The determinants of economic institutions and the knock-on effects on GDP per capita

Castro Souza Junior, Jose Ronaldo and Gross, Daniel and Figueiredo, Lizia (2023): The determinants of economic institutions and the knock-on effects on GDP per capita.

Abstract

There have been only a small number of empirical studies assessing the determinants of economic institutions despite the development of several notable theories regarding their origins and their impact on economic development. In this article, we identify the key determinants of economic institutions highlighted in the theoretical literature and select empirical proxies that best represent them while also ensuring as large a sample of countries as possible. With economic institutions as the dependent variable, we use a dynamic panel data model which allows us to deal with endogeneity problems. Our results indicate that democratic political institutions, years of schooling and political regime duration have a positive and statistically significant effect, and income inequality has a negative and statistically significant effect on the quality of economic institutions. Our main results are robust to removing certain groups of countries from the sample. We also use an interaction term to evaluate if regime duration has a stronger effect on the quality of economic institutions in autocracies than democracies, however the results we found are not robust to the two democratic political institutions data sources used in this paper. In the second part of the article, we use the same dynamic panel data model but with GDP per capita as the dependent variable. When we control for the quality of economic institutions, the association between democratic political institutions and GDP per capita switches from positive to negative. This and other evidence support our hypothesis that democratic political institutions have a positive indirect effect on per capita income via economic institutions.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic institutions; political institutions; law and economics
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; K - Law and Economics > K1 - Basic Areas of Law; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development

References

Acemoglu, D. and Johnson, S. (2005), ‘Unbundling Institutions’, Journal of Political Economy 113(5), 949–995. Acemoglu, D., Johnson, S. and Robinson, J. A. (2001), ‘The colonial origins of com- parative development: an empirical investigation’, The American Economic Review 91(5), 1369–1401. Acemoglu, D., Jonhson, S. and Robinson, J. A. (2005), Institutions as a fundamen- tal cause of long-run growth, in P. Aghion and S. N. Durlauf, eds, ‘Handbook of economic growth’, Vol. 1, North Holland, Amsterdam, chapter 6, pp. 385–472. Acemoglu, D. and Robinson, J. A. (2008a), ‘Persistence of power, elites, and institu- tions’, American Economic Review 98(1), 267–293. Acemoglu, D. and Robinson, J. A. (2008b), ‘The persistence and change of institutions in the Americas’, Southern Economic Journal 75(2), 282–299. 29 Alonso-Borrego, C. and Arellano, M. (1999), ‘Symmetrically normalized instrumental- variable estimation using panel data’, Journal of Business & Economic Statistics 17(1), 36–49. Arellano, M. (2003), Panel Data Econometrics, Oxford University Press, New York. Arellano, M. and Bond, S. (1991), ‘Some tests of specification for panel data’, Review of Economic Studies 58, 277–297. Arellano, M. and Bover, O. (1995), ‘Another look at the instrumental-variable estima- tion of error-components models’, Journal of Econometrics 68, 29–51. Barro, R. J. and Lee, J. (2013), ‘A new data set of educational attainment in the world, 1950-2010’, Journal of development economics 104, 184–198. Baryshnikova, N. V., Pham, N. T. and Wihardja, M. M. (2016), ‘Does Political and Economic Inequality Affect Institutional Quality?’, Economic Record 92(297), 190– 208. Blundell, R. and Bond, S. (1998), ‘Initial conditions and moment restrictions in dy- namic panel data models’, Journal of Econometrics 87, 115–143. Bond, S., Hoeffler, A. and Temple, J. (2001), ‘GMM Estimation of Empirical Growth Models’, CEPR Discussion Paper p. 33. URL: http://economics.ouls.ox.ac.uk/14464/ Borner, S., Bodmer, F. and Kobler, M. (2004), Institutional efficiency and its deter- minants: the role of political factors in economic growth, Organisation for Economic Co-operation and Development, Paris. Clague, C., Keefer, P., Knack, S. and Olson, M. (1996), ‘Property and contract rights in autocracies and democracies’, Journal of Economic Growth 1, 243–276. Cohen, D. and Leker, L. (2014), ‘Health and Education: Another Look with the Proper Data’. URL: http://www.parisschoolofeconomics.eu/docs/cohen-daniel/cohen-leker- health-and-education-2014.pdf Cohen, D. and Soto, M. (2007), ‘Growth and human capital: Good data, good results’, Journal of Economic Growth 12(1), 51–76. Gutmann, J. and Voigt, S. (2015), The rule of law: Measurement and deep roots, CESifo Working Paper n. 5670. Howell, L. D. (2007), The handbook of country political risck analysis, The PRS Group, Easty Syracuse. Keefer, P. and Knack, S. (2002), ‘Polarization, Politics, and Property rights’, Public Choice 111(August), 127–154. 30

Marshall, M. G., Gurr, T. R. and Jaggers, K. (2010), Polity IV Project - Political regime characteristics and transitions, 1800-2009: Dataset users’ manual, Center for Systemic Peace, Vienna. Marshall, M. G., Gurr, T. R. and Jaggers, K. (2014), Polity IV Project - Political regime characteristics and transitions, 1800-2013: Dataset users’ manual, Center for Systemic Peace, Vienna. North, D. (1990), Institutions, institutional change and economic performance, Cam- bridge University Press, New York. North, D. C. (1981), Structure and Change in Economic History, W. W. Norton & Company, New York. Roodman, D. (2009), ‘How to do xtabond2: An introduction to difference and system GMM in Stata’, The Stata Journal 9(1), 86–136. Staiger, D. and Stock, J. H. (1997), ‘Instrumental variables regression with weak in- struments’, Econometrica, Econometric Society 65(May(3)), 557–586. Sunde, U., Cervellati, M. and Fortunato, P. (2008), ‘Are all democracies equally good? The role of interactions between political environment and inequality for rule of law’, Economic Letters 99, 552–556. Thomas, V., Wang, Y. and Fan, X. (2001), Measuring education inequality: Gini coefficients of education, Policy Research Working Papaer 2525, The World Bank, Washington, D.C.