INDONESIAN UNDERGRADUATE ECONOMIC REVIEW

Volume 2 Issues 1 No.8 (5 pages)

Property Rights, Income Per Capita, and Inequality: A Cross Country Analysis
Alfi Syahrin Ario Waskito1
Universitas Padjadjaran-Bandung, West Java, Indonesia
alfisyahrinaw@gmail.com1
Accepted : October 28, 2016
Indonesian Undergraduate Economic Review 2016
ABSTRACT

INTRODUCTION

Many studies have shown that inclusive institution

is important determinant for nation's prosperity.
Acemoglu (2012) stated that one of the most
important determinant for an inclusive economy is
property rights enforcement. The absence of
property right protection in the society creates
barrier to entry or impediments to occupational
choices to its citizen. De Soto (1994) also confirms
that property rights enforcement affords holders
indisputable proof of ownership, and protection
from uncertainty and fraud.This study aims to find
the evidence on the important role of property right
enforcement toward GDP per capita and Gini
Coefficient. Using 2SLS method with The World
Banks World Development Indicator and Property
Rights Index by Heritage Foundation from 2010 to
2014, this study found that property right
enforcement has a positive and significant
correlation to GDP per capita and negative
correlation to Gini Coefficient. This study suggests,
with better property rights enforcement, nations can
raise their standard of living and in addition can
mitigate the income inequality.

Many studies have shown that inclusive institution

is important determinant for nation's prosperity
including growth, development, and poverty
alleviation. Study conducted by Rodrik et al. (2002)
shows that quality of institutions including security
of property rights and rule of law is a strong
determinant for income levels. Economic
institutions matter for economic growth because
they shape the incentives of key economic actors in
society, in particular, they influence investments in
physical and human capital and technology, and the
organization of production (Acemoglu, Johnson, &
Robinson, 2005). Acemoglu (2012) also stated that
inclusive economic institutions create a level
playing field through which a nation can best deploy
its talents.
[Inslusive institution with poverty from
InclusiveInstitution.pdf] please paraphrase this
sentence: Across academic literature, cross-country
econometric studies find that better more inclusive
governance in political or economical institution
reduces poverty and improves human development
outcomes relating to, for example, infant mortality,
literacy, and health (Halperin et al., 2010; Kaufmann
et al., 1999). (Evidence identified by Evans &
Ferguson, 2013.)
Without property rights, individuals will not
have the incentive to invest in physical or human
capital or adopt more efficient technologies
(Acemoglu, 2003). Acemoglu (2012) stated that one
of the most important determinant for an inclusive
economy is property rights enforcement. The
absence of property right protection in the society
creates barrier to entry or impediments to
occupational choices to its citizen. Property rights
also can help achieve efficient allocation of
resources. What the poor lack is easy access to the

Published online : November 14, 2016 (Vol.2 Issues1)

INDONESIAN UNDERGRADUATE ECONOMIC REVIEW

Volume 2 Issues 1 No.8 (5 pages)

property mechanisms that could legally fix the

economic potential of their assets so that they could
be used to produce, secure, or guarantee greater
value in the expanded market (de Soto, 2001).
[In Indonesia, years after autocratic rules or
New Order Regime (From 1970s to 1990s) has
brought a systemic extractive political and
economical institution that disregad basic human
rights. As Indonesia entered the period when
economic nationalism was the most important
determinant of economic policy, economic thinking
was dominated, not by populism, but by a form of
statist developmentalism. This important shift in the
official definition of policy goals took place in the
mid-1970s. The more critical attitude towards
foreign investment had originated amongst
indigenous business groups and their intellectual
supporters, and initially won state support. The
debates on development in 1973 and the protests of
1974 put questions of social justice higher on the
political agenda, linking it to efforts to increase the
small share of the economy owned by indigenes and
unprotected property right of every citizen (Hadiz,
2005). This held long-lasting effect on goverment
approach in economics development policy, even
after reformation era in late 1990s explain some
indonesian context for property rights and inclusive
institution] show that a lot of paper discussed

inclusive institution in Indonesia but not property

rights.
In this study, we investigate empirically that
property rights have a correlation with both Gini
coefficient and Gross Domestic Product among
countries in the world. A Two Stage Least Square
(2SLS) method is used to estimate the correlation.
This study suggest that, with a better property rights
enforcement a country can become more prosperous
and the distribution of wealth can be more equal.
MODELS AND DATA
The Firat model is wants to see how property right
can affected the income per capita across a country.
We use a model that are based from J.Barro(1997).
The model is explained the determinant that can
affect the change of GDP per Capita. J.Barro
explained how macroeconomics indicators and
policy (exchange rate, unemployment, interest rate
and government spending can affect the rate of
income per capita especially in developing
countries.
The
channels
through
which
macroeconomic policies affect the change of
individual income are indeed intricate, with
complexities arising from the fact that the impact of
individual variables may differ.
The models for Income Per Capita is :

log GDP per Capita=((Govt.Consumption)/GDP)+Property Right Index+Inflation Rate +l(total

fertillity)+education+(Investment/GDP)
The Second model is to see how property right
can affected the inequality of income distribution
across a country. We use a model that are based from
K. Jha (1999) and Blejer & Guerrero (1990)
research. Both model are explained the determinant
that can affect the Inequalities. Blejer & Guerrero
explained how macroeconomics indicators and
policy (exchange rate, unemployment, interest rate
and government spending can affect the rate of

inequalities especially in developing countries. The

channels through which macroeconomic policies
affect income distribution are indeed intricate, with
complexities arising from the fact that the impact of
individual variables may differ depending on the
composition of aggregate policy packages and the
nature of the initial shock. Meanwhile K Jha sees
that public and fiscal policy also have influence to
the income distribution in a country.

The models are :

gini_i=_0+_1 exrate_i (_0+_1 deflator_i+_1 realint_i+v_i )+_2 pr_i+_3 unemp_i+u_i

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INDONESIAN UNDERGRADUATE ECONOMIC REVIEW

Volume 2 Issues 1 No.8 (5 pages)

Variables used in this study:

Loggdpcap : Income per capita of a

country in USD.
PR: Index of Property Rights for measuring
how far the property rights are protected in
a country.
Infrate: Average rate inflation in a year
using Consumer Price Index
Lfer : Fertility rate for every women
across the countries (in percentage).
Totalenrollment: Total of every person that
graduated from primary and secondary
education in every year.
Invest: Rate of investment spent per GDP
for every year in USD.
Unemp: Unemployment in a country (in
percentage).
Realint: Average real interest rate.

Gini : Gini coefficient to measure

inequality of income distribution.
C: Government consumption in USD.

Property rights index data is based on Heritage

Foundation. All data except Property Rights Index
are based from World Development Indicator
dataset from World Bank, we used 2 Stage Least
Square (2SLS) regression to estimate the model and
to avoid the endogenous problem that likely exists
in our model.
The model used in this study modifies the
model conducted by () for Gross Domestic
Product (GDP). For Inequality model, this study
modifies the model conducted by ().
RESULT AND DISCUSSION
Theoretically, there should be endogeneity problem
in our models. Using The Hausman Test, we
estimated the models to check endogeneity problem
in both models by comparing 2SLS estimates to
OLS estimates. The null hypothesis used is:

Ho: variables are exogenous

Inequality Model
Durbin (score) chi2(1) = 151.987
Wu-Hausman F(1,59)
= 143.521

(p = 0.2176)
(p = 0.2357)

As we can see from table 1, the probability are above 5

percent. Therefore, the null hypothesis is rejected. Hence,
it could be concluded that there is endogeneity problem in
our models. To avoid endogeneity problem, we use 2SLS
rather that OLS. The sample of Inequality model consists

GDP Per Capita Model

Durbin (score) chi2(1) = 161.797 (p = 0.2153)
Wu-Hausman F(1,59)
= 143.521 (p = 0.2369)

of a cross sectional/time series dataset on 67 countries

from 2010 to 2014. To avoid unavailability of the data, we
estimate the data into five year average. The estimation
result of Inequality Model using 2SLS is provided in table
2.

Table 2. 2SLS Estimation for Inequality Model

VARIABLES

gini5

exrate5

-0.00221*
(0.00127)

unemp5

-0.256***
(0.0887)

pr5

-0.217*
(0.109)

Constant

59.12***
-8.130

Observations

47

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

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Volume 2 Issues 1 No.8 (5 pages)

From table 2, we can see that coefficient of property

rights is significant and has negative sign as
expected. This means property rights enforcement
have negative correlation with Gini coefficient. The
point estimates suggests that, ceteris paribus, a
country with one percent higher in property rights
index is more likely to reduce Gini coefficient by...

The sample of GDP Per Capita Model consists

of a cross sectional/time series dataset on 159
countries from 2010 to 2014. To avoid unavailibility
of the data, we estimate the data into five year
average. The estimation result of GDP Per Capita
Model using 2SLS is provided in table 3.

Table 3. 2SLS Estimation for GDP Per Capita Model

VARIABLES
totalenrollment5

lgdpcons5
1.25e07***
(2.26e-08)

pr5

0.0313***

lfer5

-1.584***

(0.00772)
(0.384)
Constant

23.74***
(0.646)

Observations

159

R-squared

0.254

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1
From table 3, we can see that coefficient of
property rights is significant and has positive sign as
expected. This means property rights enforcement
have positive correlation with Log GDP Per Capita.
The point estimates suggests that, ceteris paribus, a
country with one percent higher in property rights
index is more likely to increase GDP Per Capita by...
CONCLUSION
There are two major findings in this study. First,
estimating correlation between GDP Per Capita and
and property rights index. Second, estimating
correlation between Gini Coefficient and property
rights index. Property rights index shows significant
and appropriate signs of coefficient estimate as
expected with five percent significance level in
Inequality Model and one percent significance level
in GDP Per Capita Model.
This findings provide a sign for policy makers
to put more concern on property rights enforcement.

Published online : November 14, 2016 (Vol.2 Issues1)

However, study on property rights on welfare

indicators need to be more explored, with more
observations and variables. In addition, more
research on property rights enforcement needs to be
done especially in indonesia which half of it's
economy is in informal sector.
REFERENCES
Bibliography
Barro, R. J. (2003). Determinants of Economic
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Brenger, V., & Verdier-Chouchane, A. (2007).
Multidimensional measures of well-being: standard
of living and quality of life across countries. World
Development, 35(7), 12591276.
Nordhaus, W. D., & Tobin, J. (1972). Is growth
obsolete? In Economic Research: Retrospect and
Prospect, Volume 5, Economic Growth (pp. 180).
Nber.

INDONESIAN UNDERGRADUATE ECONOMIC REVIEW

Volume 2 Issues 1 No.8 (5 pages)

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(Vol. 72). Routledge.

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