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DecemberAbstract

2, 2015

HOW DOES DEMOCRATIC


SOCIALISM IMPACT
ECONOMIC GROWTH?

Democratic socialist, Bernie Sanders, has become the center of attention for many potential left
wing United States voters, in the 2016 presidential elections. His candidacy raises the question: is
socialism an effective way to growth an economy? Using panel data controlling for countries and
years, I generated a multitude of regression models and a statistical analysis based on GDP per
capita growth, in regards to a set of explanatory variables in lieu of democratic socialism. In an
effort to assess the practicality of democratic socialism, this study was commenced. Some of the
models I developed could not justify any impact of certain socialistic values toward economic
growth. On the contrary, correlation and some statistical significance between the characteristics
and economic growth was discovered.

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Introduction
Democratic socialism is an ideology involving a combination of political
democracy and social ownership over the means of production, a socialist economic
system. The concept of democratic socialism has been raised into the public eye recently
by Vermont Senator, Bernie Sanders. Sanders plans to run for the 2016 presidential
election and has gained a significant following in less than a year, since his
announcement. Perhaps this is due to 52% of Democrats favoring socialism. Even more
prevalent, 59% of Democratic voters would be okay with voting for a socialist (Blake).
Bernies run for presidency raises the question if socialism is an effective way to operate
an economic system. By exploring different economic aspects comprising democratic
socialist policy, we can potentially learn how effective democratic socialism would be at
growing not only the United States economy, but even the economies of other nations.
The explanatory variables studied, as well as GDP per capita growth were
measured as percents taken from the World Bank Development Indicators. Percent
indicators were taken as a system of scaling the panel data and for a base of consistency
among all variables in study. It is important to understand that this study was completed
using unbalanced panel data, with information dating back to 1960 from 199 countries.
The socialist democrat characteristics focused in this study include: government
expenditure on education, public health expenditure, subsidies and other transfers, wage
and salaried workers, and total tax rate. Each variable was taken as a piece of a greater
puzzle in determining the value in a democratic socialist government.
Though certain regressions could not justify an impact of the studied variables on
economic growth, correlation and some statistical significance was found to influence
economic growth. With a fixed effects test government expenditure on education, public

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health expenditure and wage and salaried workers were all discovered to be significant at
the 1% level in negatively affecting economic growth per capita.

Literature Review
A past study on health expenditure theory was completed investigating the impact
of GDP per capita and public financing as a percentage of total financing. This article
stresses the need for more macroeconomic studies on health expenditure impact, as well
as updated replications of data to unify results of previous analysis. Politicians,
academics and administrators continuously use health expenditure as a discussion point
as a share of Gross Domestic Product. Health expenditure between countries varies
vastly.
In this health expenditure study light is shed onto some of the not as apparent
effects behind health expenditure between countries. It also compiles literature on health
expenditure econometric theory, which has been of substantial interest in and outside of
health economics, for decades. Most efforts from different studies, to find possible
significance in variables to explain health expenditure has generally raised more
questions. Also, many of the independent variables studied alongside health expenditure
is sparse and only brushed upon (Gerdtham).
In another investigation, government expenditure as a whole was of interest in
affecting economic growth. Government expenditures impact on economic growth is of
particular interest as it sparks the question of just how government impacts the economy.
Government expenditure is used to represent government impact because there is not
enough positively correlated dimensions of economic welfare available to represent the
unexplained variation. Even so though the partial relationship with government
expenditure is still intriguing, because government involvement is of such interest.

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Per capital real GDP was used as the measure for the dependent variable,
economic growth. The independent variable, government expenditure, was measured by
government spending in this study. Many would argue more spending would increase
GDP, while others would speculate that government spending would decrease GDP,
generally. In this study, these contrasting views are put to the test, not attempting to
explain the impact of different expenditures individual impact.
Due to theoretical limitations behind government expenditure, weakens the data.
With that said the negative beta values, found in this study, for most country income
levels could be insightful. The results are consistent with a pro- free market viewpoint, in
that growth of government hurts economic growth (Landau).
Another study investigates the implications of fiscal policy on economic growth.
Many economists hold an opinion on fiscal policy as a growth determinant for economic
well-being of a particular country, in some respect. It is a well renounced belief that
elements of fiscal policy such as taxation, public investment and more contribute to
growth. The empirical evidence giving light on the importance of fiscal policy in
influencing economic growth is rather sparse. With that said, the measurement error in
the data sets used is rather substantial, but there is quite a bit of information at the same
time.
As a result of this fiscal policy study, any indication that tax rates are a
determinate of economic growth, is delicate. It is exceptionally difficult to determine the
effects of tax policy on growth, with this study hinting taxes may not even matter in
terms of economic growth. Causality questions still linger to the effect of the fiscal
policy based variables used on economic growth (Easterly).

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Literature has also been published on the impact of immigration on host country
wages, employment and economic growth. An indisputably touchy issue throughout
industrialized nations of the world, is immigration. Immigration because it impacts
population size of a country, arguably influences a multitude of other factors within an
economy. Generally, with the theory of immigration diluting job markets, makes this
study extremely relevant. Many of the key components, which are apart of debates on
immigration, are economic in nature.
The dependent variables brought to study are host country wages, employment
rates and economic growth as GDP, while immigration was held consistent as the
explanatory variable used. These variables were regressed individually in reference to
economic growth to get a more individualized impact per dependent variable.
Overall, the literature on the question of the effect of immigration on host
countries does not demonstrate a strong adverse relationship with wages and employment
opportunities. More information and study on this topic should be gathered, because
theoretical literature often conflicts that of empirical analysis. This study concluded that
the impact of immigration on countries population is still more or less, a grey area
(Friedberg).
As a whole the prior literature published on the topics delved into within this
study brush upon what is currently known about explanatory social economic variables
and economic growth. With that said, a resounding theme from article to article was that
there is much more research on these topics to be done. The significance of social
economic variables on economic growth could not be concluded. Through this study, I
hypothesized that each social economic variable had no effect on economic growth. As

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an alternative hypothesis, the social economic variables used had an impact in explaining
economic growth.

Data Analysis
To test the impact of social economic variables on GDP per capita growth, the
following population model was used: y = 0 + 1x + where y is the % annual GDP per
capita growth and x contains government expenditure on education and public health
expenditure measured as % of total government expenditure. Also contained within x:
subsidies and other transfers as a % of total expense, total tax rate as a % of commercial
profit, and wage and salaried workers as a % of total employed. Each variable of interest
was measured as a percentage, in order to standardize the range of data used and to
reduce variances. Percents were used to trouble shoot the inherent possibility of
heteroscedasticity within the population model. With that precaution taken,
homoscedasticity can be safely enough assumed.
It is important to understand some of significance and meaning behind the several
variables used within this study. GDP per capita growth as an annual % is a function of
GDP per capita divided by a midyear population of a country. What differentiates this
measure from other GDP metrics is that it is based on country specific currency with
aggregates based on constant 2005 United States dollars.
Government expenditure on education does include inflow of transfers from
international sources of government, and is not to be confused with the transfers
explained by the subsidies and other transfers variable. Subsidies and transfers explains
grants, subsidies and other social benefits, as well as outflowing transfers. Public health

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expenditure comprises of intermittent and capital, budget based government spending,
social health insurance funds and grants.
Taxes withheld and remitted to tax authorities are excluded from total tax rate as a
% of commercial profits. Total tax rate does measure the taxes businesses must pay after
deductions and any commercial profit exemptions are made. It is important to note that
some tax rates will be range above 100%, because businesses can be taxed in various tax
brackets based on commercial profits, depending on different countries fiscal policies
(New York Times). Wage and salaried workers are defined as workers who have held a
job with contracted paid employment. Wage and salaried workers can be viewed but not
defined as a function and representation of legal employment within a country.
With such range of variables of interest, comes a wide range of observations
between variables. For GDP per capita growth, 8154 observations were gathered, while
for government expenditure on education only 1573 observations were found. With that
said, the social economic variable data was unbalanced as panel data with GDP per capita
growth. The difference in observations between variables causes somewhat of a loss of
efficiency in the data gathered. Unfortunately, the missing data is systematic and caused
by a limitation and inconsistency in data provided by the World Bank Development
Indicators which were used for this study. Even with this issue of total observational
variation, paneling the variables used with countries and years is essential to controlling
such large samples. Unbalanced data may be the result, but is not a deliberate concern.
Using both fixed and random effects models, in OLS regression analysis, will account for
a range of possible conclusions.

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Descriptive statistics for each variable depict the shape of their respective
distributions. GDP per capita growth holds a mean of about 2.1% with a standard
deviation of about 6.7%. With a minimum value of 65% and a maximum value of about
182%, I relatively spread out distribution could be drawn. With a standard deviation of
4.5%, public health expenditure would have a more condensed distribution ranging from
about .1% to 34.4% (Table 1). It can been recognized that the sizes and shapes of the
individual distributions for the dependent variable and each variable of interest will vary
somewhat significantly. Standardized testing within our regression models, combats
these distribution curve differences and adequately reflect them on a normalized curve.
We assume that each estimator is normally distributed and F-statistics were pulled
accordingly.
Another assumption, which one might see the variables of interest violating, is no
perfect collinearity. Multicollinearity is difficult to escape entirely, especially with
variables directly related to government expenditure and spending. With that said enough
observations were used (398 for multilinear regressions) to assume no perfect
collinearity.
All other OLS assumptions can be made for the data used as well. A population
model including the dependent variable, variables or interest and an unobserved random
error is linear in parameters by nature. Also, random samples with substantially more
observations than the practiced 30 minimum were taken to fulfill the random sampling
assumption. The zero conditional mean assumption was also met, due to each variable of
interest varying from one another in concept and being unrelated to the unobserved
coefficients mean. To help defend the datas support of OLS assumptions and the true

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independence of each variable of interest, a correlation matrix is displayed within Table
2.
All variables of interest have a correlation between -0.5 and .5, indicating weak to
no correlation. Variables with the highest correlation include subsidies and other
transfers in relation to government expenditure on education and public health
expenditure. Wage and salaried works had a particularly weak but still prevalent
correlation to public health expenditure and subsidies and transfers. The most important
item to recognize from Table 2 is the generally weak correlation between variables of
interest. Furthermore, there is a lack of evidence to support significant multicollinearity
between variables.

Empirical Results
For the sake of accounting for more possible OLS regression outcomes, tables are
included for both fixed effects and random effects models for the panel data used. The
Hausman test was used, with a null hypothesis in support of random effects, while fixed
effects was held as an alternative hypothesis. The set of panel data was determined
significant at the 5% level with the probability of obtaining a chi-square statistic of 1%.
It can be concluded from the Hausman test, that a fixed effects model is most appropriate
for an OLS regression.
Table 3 includes relevant information from a robust fixed effects multilinear
regression model as well as linear regression models for each variable of interest. Table 4
portrays the same information, with a robust fixed time effects model. A fixed time
effects model controls for time. The data gathered is sparse between years for each

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variable so controlling for time is an especially necessary action, especially in the multilinear regression, where only 398 observations were used.
Both the fixed effects and the fixed time effects models found government
expenditure on education, public health expenditure and wage and salaried workers
significant at the 1% level. Additionally, the fixed effects model showed subsidies and
transfers significant at the 10% level. In a fixed effects multilinear regression, public
health expenditure was significant at the 10% level. Total tax rate was significant at the
5% level under a fixed effects model, but was found insignificant when controlling for
time. In a fixed time effects multilinear regression, public health expenditure was
discovered significant at the 5% level.
With that said, the fixed effects model based tables showed significance between
specific social economic variables and GDP per capita growth. Using robust fixed
effects, for each percent increase in government expenditure on education, GDP per
capita growth is estimated to decrease by .094 percent. For every percent increase in
public health expenditure, GDP per capita growth decreases by .073 percent. For every
percent increase in expense of subsidies and other transfers, GDP per capita growth is
raised by .008 percent. For every percent increase in wage and salaried workers of total
employed, GDP per capita growth decreases by .023 percent. In multilinear fixed effects
regression, for each percent increase in public health expenditure, GDP per capita growth
raises by .567 percent. Also for each percent of commercial profits increase in total tax
rate, GDP per capita growth is increased by .119 percent. It is also important to recognize
the F-test significance at the 10% level.

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When controlling for time, coefficient outputs for a robust fixed effects model
were quite different. With each percent increase in government expenditure on
education, GDP per capita growth is estimated to decrease by .097 percent. For each
percent increase in public health expenditure, GDP per capita growth is decreased by .072
percent. For each percent increase in wage and salaried workers of total employed, GDP
per capita growth decreases by .02 percent. In multilinear fixed time effects regression,
for every percent increase in public health expenditure, GDP per capita growth increases
by .633 percent. In this model, the joint variable probability test is significant at the 1%
level.
In the robust random effects model, controlling for countries, for each percent
increase in wage and salaried works of total employed, GDP per capita growth decreases
by .067 percent. In a multilinear regression model, with robust random effects and
controlling for countries, for each percent increase in public health expenditure, GDP per
capita growth is estimated to increase by .567 percent. Under the same model, for every
percent increase in total tax rate as a segment of commercial profits, GDP per capita
growth is estimated to increase by .119 percent.
Most of the variables of interest which were found most significant, were only
significant when individually regressed with GDP per capita growth. Individual
regressions could have demonstrated a greater significance, because more so of each
regressions total variation was explained by their models, than that of the multilinear
regressions. This is portrayed by the adjusted R2 values, given in the fixed time effects
tables. When time was not controlled for, this theory was shown to not be as likely as
relevant for variables, as less of the total variation for each model could be explained.

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For that reason, it could be argued that the coefficients for fixed effects are not as
accurate as the coefficients for fixed time effects, because significantly less variation is
accounted for.

Conclusion
The impact of public health expenditure, total tax rate and wage and salaried
workers on GDP per capita growth were most apparent. Overall, suggesting that
individually these significant variables negatively impact economic growth, while
together in multilinear regression hold a positive impact. In a more real world scenario,
these social economic variables definitely come hand in hand. With that said, it is most
important to recognize the collective increase of nearly a percentage point in GDP per
capita, when both public health expenditure and total tax rate as a percent of commercial
profits, are increased by 1 point each. It is certainly interesting that on their own, many
of the social economic variables in this study, across tables, decrease economic growth
when expanded on. On the contrary, these are measured through linear regressions which
do not account for a bigger picture social economic policy, in which the multilinear
regression entails.
In support of United States 2016 presidential candidate Bernie Sanders, I would
encourage an increase in public health expenditure and total tax rate. These social
economic variables statistically demonstrate an increase in economic growth. With the
United States being over $18 trillion in debt, any method to grow our economy should be
taken.

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The positive impact on economic growth that these variables have, can support
ideologies such as that a healthy work force is a more productive one and that taxing big
business is healthy. Yes, more information can and should be gathered on the impact of
increasing total tax rate and public health expenditure. For example, the effect of total
tax rate and public health expenditure on employment. If employment decreases, due to
these social economic variables, then naturally the economy would be suffer. Statistically
though, increasing these variables would be healthy to growing the United States
economy and should be raised accordingly.

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References
Blake, Aaron. "Could a Socialist Actually Be Elected President?" Washington Post. The
Washington Post, 17 Aug. 2015. Web. 30 Nov. 2015.
Easterly, William, and Sergio Rebelo. "Fiscal policy and economic growth."Journal of monetary
economics 32.3 (1993): 417-458.
Friedberg, Rachel M., and Jennifer Hunt. The Impact of Immigrants on Host Country Wages,
Employment and Growth. The Journal of Economic Perspectives9.2 (1995): 2344. Web...
Gerdtham, Ulf-G., and Bengt Jnsson. "International comparisons of health expenditure: theory,
data and econometric analysis." Handbook of health economics 1 (2000): 11-53.
"How Its Possible to Pay a 100% Tax Rate." The New York Times. The New York Times, 02 Feb.
2012. Web. 01 Dec. 2015.
Landau, Daniel. Government Expenditure and Economic Growth: A Cross-country
Study. Southern Economic Journal 49.3 (1983): 783792. Web...
World Development Indicators, The World Bank

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Tables
Table 1 - Summary Statistics Table: Economic Growth and Social Economic Variables
Variable

Metric

Observations

Mean

GDP per
capita
Growth
Gov.
Expenditure
on Edu.
Health
Expenditure,
public
Subsidies and
other
transfers
Total Tax
Rate

% annual

8154

% of gov.
expenditur
e
% of gov.
expenditur
e
% of
expense
% of
commercia
l profit
% of total
employed

Wage and
salaried
workers

2.104

Standard
Deviation
6.654

Minimum
Value
-64.997

Maximum
Value
182.356

1573

15.053

4.996

3.22

44.8

3504

11.201

4.504

.099

34.412

1967

37.508

21.051

.08

90.8

1793

47.673

37.304

7.4

339.1

2219

70.673

19.732

1.4

99.6

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Table 2 - Correlation Matrix: Economic Growth and Social Economic Variables

GDP per
capita
Growth
Gov.
Expenditure
on Edu.
Health
Expenditure,
public
Subsidies
and other
transfers
Total Tax
Rate
Wage and
salaried
workers

GDP per
capita
Growth
1.0000

Gov.
Expenditure
on Edu.

Health
Expenditure,
public

Subsidies
and other
transfers

Total Tax
Rate

0.0075

1.0000

- 0.2249

- 0.0226

1.0000

- 0.1265

- 0.4031

0.4117

1.0000

0.0198

- 0.1994

0.0357

0.2725

1.0000

- 0.2846

- 0.2371

0.4572

0.4732

- 0.0141

Wage and
salaried
workers

1.0000

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Table 3 - Multilinear Regression: Fixed Effects Model


Gov.
Expenditure
on Edu.
Health
Expenditure,
public
Subsidies and
other
transfers
Total Tax
Rate
Wage and
salaried
workers
Constant
Observations
Prob. > F
Adj. R2

(1)
- .094***
(4.086)

(2)

(3)

(4)

(5)

- .073***
(.022)

.567*
(.421)
.008*
(.005)

-.008
(.048)
- .002
(.002)

4.086***
(.438)
1555
0.000
0.012

3.395***
(.295)
3425
0.001
0.003

(6)
-.199
(.182)

2.110***
(.213)
1920
0.070
0.002

2.502***
(.180)
1762
0.329
0.000

- .023***
(.005)

.119**
(.052)
- .148
(.158)

4.037***
(.354)
2167
0.000
0.014

3.711
(10.607)
398
0.077
0.089

Notes: Robust standard errors reported. Coefficient significance noted at levels 1%, 5% and
10% with ***, **, *.

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Table 4 Multilinear Regression: Fixed Time Effects Model


Gov.
Expenditure
on Edu.
Health
Expenditure,
public
Subsidies and
other
transfers
Total Tax
Rate
Wage and
salaried
workers
Constant
Observations
Prob. > F
Adj. R2

(1)
- .097***
(.025)

(2)

(3)

(4)

(5)

- .072***
(.023)

.633**
(.307)
.006
(.004)

.003
(.032)
- .004
(.002)

4.005**
(.359)
1555
.
0.150

3.090***
(.511)
3425
0.000
0.045

(6)
-.287
(.216)

.380
(1.014)
1920
0.000
0.156

3.835***
(.331)
1762
0.000
0.097

- .020***
(.005)

-.019
(.038)
.000
(.119)

3.011***
(.615)
2167
0.000
0.190

3.711
(10.607)
398
0.000
0.089

Notes: Robust standard errors reported. Coefficient significance noted at levels 1%, 5% and
10% with ***, **, *.

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Table 5 Multilinear Regression: Random Effects Model


Gov.
Expenditure
on Edu.
Health
Expenditure,
public
Subsidies and
other
transfers
Total Tax
Rate
Wage and
salaried
workers
Constant

(1)
- .017
(.041)

(2)

(3)

(4)

(5)

- .062
(.054)

.567**
(.266)
.015
(.014)

-.008
(.038)
- .002
(.006)

3.725
(2.320)

5.425***
(1.812)

(6)
-.199
(.226)

7.285***
(2.237)

5.691***
(1.959)

- .067***
(.021)

.119**
(.013)
- .148
(.149)

6.863***
(1.233)

-5.228
(8.244)

Notes: Robust standard errors reported. Data controlled by country. Coefficient significance
noted at levels 1%, 5% and 10% with ***, **, *.

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Appendix
Countries in Study
Afghanistan
Albania
Algeria
Andorra
Angola
Antigua and Barbuda
Argentina
Armenia
Aruba
Australia
Austria
Azerbaijan
Bahamas, The
Bahrain
Bangladesh
Barbados
Belarus
Belgium
Belize
Benin
Bermuda
Bhutan
Bolivia
Bosnia and Herzegovina
Botswana
Brazil
Brunei Darussalam
Bulgaria
Burkina Faso
Burundi
Cabo Verde
Cambodia
Cameroon
Canada
Chad
Chile
China
Colombia
Comoros
Congo, Dem. Rep.

Congo, Rep.
Costa Rica
Cote d'Ivoire
Croatia
Cuba
Curacao
Cyprus
Czech Republic
Denmark
Djibouti
Dominica
Dominican Republic
Ecuador
Egypt, Arab Rep.
El Salvador
Equatorial Guinea
Eritrea
Estonia
Ethiopia
Fiji
Finland
France
Gabon
Gambia, The
Georgia
Germany
Ghana
Greece
Greenland
Grenada
Guam
Guatemala
Guinea
Guinea-Bissau
Guyana
Haiti
Honduras
Hong Kong SAR, China
Hungary
Iceland

India
Indonesia
Iran, Islamic Rep.
Iraq
Ireland
Israel
Italy
Jamaica
Japan
Jordan
Kazakhstan
Kenya
Kiribati
Korea, Dem. Rep.
Korea, Rep.
Kosovo
Kuwait
Kyrgyz Republic
Latvia
Lebanon
Lesotho
Liberia
Libya
Liechtenstein
Lithuania
Luxembourg
Macedonia, FYR
Madagascar
Malawi
Malaysia
Maldives
Mali
Malta
Marshall Islands
Mauritania
Mauritius
Mexico
Micronesia, Fed.
Moldova
Monaco

Mongolia
Montenegro
Morocco
Mozambique
Myanmar
Namibia
Nepal
Netherlands
New Zealand
Nicaragua
Niger
Nigeria
Norway
Oman
Pakistan
Palau
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Portugal
Puerto Rico
Qatar
Romania
Russian Federation
Rwanda
Samoa
San Marino
Sao Tome and Principe
Saudi Arabia
Senegal
Serbia
Seychelles
Sierra Leone
Singapore
Slovak Republic
Slovenia
Solomon Islands

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Somalia
South Africa
South Sudan
Spain
Sri Lanka
St. Kitts and Nevis
St. Lucia
St. Vincent and Grenadines
Sudan
Suriname
Swaziland
Sweden
Switzerland
Syrian Arab Republic
Taiwan, China
Tajikistan
Tanzania
Thailand
Timor-Leste
Togo
Tonga
Trinidad and Tobago
Tunisia
Turkey
Turkmenistan
Tuvalu
Uganda
Ukraine
United Arab Emirates
United Kingdom
United States
Uruguay

Uzbekistan
Vanuatu
Venezuela, RB
Vietnam
Yemen, Rep.

Zambia
Zimbabwe