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Social security expenditures and economic growth


A heterogeneous panel application
Chien-Chiang Lee
Department of Applied Economics, National Chung Hsing University, Taichung, Taiwan, Republic of China, and

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Chun-Ping Chang
Institute of Intredisciplinary Studies for Social Science, National Sun Yat-Sen University, Kaohsiung, Taiwan, Republic of China
Abstract
Purpose The purpose of this paper is to re-examine the long-run co-movement and causal relationship between GDP and social security expenditures. Design/methodology/approach The paper uses panel data unit root tests and panel cointegration tests, as well as estimation techniques appropriate for heterogeneous panels such as fully modied OLS. Data are employed on 12 Asian countries from 1972 to 2000. Findings The cointegration test results show strong evidence in favor of the existence of a long-run equilibrium cointegrating relationship between GDP, capital stock and social security expenditures after allowing for heterogeneous country effects. Regarding the panel-based error correction model and the Granger causality test, there are long-run, bi-directional causal linkages between social security expenditures and economic growth. In addition to the robust test, they display similar results. Originality/value The paper shows that in every moment, economic growth must be based in the social welfare policy contiguously, and the economic growth process can allow the social welfare policy to proceed contiguously Keywords Social security, Social welfare, Expenditure, Economic growth Paper type Research paper

1. Introduction
Hence, theorist should eschew easy optimism regarding economic growth; they should pay more attention than previously to the problem of sustaining growth once it has begun; and they should investigate causes of secular economic decline. There are many factors in declines of this character, such as the depletion of the soil; of forests, and of other natural resources, and military defeats, but one of the most important is generally overlooked; it is that as a society attains a high level of material well-being, it strives to satisfy non-economic wants. These words are taken from Chough (1955), views before 50 years ago.

Journal of Economic Studies Vol. 33 No. 5, 2006 pp. 386-404 q Emerald Group Publishing Limited 0144-3585 DOI 10.1108/01443580610706609

Social security forms a major district of government policy and social expenditure. Government decisions in this district directly impacts all citizens, and consequently social security policy is the focus for much debate. However, the policy aims of social security must satisfy peoples needs to reduce the impact brought by social changes, as well as ensure peoples basic right for survival. They should also promote family harmony, cultivate mutual assistance in society, and improve education quality. Finally, they should accumulate economic capital, and contribute to the stability of

democratic politics to make citizens have a stable and dignied life of good health. Hence, how to achieve the balanced development of social security and economic aspects is a mutual aid target. But so far, the worry of Chough (1955) still exists. Like Feldstein (1974) and Sala-i-Martin (1992), they argued that if social security expenditure induces earlier retirement, it may positively inuence savings, and therefore growth. But again Darby (1979) and Ehrlich and Zhong (1998) found that too much social security expenditure will oppress folk savings, its unfavorable to accumulate capital and disadvantageous economic development. Basically, these debates come from limited resource situations. Because the government has the responsibility to promote quality of life of its citizens with offer in distances of drawing of a more high-quality living environment of people, but the budget is insufcient, and social security have the transfer payments characteristic, so many economist oppose lack of the economic benets like this. However, if the welfare system is not well-appointed, we must pay the unavoidable social costs associated with the crises in emerging market economies have been substantial: the falling of real wages, an increase in unemployment, and there a sharp increase in the number of poor. By the way, as the school dropout rates rise among poor children, this may result in grave long term effects on the human capital of the poor (World Bank, 2000). Indeed, the relationship between social security expenditures and growth is complicated and confused. As the above discussion makes clear, the effect of social security expenditures on growth is still an open question both theoretically and empirically. Actually, the key point is the capital efciency. The function of social security providing economic efciency is currently undecided. Therefore, the principal motivation of this paper is to re-examine the long-run co-movement and the causality relationship using a trivariate model with real social security expenditures (hereafter referred to as SE), real GDP (hereafter referred to as GDP) and real capital stock (hereafter referred to as K). We combine cross-sectional and time series data to delve into the relationship among SE, GDP and K, using updated data for 12 countries that are distributed in each region of Asia for the years 1972-2000. This is based on the incentive from the 1980s, as the now compact, mature economies in Asia were industrializing. It is not in dispute that there is a close and positive relationship between industrialization and social welfare, In addition, there is an existing common phenomenon that the social security expenditures have signicantly rised recently in the sample countries[1]. To the result, we just did further distinguishing of the relations between either, not only because they will make a denite answer to above-mentioned debates, but also to make a clear conclusion. Thus, according to the Pedronis (1999, 2004) panel cointegrated test, we quote the issue from Christopoulos and Tsionas (2004) as well as Lee (2005) and steer to extend the causality relationships by estimating the panel vector error correction mechanisms (VECMs). These have the advantage of a reduced form approach, not imposing restrictions on the data, while also allowing both short and long run effects to be discerned. In other words, we use panel unit root tests and heterogeneous panel cointegrated tests, as the least of our variables are integrated of order one, we should work in error correction form to avoid spurious regressions and implementing the panel-based error correction model, then we can nd that different periods causalities exist between GDP and SE or not[2].

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More recently, new testing procedures for the integrated hypothesis using panel data have been developed. These procedures bring together cross-sectional and time series analysis. Yet, to the best of our knowledge, analyses of relationships among SE and GDP have thus far ignored the panel unit root or panel cointegration properties. This is with regard to the well-known panel cointegration test which was created by Pedroni (1999), who developed asymptotic and nite-sample properties of testing statistics to examine the null hypothesis of non-cointegration in the panel. Thus, like as the claims by Pedroni (1999, 2004), the panel cointegration technique is really intended to allow researchers to selectively pool information regarding common long-run relationships from across the panel while allowing the associated short-run dynamics and xed effects to be heterogeneous across different members of the panel. This technique has also broadly been used in the study of a different topic currently (Bahmani-Oskooee and Miteza, 2004; Westerlund, 2005; Hatemi-J and Irandoust, 2005; Irandoust and Ericsson, 2005). What is the relation between social security expenditures and growth? We can review it through theoretical and empirical aspects. Theoretically, since Feldstein (1974) argued that social security expenditures by the government have an effect on macroeconomic variables such as private savings, the recent theoretical work on social security has considered more factors[3]. Moreover, some models predict a positive effect of redistributive expenditures on growth, for example, Sala-i-Martin (1992) emphasized that pensions are a means to induce retirement; that is, equal to buying the elderly out of the labor force and higher aggregate output if the elderly do not work. From the ndings of another study, the average productivity will be increased and contribute to greater output. Zhang (1995) argued that unfunded social security has the positive impact of a long-run growth trough reducing fertility and advancing human capital investment not affecting the savings rate. Sala-i-Martin (1996) commented that a larger social security program promotes growth as long as social security encourages retirement, by letting elderly workers to back out from labor market, leaving younger workers to improve in productivity. Mulligan (1997) suggested that social security may enhance growth since parents accumulate altruism for children as an alternative to working and paying social security tax. Bellettini and Ceroni (1999) argued that a social security system with benets indexed to wages provides taxpayers with incentives to support growth-oriented policies, which increase the future productivity of labor and long-run growth (same as Sanchez-Losada, 2000). Zhang and Zhang (2004) point out that the interactions among fertility, investment in human capital, growth, and social security are complicated in general. However, all these discussions are constrained by the fact that SE is an independent variable. From the empirical aspects, since Barro (1991) nds that only social security expenditures seem to be positively related to growth among the three components of public spending public investment, public consumption, and public transfers. Perotti (1996) reported a positive coefcient of social security expenditures in cross-country growth regressions, then Cuyvers and Rayp (1998) presented that the results in the incomplete market model, such as social security systems, have positive signicance for economic growth in East Asian newly industrializing countries. These detections induct a further discussion, as Ehrlich and Zhong (1998) indicated the effects of the pension-GDP ratio on fertility, marriage/divorce, savings, and growth using the cross-country data. To follow up, Bellettini and Ceroni (2000) analyzed the relationship

between social security expenditures and economic growth recently based on 61 countries data. They found that whenever a statistically signicant association between social security expenditures and growth exists, it has a positive sign. Additionally, the positive estimated coefcient of social security expenditures seems robust to various forms of mis-specication and appears to be larger in relatively underdeveloped social security systems (poor countries). As for the channels through which the positive effect of social security expenditures on growth should take place, the results seem to indicate that such expenditures have a positive inuence on human capital formation. Recently, the similar evidences are offered by Zhang and Zhang (2004). Thus, even from a theoretical point of view, the relationship between social security expenditures and growth is not unambiguously negative. However, Huntington (1968) argued that periods of rapid growth may increase socio-political instability, in the absence of a awless social security system. This will trigger a deep social conict that may harm economic activities. Maruo (1987) considers the impact of demographic aging in Japan on the social security system and on economic growth. It is argued that as the cost of social security increases signicantly in the earlier stage of ageing, the disposable income and private consumption of the present labor force generation tend to increase at a lower growth rate than that of the GNP. Yet some researchers have again asserted that social security expenditures have a negative effect on savings and concluded that empirical evidence does not support the presumption that private savings are displaced by social security (Darby, 1979; Aaron, 1982; Alesina and Rodrik, 1994). In fact, the above controversy arises when the social security expenditures are located in government transfer expenditure. So, as the aim of this paper is to distinguish the long-run co-movement and the causal relationship between GDP and SE, we will examine this issue further. Relatively, previous studies have used time series data which may yield unreliable results due to short time spans of typical data sets (Feldstein, 1974, 1996; Cigno and Werding, 2003). There are also no serious effort to understand the two-way link between GDP and SE. In many countries the estimation of causality cannot be achieved, because of the short data span, which lowers the power of unit root and cointegration tests. The other countries, for instance, have only annual data available with a maximum span of 20-30 years[4]. In this paper, we take a different direction to overcome the short data span and the distortions of a small sample. Since the power of an individual unit root test can be distorted when the span of the data is short (Pierse and Shell, 1995), we use a panel unit root test. The power of the traditional cointegration test (Johansen, 1988) is that multivariate systems with small sample sizes can be severely distorted. To this end, we need to combine information from time series and cross-section data once again, and thus we use panel unit root tests and heterogeneous panel cointegration tests. Additionally, although the panel data approach undoubtedly provides heterogeneous information at the country level while ensuring more reliable estimates via large sample property (Huang et al., 2004), the disturbing condition is that we need to face heterogeneity characteristics in the data set applications. However, concerning the problem of heterogeneity, we also expect the researcher to never embrace a kind of negative taste, without authority, to inspect such a problem. Several interesting as well as positive detections have already been provided. For instance,

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Islam (1995) presented panel estimates of the neoclassical model which accommodated level effects for individual countries through heterogeneous intercepts (i.e. the xed effects), allowing for intercept heterogeneity increases Islams estimates of the speed of convergence in a 96 non-oil sample. To the extent that these intercepts are correlated with the regressors, the conventional cross-section estimates used by Barro (1991) and Mankiw et al. (1992) will be biased because they assumed that conditional on countries accumulation of human and physical capital, per capita outputs converge to the same levels and the same growth rates (Lee et al., 1998). On a priori grounds, differential rates of technology growth across countries are clearly possible, induce Lee et al. (1997) allowed for heterogeneity in level effects, growth effects, and speeds of convergence while they were undergoing estimating empirical evidences based on the neoclassical growth model. In particular, one widely accepted prediction of most economic growth models is that purely redistributive policies (such as social security project expenditures) have a depressive effect on physical capital accumulation and growth (Ehrlich and Kim, 2005). When they imply a reduction of national savings and investment, some still dispute the existence of this phenomenon. For example, since they could not build a comprehensive security system in accordance with the principles of self-sufciency and nanced through the security tax, this will increase the operating costs of the manufacturer[5]. The cash subsidy will reduce the labor supply and the crowding out effect when governments adopt an expansion scal policy. But it can force people to save during employment; a high-quality working environment contributes to the improvement of the marginal productivity of labor forces in the welfare state, which contribute to the stabilization of politics and investment environment, coming from the multiplier effect of the government expenditure. As far as we can see, the pros and cons of the social security expenditures each make their claims. In this paper, we begin by examining previous studies of social security expenditures and economic growth relations. In summary, we hope to propose a new style and features in social security policy through this paper. Our paper contributes the following. First, we use a cointegration test for a panel of countries instead of a time-series approach, which provides more power for tests and estimates and allows us to increase the information available coming from the cross-section. Next, we use the full modied OLS (FMOLS hereafter) technique to estimate the cointegration vector for heterogeneous cointegrated panels, which correct the standard OLS for the bias induced by the endogeneity and serial correlation of the regressors. Furthermore, we specify and estimate an error correction model appropriate for heterogeneous panels, which distinguishes between long-run and short-run causality. Finally, because of the sensibility of macroeconomic series in East Asia countries, we can use the robust test to remove these nations from our samples and re-check the relations among SE, GDP and K. The paper is organized as follows: Section 2 provides a brief discussion of the panel unit root test and the panel cointegration procedure. Section 3 provides the empirical results, and nally, Section 4 is the conclusion.

2. Methodology 2.1 The panel unit roots test Investigations into the unit root in panel data have recently attracted a lot of attention. Abuaf and Jorion (1990) point out that the power of unit root tests may be increased by exploiting cross-sectional information. Levine and Lin (1992, henceforth LL)[6] proposes a panel-based ADF test that restricts parameters gi by keeping them identical across cross-sectional regions as follows: Dyit ai gi yit21
k X j1

Social security expenditures and economic growth 391

aj Dyit2j eit ;

where t 1; . . . ; T time periods and i 1; . . . ; N members of the panel. LL tests the null hypothesis of gi g 0 for all i, against the alternate of g1 g2 ; . . . g , 0 for ^ ^ all i, with the test based on the statistics t g g=s:e:g: However, one drawback is that g is restricted by being kept identical across regions under both the null and alternative hypotheses. For the above reason, Im et al. (2003, henceforth IPS) relaxed the assumption of the identical rst-order autoregressive coefcients of the LL test and allowed g to vary across regions under the alternative hypothesis. IPS tested the null hypothesis of gi 0 for all i, against the alternate of gi , 0 for all i. The IPS test is based on the mean-group approach, which uses the average of the tgi statistics to perform the  following Z statistic: p N  2 E t t  2 Z p ; Var t P where  1=N N tgi ; the terms E and Var are, respectively, the mean and t t t i1 variance of each t gi statistic, and they are generated by simulations and are tabulated  in IPS (2003). The Z converges to a standard normal distribution. Based on Monte Carlo experiment results, IPS demonstrates that their tests have more favorable nite sample properties than the LL test. Hadri (2000) argues differently that the null should be reversed to be the stationary hypothesis in order to have a stronger power test. Hadris (2000) Lagrange multiplier (LM) statistic can be written as: 0 1 T X 2 1 S it C N BT 2 t X 1 X B t1 C ^ B C; S it ^ 3 1ij ; LM N i1 B s2 C ^1 A @ j1 ^1 where s2 is the consistent Newey and West (1987) estimate of the long-run variance of disturbance terms. 2.2 The panel cointegration tests Pedroni (1999) considers the following time series panel regression: yit ai di t X it bi eit ; 4

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where yit and X it are the observable variables with dimension of N * T 1 and N * T m; respectively. He develops asymptotic and nite-sample properties of testing statistics to examine the null hypothesis of non-cointegration in the panel. The parameters ai and di allow for the possibility of member specic xed effects and deterministic trends, respectively[7]. The slope coefcients bi are also permitted to vary by individual, so that in general the cointegrating vectors may be heterogeneous across members of the panel (Pedroni, 2004). The tests allow for heterogeneity among individual members of the panel, including heterogeneity in both the long-run cointegrating vectors and in the dynamics since there is no reason to believe that all parameters are the same across countries. From the form in equation (4), this formulation allows for considerable heterogeneity, xed effect, individual deterministic trend and a heterogeneous slope coefcient, which powerfully incorporates all kinds of country and time heterogeneities that are usual in the SE-GDP relationship (Gutierrez, 2003; Kim et al., 2005). Two types of panel coinegration tests are suggested by Pedroni (1999). The rst type is based on the within-dimension approach, which includes four statistics. They are the panel v-statistic, the panel r-statistic, the panel PP-statistic, and the panel ADF-statistic. These statistics pool the autoregressive coefcients across different members for the unit root tests on the estimated residuals. The second test by Pedroni (1999) is based on the between dimension approach, which includes three statistics. They are the group r-statistic, the group PP-statistic, and the group ADF-statistic. These statistics are based on estimators that simply average the individually-estimated coefcients for each member[8]. ^ In equation (4) above, eit is the estimated residual and the other terms are properly dened in Pedroni (1999). All seven tests are distributed as being standard normal asymptotically. This requires a standardization based on the moments of the underlying Brownian motion function. The panel v-statistic is a one-sided test where large positive values reject the null of no cointegration. The remaining statistics diverge to negative innitely, which means that large negative values reject the null. The critical values are also tabulated by Pedroni (1999). In the presence of unit root variables, the effect of superconsistency may not dominate the endogeneity effect of the regressors if OLS is employed. Pedroni (2000) shows how FMOLS can be modied to make an inference in being cointegrated with the heterogeneous dynamic. In the FMOLS setting, non-parametric techniques are exploited to transform the residuals from the cointegration regression and can get rid off nuisance parameters. The cointegration analysis of panel data consists of four steps. First, we test for a panel unit root; second, we test for cointegration panel data employing the heterogeneous panel cointegration test developed by Pedroni (1999) which allows for different individual effects cross-sectional interdependency. Third, the long-run relationship is estimated using the FMOLS technique for heterogeneous cointegrated panels (Pedroni, 2000). Finally, once the panel cointegration is implemented, we establish a panel error correction model to examine for short-run and long-run causalities between SE and GDP.

3. Empirical investigation Our study uses the annual time series for the 12 Asian countries, including Australia, Bahrain, Iran, Israel, Korea, Kuwait, Malaysia, Singapore, Sri Lanka, Syrian, Thailand and Turkey[9]. The main data source of the social security expenditures is the World Bank (2000) Public expenditures on social security and welfare. The unit is expressed in US dollars. The empirical period depends on the availability of data, where the time period used is 1972-2000. GDP, K and SE are measured at constant 2000 prices and transformed in natural logarithms. In addition, due to enhanced security for people means reducing their vulnerability to such risks as ill health, providing them with the means to manage risk themselves, and strengthening market or public institutions for managing risk. Thus, the tools include micronance programs, old age assistance and pensions, as well as public provision of basic health care and education. Thus, the main social policy areas are as follows: old age, survivors, incapacity-related benets, health, family, active labor market programs, unemployment, housing, and other social policy areas. In this paper, we dene the social security expenditure sum total education, health, social security and welfare, housing and community amenities, and economic services expenditures. Table I presents the panel unit root tests. At the 5 percent signicance level, no matter if there is a time effect or not, IPS and Hadri statistics signicantly conrm that three series have a panel unit root; then just only one statistics reject the panel unit root in the LL test. The test like this shows the following: all variables are the I(1) process. Using these results, we proceed to test GDP, SE and K for cointegration in order to determine if there is a long-run relationship to control for in the econometric specication. We rst implement the following equations: GDPit ai di t bi SEit ci Kit 1it ; SEit fi gi t xi GDPit hi Kit nit ; 5 6

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where it allows for cointegrating vectors of differing magnitudes between countries, as well as country (a and f) and time (d and g) xed effects. Table II contains the panel cointegration estimates (with time xed effect) for systems in which the dependent variables are measures of GDP and SE. First, in column 2 of Table II, the dependent variable is GDP, except for the panel PP and group PP statistics, all other statistics are not able to signicantly reject the null of no cointegration. However, a re-check of the dependent variable is SE in column 3. It shows a contrary result, except for the panel variance statistics, all other statistics signicantly reject the null of no cointegration. Thus, it can be seen that the GDP, K and SE move together in the long run. The next step is an estimation of such a relationship. Table III reports the results of the country-by-country and panel FMOLS, when the dependent variable is GDP. The panel parameters are 0.16 and 0.25 shown at the bottom of Table with and without time dummies, respectively. The coefcient of SE is statistically signicant at the 5 percent level, and the effect is positive. On a per country basis, SE has a positive impact on GDP in Australia, Bahrain, Iran, Israel, Korea and Malaysia. The FMOLS estimates of the elasticity of SE with respect to GDP range from 2 0.07 (Turkey) to 0.4 (Iran). Moreover, for six countries of SE are statistically

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Variables Parameters Time xed effects 0.285 4.260 20.175 27.441 * * 212.291 * * 22.481 * * 2.873 0.474 2 0.662 2 9.059 * * 2 9.419 * * 2 7.016 * * 0.899 1.284 0.429 2 7.072 * * 2 5.281 * * 2 3.081 * * No time effects Time xed effects

GDP SE K DGDP DSE DK

Notes: D denotes rst differences. All variables are in natural logarithms; * * indicates statistical signicance at the 5 percent level

Table I. Panel unit root tests LL IPS No time effects 9.882 * * 6.784 * * 9.451 * * 1.054 1.487 2.212 Hadri Time xed effects 4.624 * * 5.897 * * 7.368 * * 1.285 6.516 * * 2.787

No time effects

20.438 1.001 23.054 * * 29.173 * * 29.048 * * 26.389 * *

Testing statistics Panel variance Panel r Panel PP Panel ADF Group r Group PP Group ADF

Dependent variable is GDP 23.723 0.011 21.836 * * 20.763 0.204 25.232 * * 20.383

Dependent variable is SE 0.572 2 4.223 * * 2 12.078 * * 2 7.249 * * 2 2.783 * * 2 14.994 * * 2 6.250 * *

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Table II. Panel cointegration tests

Notes: Statistics are asymptotically distributed as normal. The variance ratio test is right-sided, while the others are left-sided; * *rejects the null of no cointegration at the 5 percent level

signicant at the 5 percent level, and the effect is positive. When the dependent variable is SE, as seen from Table IV, for the individual countries, in 9 out of 12 cases one nds rejection of the null. The panel parameters are 1.41 and 2.44 with and without time dummies, respectively. The coefcients of GDP are statistically signicant at the 5 percent level, and the effect is positive. For the panel tests above, all two reported tests reject the null at least at the 5 percent level. Therefore, through this examination, we nd that the cointegrated relationship between social security expenditures and economic growth in Asian countries is very denite. To conclude, the country-by-country and panel cointegration test results clearly indicate that there is a long run cointegrating relationship among GDP, SE and K in the Asian countries. Hence, because the FMOLS offer information about the direction of the long-run cointegrated relationship, from Tables III and IV we investigate that social security expenditure has a positive inuence on growth, increasing social security spending can promote economic growth by some connections, whereas, after economic development can also improve its state of well-being in these Asian countries. At least, our conclusion matches with Sala-i-Martin (1996) and Bellettini and
Country groupings Australia Bahrain Iran, Islamic Israel Korea Kuwait Panel (without time dummies) Malaysia Singapore Sri Lanka Syrian Arab Rep. Thailand Turkey Panel (with time dummies) 0.17 0.18 0.40 0.20 0.29 0.20 0.25 0.29 0.08 2 0.06 0.04 0.18 2 0.07 0.16 SE (5.54) * * (2.87) * * (7.17) * * (8.96) * * (5.68) * * (0.59) (12.21) * * (2.98) * * (0.70) (21.10) (1.02) (1.16) (22.52) * * (9.54) * * 0.19 0.15 0.23 20.01 0.37 20.42 0.29 0.15 0.16 20.09 0.09 0.49 20.54 0.06 K (6.00) * * (3.26) * * (6.04) * * (2 2.65) * * (4.95) * * (2 1.25) (14.06) * * (1.63) (0.53) (2 0.90) (1.39) (2.24) * * (2 3.71) * * (5.64) * *

Notes: t-value in parentheses; * * and * indicate statistical signicance at the 5 and 10 percent levels, respectively

Table III. FMOLS estimate tests of cointegration (dependent variable is GDP)

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Country groupings Australia Bahrain Iran, Islamic Rep. Israel Korea Kuwait Panel (without time dummies) Malaysia Singapore Sri Lanka Syrian Arab Rep. Thailand Turkey Panel (with time dummies)

GDP 3.47 2.41 1.89 3.53 2.04 0.06 2.44 1.38 1.11 2 0.69 2.91 1.02 2 2.16 1.41 (8.32) * * (5.73) * * (7.01) * * (8.22) * * (4.30) * * (0.52) (10.69) * * (3.20) * * (2.34) * * (2 0.58) (3.04) * * (2.20) * * (2 1.58) (12.33) * * 20.83 20.36 20.33 0.03 20.40 20.61 20.34 0.05 21.16 21.20 0.92 20.64 1.11 20.29

K (2 7.79) * * (2 4.71) * * (2 2.60) * * (2.18) * * (2 1.08) (2 5.22) * * (2 1.68) * (0.27) (2 2.68) * * (2 4.14) * * (4.79) * * (2 1.47) (1.21) (2 6.13) * *

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Table IV. FMOLS estimate tests of cointegration (dependent variable is SE)

Notes: t-value in parentheses; * * and * indicate statistical signicance at the 5 and 10 percent levels, respectively

Ceroni (2000), whose found positive effects of social security expenditure on growth. But different from these previous esteemed theories, generally speaking, this paper focused on investigating how social security affects growth as well as growth determinants (capital) and vice versa through the panel cointegration and causality test. As well as the majority of time series based tests, taking account of the fact that the panel unit root test and cointegration tests utilize the data in a more efcient way, the panel results provided clear evidence that there is a fairly strong long run relationship among GDP, social security expenditure and capital stock. Once the three variables are cointegrated, the next step is to implement the causality test[10]. We use a panel-based error correction model to account for the long-run relationship using the two-step procedure from Engle and Granger (1987). The rst step is the estimation of the long-run model for equations (5) and (6) in order to obtain the estimated residuals (error correction term; ECM hereafter). The second step is to estimate the Granger causality model with a dynamic error correction as follows: X X u11ik DGDPit2k u DSEit2k DGDPit u1j l1i ECMit21 k k 12ik X u DKit2k u1it 7 k 13ik X X DSEit u2j l2i ECMit21 u21ik DGDPit2k u DSEit2k k k 22ik X u DKit2k u2it ; k 23ik

Since this is a dynamic panel data model, we must use an instrumental variables estimator to deal with the correlation between the error term and lagged dependent variables. The capital stock equations are omitted, because they are not relevant. Since, this is a dynamic panel data model, we must use an instrumental variables estimator to deal with the correlation between the error term and lagged dependent variables

(Christopoulos and Tsionas, 2004; Lee, 2005)[11]. We have found the lag length k 2 is necessary to satisfy the classical assumptions on the error term, then we use three and four periods as instruments for the lagged dependent variables. To maintain consistency, the dynamic panel estimator depends on the validity of the instruments for addressing this issue. We address this concern by using the Sargan test of over-identifying restrictions, which tests the overall validity of the instruments by analyzing the sample analog of the moment conditions used in the estimation process (Edison et al., 2002). The sources of causation can be identied by testing for the signicance of the coefcients of the dependent variables in equations (7) and (8). First, the short-run effect can be considered transitory. For short-run causality, we can test H0: u12k 0 for all k in equation (7) or H0: u21k 0 for all k in equation (8). Next, the long-run causality can be tested by looking at the signicance of the speed of adjustment l, which is the coefcient of the error correction term. The signicance of l indicates the long-run relationship of the cointegrated process, and so movements along this path can be considered permanent. For long-run causality, we can test H0: l1i 0 in equation (7) or H0: l2i 0 in equation (8). Finally, we can use the joint test to check for a strong causality test, where variables bear the burden of a short-run adjustment to re-establish a long-run equilibrium, following a shock to the system[12]. Table V shows the result of a panel causality test between GDP and social security expenditure. In the short-run, we nd that no matter if we are analyzing GDP or SE, the equations are not signicant at the 5 percent level, implying a lack of short-run causalities. Whereas, in the long-run, we nd both GDP and SE equations are signicant at the 5 percent level. This indicates that bi-directional causal linkages between social security expenditure and economic growth are identied. Consequently, the governments social security expenditure acts as a factor of economic growth. We support the conviction of previous studies that it can promote the quality of life of its citizens, improve education, and induce retirement. We also agree that it positively inuences savings, health and social welfare systems, as well as marginal productivity of labor forces in a welfare state, which contribute to the stabilization of politics and investment environment, and therefore growth (Feldstein, 1974; Sala-i-Martin, 1992). But different from these previous theories, generally speaking, this paper focused on investigating how social security affects growth as well as growth determinants (capital) and vice versa through panel cointegration and causality tests. There are explicit long-run causality relationships between SE and GDP. Such phenomena are similar to studies by Kaganovich and Zilcha (1999), Bellettini and Ceroni (2000), under the social security program nanced by a pay-as-you-go system, suggest that higher investment in education results in higher aggregate output in later

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Dependent variable DGDP DSE

Source of causation (independent variable) Short run Long run DGDP DSE ECM ECM/DGDP 0.123 2.094 18.748 * * 18.175 * * 6.207 * *

ECM/DSE 7.197 * *

Notes: * * and * indicate statistical signicance at the 5 and 10 percent levels, respectively

Table V. Panel causality tests

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periods in the economy and therefore in higher social security benets (given a xed tax rate). Thus, if the government can choose the allocation of its funds, it can maximize the long-run growth rate. Hence, we nd that the social security expenditure and economic growth have long-term synchronous trends in Asia. Heterogeneity in countries rates of growth of technology and cross-country differences in the speed of convergence also raise important econometric issues. This is now widely recognized for slope heterogeneity (Pesaran et al., 1996). The Pedronis (1999, 2004) cointegrated tests allow for heterogeneity among individual members of the panel, including heterogeneity in both the long-run cointegrating vectors and in the dynamics since there is no reason to believe that all parameters are the same across countries. Requiring special attention is a central question for empirical economics in general and a question for economic growth in particular is which sample countries should be included and which ones should be excluded. Not surprisingly, due to the sensibility of macroeconomic series in East Asian countries (Barro and Sala-i-Martin, 2004, p. 553), it is sensible to pool their time series data together to perform the panel cointegration test. Therefore, we can use the robust test by taking the above-mentioned national sample out of consideration (such as Korea and Singapore). We also nd some changes in the results. Based on Table VI, the panel cointegration estimates with a time xed effect, when the dependent variables are the GDP, the panel PP, the group PP and the group ADF statistics that are signicant reject the null of no cointegration. In column 3 while SE is the dependent variable presenting a contrary result, except for the panel variance statistics, all other statistics signicantly reject the null of no cointegration. Next, Tables VII and VIII report the results of the country-by-country and panel FMOLS. The panel parameters are 0.28 and 0.14 without and with time dummies, respectively. The coefcient of SE is statistically signicant at the 5 percent level, and the effect is positive while dependent variable is GDP. On a per country basis, SE has a positive impact on GDP in Australia, Bahrain, Iran, Israel, Malaysia, Thailand and Turkey. Especially, in Thailand and Turkey, the evidences shows mightily by originally of insignicant transform into signicantly that SE have positively impact on GDP. Furthermore, let the dependent variable change from GDP to SE, the coefcient of GDP are statistically signicant at the 5 percent level without time dummies and the effect is positive but insignicant with time dummies. Besides this, the panel parameters are 2.49 and 1.57, respectively. Iran, Syria and Turkey are the nations of superiorly change,

Testing statistics Panel variance Panel r Panel PP Panel ADF Group r Group PP Group ADF

Dependent variable is GDP 23.936 20.778 22.458 * * 0.112 20.226 27.803 * * 25.905 * *

Dependent variable is SE 0.345 2 4.041 * * 2 10.751 * * 2 2.833 * * 2 2.557 * * 2 15.367 * * 2 4.403 * *

Table VI. Panel cointegration tests (robust test)

Notes: Statistics are asymptotically distributed as normal. The variance ratio test is right-sided, while the others are left-sided; * *rejects the null of no cointegration at the 5 percent level

Country groupings Australia Bahrain Iran, Islamic Israel Kuwait Panel (without time dummies) Malaysia Sri Lanka Syrian Arab Rep. Thailand Turkey Panel (with time dummies) 0.13 0.40 0.04 1.11 0.02 0.28 0.20 0.09 2 0.05 0.56 0.09 0.14

SE (1.82) * (4.57) * * (0.03) (5.18) * * (1.26) (12.58) * * (2.09) * * (0.05) (2 0.80) (8.02) * * (16.77) * * (8.57) * * 0.62 20.00 0.35 0.03 20.32 0.21 0.40 0.52 0.10 0.45 20.06 0.04

K (5.98) * * (2 0.01) (4.85) * * (4.43) * * (2 2.69) * * (9.96) * * (5.69) * * (5.73) * * (0.60) (8.72) * * (2 1.80) * (2.71) * *

Social security expenditures and economic growth 399

Notes: t-value in parentheses; * * and * indicate statistical signicance at the 5 and 10 percent levels, respectively

Table VII. FMOLS estimate tests of cointegration (dependent variable is GDP, robust test)

Country groupings Australia Bahrain Iran, Islamic Israel Kuwait Panel (without time dummies) Malaysia Sri Lanka Syrian Arab Rep. Thailand Turkey Panel (with time dummies)

GDP 3.11 (3.41) * * 1.04 (2.27) * * 2 0.11 0.64 0.08 2.49 0.59 0.65 2 0.04 1.31 17.68 1.57 (2 0.19) (2.79) * * (0.18) (9.66) * * (1.03) (1.14) (2 0.04) (6.62) * * (13.33) * * (10.61) 21.28 20.22 0.46 20.02 0.27 20.23 0.38 20.30 2.03 20.47 23.17 20.19

K (2 1.82) * (2 1.53) (1.82) * * (2 1.85) * (1.16) (2 0.98) (1.19) (2 0.93) (6.26) * * (2 2.90) * * (2 4.48) * * (2 5.02) * *

Notes: t-value in parentheses; * * and * indicate statistical signicance at the 5 and 10 percent levels, respectively

Table VIII. FMOLS estimate tests of cointegration (dependent variable is SE, robust test)

among them, the negative inuence exist from GDP to SE in Iran and Syria. Whereas, the impact effect is quite the contrary in Turkey. Finally, Table IX shows the result of a panel causality test between GDP and social security expenditure. We nd both GDP and SE equations are signicant at the 5 percent level in the long-run. This indicates
Source of causation (independent variable) Short run Long run DGDP DSE ECM ECM/DGDP 2.372 1.116 4.869 * * 3.418 * * 2.598 *

Dependent variable DGDP DSE

ECM/DSE 2.197 * Table IX. Panel causality tests (robust test)

Notes: * * and * indicate statistical signicance at the 5 and 10 percent levels, respectively

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that bi-directional causal linkages between social security expenditure and economic growth are identied. 4. Concluding remarks The social security system is intended to satisfy the peoples need for living and to protect peoples basic right for survival. The performance of social security directly affects the publics attitude toward the government and avoids the worry of Chough (1955) as much as possible. It is also an indicator of a countrys modernization. This paper employs data on 12 Asian countries from 1972 to 2002, and uses the panel unit root test of LL, IPS, and Hadri to check whether the data is stationary or not. The results indicate that GDP, K and SE are non-stationary. We then re-examined the co-movement as well as the causal relationship between GDP and SE using the panel cointegration tests. What is the long-run trend between social security expenditure and economic growth? The panel cointegration and the panel-based error correction model were conducted to answer the question. The FMOLS deals with the problem of endogeneity of regressors. Our evidence shows that there is a long-run steady-state relationship among GDP, SE and K for a cross-section of countries, after allowing for a country-specic effect. In other words, there is existent synchronization. Implementing the Granger causality test, we nd that the long-run, bi-directional causal linkages between social security expenditure and economic growth are identied. In addition to the robust test, they display similar results, but the individual impact effect isnt same. This shows that in every moment, economic growth must be based in the social welfare policy contiguously, and that the economic growth process can allow the social welfare policy to proceed contiguously.
Notes 1. We also feel regret for the data in large parts of Asia is quite scarce. 2. Another adaptive method is the global vector autoregressive model (GVAR) as a generator of global macroeconomic dynamics and scenarios offered by Pesaran et al. (2004). This is in contrast to the GVAR, which estimates that a cointegrated model for each country/region separately, allowing for heterogeneities that exist across the different countries. Accordingly, in order to match the international trade pattern of the country/region, the author used the relative domestic macroeconomic variables such as GDP to corresponding foreign variables constructed exclusively, thus, the specic vector error-correcting models (VECM) are estimated for individual countries (or regions). By assuming the exogeneity regarding the rest of the world with respect to a given domestic or regional economy, the GVAR makes efcient use of the fact of limited data. 3. See detail in Zhang and Zhang (2004). 4. Of course there are other research studies that use a longer time span, but they usually ignore the potential problem of structural breaks. 5. Liu (1991) found that social security for the state work force in China, primarily income-security programs for state enterprises, faces unprecedented challenges caused by a decade of policy changes and experiments in social security and in enterprise and labor-force reforms. Serious problems in funding and administering these programs have surfaced, including social security expenditures which are raising rapidly. 6. This was nally published as Levine et al. (2002).

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7. Consequently, in the panel data estimation, there is a random effect and xed effect models must be selected by researcher. Nevertheless, according to Judge et al. (1988), the difference in results is miniscule for a large T and a small N, (any series represent the country i at time t; i 1; . . . ; N and t 1; . . . ; T). In the case of a small T relative to N, the xed-effect model is inefcient though consistent and, as such, a random effect model may be preferred, otherwise, the xed effect is conducted. Baltagi et al. (2000) and Freeman (2000) pointed out that the xed effect model performs better in prediction among the pooling techniques. 8. The detailed of the panel v-statistic, panel r-statistic, panel PP-statistic, panel ADF-statistic, group r-statistic, group PP-statistic, and group ADF-statistic are available in Pedroni (1999). 9. Pedroni (2004) pointed out that the use of cointegrated techniques to test for the presence of long-run relationships among integrated variables has enjoyed growing popularity in the empirical literature. On the other hand, pooling time series has traditionally involved a substantial degree of sacrice in terms of the permissible heterogeneity of the individual time series. In this paper, we attempt to discuss regional phenomenon in Asia but were constrained by lack of national data, especially in the data length (T) to satisfy the xed effect estimation such as the parameters ai in panel cointegration regression. For matching the research topic, we look for sample country in which the social security expenditures have the longer in data span from our data source. The empirical period depends on the availability of data. 10. Another research path is the need for nancial institutions to manage risk, Pesaran et al. (2004) built a compact VECM under the global base, which explicitly provides a global modeling framework by making use of recent advances in the analysis of cointegrating systems-the individual country/region specic vector error-correcting models are estimated. They found that the global vector autoregressions (GVAR) model does relatively better forecasting real output, ination, real money and exchange rates than it does for equity prices and interest rates. This enables researchers to conduct policy analysis on the effect of changes in macroeconomic risk factors on credit risk. 11. Certainly, in Table VII of Pesaran et al.s (2004, p. 144), they offered a perfect examination method just like weak an exogeneity test. 12. See Asafu-Adjaye (2000) and Oh and Lee (2004). References Aaron, H.J. (1982), Economic Effects of Social Security, The Brooking Institutions, Washington, DC. Abuaf, N. and Jorion, P. (1990), Purchasing power parity in the long run, Journal of Finance, Vol. 45, pp. 157-74. Alesina, A. and Rodrik, D. (1994), Distributive politics and economic growth, Quarterly Journal of Economics, Vol. 109, pp. 465-90. Asafu-Adjaye, J. (2000), The relationship between energy consumption, energy prices and economic growth: time series evidence from Asian developing countries, Energy Economics, Vol. 22, pp. 615-25. Bahmani-Oskooee, M. and Miteza, M.I. (2004), Panel cointegration and productivity bias hypothesis, Journal of Economic Studies, Vol. 31, pp. 448-56. Baltagi, B.H., Grifn, J.M. and Xiong, W. (2000), To pool or not to pool: homogeneous versus heterogeneous estimators applied to cigarette demand, Review of Economics and Statistics, Vol. 82, pp. 117-26. Barro, R.J. (1991), Economic growth in a cross section of countries, Quarterly Journal of Economics, Vol. 106, pp. 407-43.

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