Africa

Bangladesh

Malawi

Sri Lanka

Barbados

Malaysia

St. Kitts and Nevis

Belize

Maldives

St. Lucia

Botswana

Malta

St. Vincent and the Grenadines

Brunei Darussalam

Mauritius

Swaziland

Cameroon

Mozambique

Tanzania

Canada

Namibia

Tonga

Cyprus

New Zealand

Trinidad and Tobago

Dominica

Nigeria

Tuvalu

Gambia, The

Pakistan

United Kingdom

Ghana

Papua New Guinea

Uganda

Grenada

Rwanda

Vanuatu

Guyana

Samoa

Zambia

India

Seychelles

Jamaica

Sierra Leone

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

The data variables that I have used below are from the world bank with the only exceptions being the
corruption index ratings and the near water variables. The corruption index ratings were found using
the corruption perception index at the Transparency International website. This data was taken for 2010
and charts the perceived corruption within a government from 1 being the most corrupt and 10 being the
least amount of corruption. The data for the near water variable collected by myself using Google world
maps. This was only a measure to see if countries were near a considerable amount of water (calculated by
having 15% of countries border with water.
Variable

Description

GDPgrow

Growth of GDP in percentage terms for 2010.

Pop

Population of each country for 2010.

FDI

FDI into chosen country as percentage of GDP.

GDPcapgrow

Growth of GDP per capita in percentage terms for

2010.

CorrupInd

Corruption index taken from Transparency

International. Scale from 1 to 10 with 1= Most
corrupt and 10= Least corrupt.

DevCoun

Whether the chosen country is developed is decided

by being an high income country from the world
bank (data for 2010).

LogPop

Log of population for 2010.

NrWater

Whether a country has 15% of its land near water.

Lifeexp

Life expectancy in years for 2010.

spendeduc

Public Spending as a percentage of government

expenditure for 2010.

Healthexpen

Health expenditure as a percentage of government

expenditure for 2010.

One of the first things i need to detect is whether my model shows signs of multicollinearity.
Multicollinearity is where two or more variables are highly correlated with each other, so in theory we
could be using the same information twice unknowingly with the model (Pindyck and Rubinfeld, 1998).
This can be problematic as we need to obtain least square estimates later in our analysis and even thought
we could still obtain these values with multicollinearity, they would prove to be statistically insignificant as
there is little or no variance in the variable used.
Variance inflation factor (VIF) asses the severity of multicollinearity in our OLS Regression (Koop, 2005).
This is calculated using Stata and we will be looking for a number greater than the formula of:

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

We will also have to check the mean VIF to discount serious multicollinearity, this value
has to be smaller than 5.
A key element to look out for in this piece of cross sectional data is Heteroskedasticity. This could be a
key issue for our research because heteroskedasticity normally indicates that while the smaller values of
the model may be correct (those at the beginning of the scatter plot) as the value of Y (GDP Growth Per
Capita) increases, the accuracy of the plot is becoming weaker as the constant variance of the coefficients
cause OLS to calculate inaccurate estimates of standard error of coefficients (Studenmund, 2010, P99).
This means that while our model is performing well at generating coefficients for smaller GDP growth, it
would be experiencing large problems for those with proportionately larger GDP growth.
To address this problem before I run my regression, I have chosen to use natural logarithms to reduce the
difference between lower and higher population bands. This would make my data easier to analyse whilst
also clearing some possibility of heteroskedasticity. Another way we may choose to approach this is by
using Weighted Least Squares (WLS) as opposed to Ordinary Least Squares (OLS) which we are already
using. By using Weighted Least squares method, it will take into account non-constant variance, meaning
that all of the residuals will be given an equal weighting which as all the variables will be multiplied by a
particular number of weights (Xiohong & Yanqin2004).

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

Motivation for variables

Y(GDPCapGro) = 0 + 1(Ln(Pop)i) - 2(CorrupIndi) + 3(FDIi) + 4(NrWateri) +

5(LifeExpi) + 6(HealthExpeni) 7(DevCouni) + 8(SpendEdui) + i
H0: 1 0
H0: 5 0

HA: 1 > 0 H0: 2 0 HA: 2 < 0 H0: 3 0 HA: 3 > 0 H0: 4 0 HA: 4 > 0
HA: 5 > 0 H0: 6 0 HA: 6 > 0 H0: 7 0 HA: 7 < 0 8 0 HA: 8 > 0

Above is the model we will use for this empirical study along with the null hypotheses of the model. I
have chosen these variables based on the research done in my literature review. The first variable
GDPgrow is the growth of GDP in commonwealth countries. Whilst this is a good indicator of
growth, results can be skewed by the large difference in population sizes of different countries. This is
why the variable GDPCapGrow is being used, with Van Den Bergh (2009) stating that its a fairer
comparison of countries GDP although there is a point where minute populations start to harm GDP per
capita too. This is true for countries as large countries tend to produce more manufactured goods
whereas smaller islands generate GDP through agriculture or tourism. This wont matter in our study as
we are analysing growth throughout the commonwealth, although there is a fear that variables of smaller
countries may suffer a crowding out effect.
Pop is the variable for population which will help inform us whether a larger population has a positive
effect on GDP per capita growth. Referring to the previous section where we mention heteroskedasticity,
Log of population or LogPop will be used to give smaller values of populations, removing the
dominance of this variable over others within the model whilst still having accurate data.
Foreign Direct Investment is an important variable as it indicates trust within a country as well as possible
incentives for growth. FDI means that either the population or infrastructure of a country is growing
(Berensztein et al., 1998) with a positive effect expect for our model. The corruption index is also an
interesting variable, with the idea developed from the study by Fernandez et al. (2001). There work
inspired me to implement the corruption data, although the accuracy of this data could be contested as a
matter of opinion, it does make the results interesting. We would expect CorrupInd to have a severe
negative impact on growth per capita but must remind ourselves that corruption is not widespread within
commonwealth countries.
DevCoun is a dummy variable for whether a country is considered developed by World Bank
standards. These high income countries are expected to experience less economic growth due to both the
financial crisis and the saturation of markets where as developing countries are expected to grow at a
quicker rate, catching up to developed countries. We will also have another dummy variable for near
water NrWater. This is another idea from my literature review as the African case study showed that
nations with water grew quicker economically.

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

Life Expectancy LifeExp is another variable which we expect to have a positive effect on growth
although the effects of this variable along with educational spending SpendEduc may not effect growth
this year much (Levine & Renelt, 1992), but will have lasting effects in the future. Health Expenditure is
another variable which could be misleading as we expect a government that spends more as a percentage
of GDP on health care to have greater rates of growth, although HealthExpen could also be hard to
measure (Quah, 1993).
There were other variables I wished to use within my model such as Trade deficits, exports and foreign
direct aid but the data wasnt available via World Bank, IMF or other resources. Trade Deficit data was
available for developed countries but I decided against implementing it in our study because there would
only be 10 countries in our data set.

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

Empirical Analysis
To conduct this empirical analysis we will be using Stata software which will allow us to analyse our
datasets quickly, automatically calculating variables with great accuracy.
One of the first problems I encountered was with the spending on education variable, this was due to the
lack of information for most countries which left us with only 12 observations compared to the full 52
observations for all other variables. This meant that I had to drop this variable from my model. When we
run the regression for our model, we find that the r-squared was 0.4195 or 42%, meaning 42 % of all
squared deviations from the mean can be explained by this model. This is a little disappointing for crosssectional data as a good percentage is normally 80% + but because of our variables been loosely related,
its difficult to find accuracy.
We also find that only two of our variables are greater than 1.96, meaning that the dummy variables of

near water and developed country are statistically significant. One of the surprises here is that being near
to water seems to have a negative impact on GDP growth per capita, which undermines our research that
countries near the sea grew quicker.
The coefficients also show that LogPop was 0.8231, which means that population had an 83% effect on
the model, proving our theory that a greater population will help to some extent for GDP per capita.
Foreign direct investment also had some effect with a beta score of 0.2382 or 22% effect on growth per
capita. This number is not as high as we expected but does show that foreign direct investment can
induce growth per capita.
We adjust our model to take out life expectancy, this is because the life expectancy variable, like an
educational variable is one that does not have a serious impact on cross-sectional data, with the variables

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

needing to be lagged throughout a time series analysis, this is unfortunate but was considered in the data
review.

We then ran the regression to find VIF scores, indicating if there was any multicollinearity within the
model. As you can see there is little multicollinearity between the variables within our model because all
the values are all less than 2. All countries have a degree of correlation between each independent
variable, but it is not until the VIF value approaches 5 that action should be taken.

We also ran a test for heteroskedasticity which found constant variance, thus not violating the 5th classical
assumption.

Below are graph of key variables to our study, the first being GDP Growth in relation to FDI. Our model
gave us a coefficient of 0.2382 when we first regressed, and this graph show the slight relation between

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

the independent and dependent variables. Obviously this line of best fit only has a narrow tilt, indicating
that the relation between the two variables isnt that strong.

Life expectancy seems to have a negative impact on per capita growth, this could be put down to the cost
of increased life expectancy, with more older residents needing welfare support whilst not contributing
statistically to GDP growth.
Our final graph shows the impact of corruption
compared to growth rates with growth rates higher
in those countries which are more corrupt. This is
shocking as all evidence should point towards less
corrupt economies growing faster. I have two
hypothesis for this, the first being that developed
countries are less corrupted and at the same time
have less excess capacity to grow. The second
theory is that the data itself suffers an element of
corruption because of the corrupt states, thus the results are inconclusive.
Finally we ran the same regression based on data found from 1990, with this model only have an Rsquared value of 11.85 or 12% accuracy. Whilst this may be unreliable in some respects, the coefficients
show that both Near Water and Developed Country variables are statistically significant at 95%
confidence interval. The values of these two variables are higher than those of the 2010 analysis, possibly
showing that the difference between developed and developing countries is getting smaller.

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

One thing that is surprising for the 1990 dataset is that population has a negative effect on GDP per
capita growth, whereas in 2010 it is positive. FDI also seemed to have more of an effect in 1990
compared to today, although this data may not be the most accurate.

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

Conclusions
In summary we found only two variables that were statistically significant, those of near water and
developed country. Both had negative impacts on our GDP per capita growth model, with the near
water dummy variable being expected to have a positive impact on growth from our literature review. We
also found that the other variables such as population log and FDI as a percentage of GDP had some
positive impact on growth per capita, but not enough to be considered statistically significant. The model
itself was disappointing with only an r-squared of 0.4195 which doesnt represent the greatest of models,
although it was far more accurate than our 1990 model, which either indicates that statistics are improving
or that factors of growth between countries are less loosely correlated than before.
The regret with this model was that I couldnt use numeric values as much as I would like because of my
insistence of percentages from the start to discount for any exchange risk or other factors such as
inflation. It is also equally disappointing that data for certain variables such as education or amount of
foreign aid werent available for all commonwealth countries and thus were omitted from the final model.
This empirical analysis shows how the commonwealth is growing, with factors such as sea meaning less,
possibly due to air travel as an increasing mode of transportation for exports. Whilst my data may say
otherwise, the sheer population of the commonwealth and the amount of FDI should be significant, with
the increasing abundance of human capital also playing a key role in consistent growth

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Investigating The Factors Of Growth Within The Commonwealth Of Nations: An Empirical Analysis

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