Institutions and growth: Testing the spatial effect using weight matrix based on the institutional distance concept

Ahmad, Mahyudin and Hall, Stephen G. (2012): Institutions and growth: Testing the spatial effect using weight matrix based on the institutional distance concept.

Abstract

This study augments a standard growth model with institutional controls, and models the spatial dependence using geographical and institutional weight matrices. Spatial Durbin model is shown to be the most appropriate to describe the data and political institutions weight matrix best explains the institutional distance concept since it produces identical results to the exogenous geographical-based distance matrix. Overall, the findings give evidence to the institutional quality effects, particularly the security of property rights, on economic growth in the developing countries. We also find evidence of an indirect route of institutions spillover where institutions in a country lead to economic improvement in that country and generate positive effects on the neighbouring countries’ income growth. Furthermore, our study is able to show that countries with similar political institutional settings have an increased spatial dependence and converge to a similar level of growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Growth; institutions; spillover effects; institutional distance; spatial Durbin model
• Subjects: R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C21 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions

References

Abreu, M., de Groot, H. L. F., & Florax, R. J. G. M. (2005). Space and Growth: A Survey of Empirical Evidence and Methods. Region et Developement, 21, 12–43.

Acemoglu, D., Johnson, S., & Robinson, J. A. (2001). The colonial origins of comparative development: An empirical investigation. American Economic Review, 91(5), 1369-1401.

Acemoglu, D., Johnson, S. and Robinson J.A. (2002). “Reversal Of Fortune: Geography and Institutions In The Making Of The Modern World Income Distribution”, The Quarterly Journal of Economics, MIT Press, vol. 117(4), pp 1231-1294

Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Institutions as a Fundamental Cause of Long-Run Growth, Handbook of Economic Growth Vol. 1, pp. 385-472.

Ades, A., & Chua, H. B. (1997). Thy Neighbor's Curse: Regional Instability and Economic Growth. Journal of Economic Growth, 2(3), 279-304.

Anselin, L. (2001). Spatial econometrics. In B. H. Baltagi (Ed.), A Companion to Theoretical Econometrics (pp. 310–330). Oxford: Blackwell.

Anselin, L., & Bera, A. (1998). Spatial dependence in linear regression models with an introduction to spatial econometrics In A. Ullah & D. E. A. Giles (Eds.), Handbook of Applied Economic Statistics (pp. 237-289). New York: Marcel Dekker.

Anselin, L., Bera, A., Florax, R., & Yoon, M. (1996). Simple diagnostic tests for spatial dependence. Regional Science and Urban Economics, 26(1), 77-104.

Arbia, G. (2006). Spatial Econometrics. Statistical Foundations and Applications to Regional Convergence. Berlin: Springer.

Arbia, G., Battisti, M., & Di Vaio, G. (2010). Institutions and geography: Empirical test of spatial growth models for European regions. Economic Modelling, 27(1), 12-21.

Barro, R. J. (1991). Economic-growth in a cross-section of countries. Quarterly Journal of Economics, 106(2), 407-443.

Barro, R. J., & Lee, J.-W. (2010). A New Data Set of Educational Attainment in the World, 1950-2010. National Bureau of Economic Research Working Paper Series, No. 15902. 23

Bosker, M., & Garretsen, H. (2009). Economic development and the geography of institutions. Journal of Economic Geography, 9(3), 295-328.

Campos, N. F., & Nugent, J. B. (1999). Development Performance and the Institutions of Governance: Evidence from East Asia and Latin America. World Development, 27(3), 439-452.

Caselli, F., Esquivel, G., & Lefort, F. (1996). Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics. Journal of Economic Growth, 1(3), 363-389.

Claeys, P., & Manca, F. (2010). A missing spatial link in institutional quality. Applied Economics Letters, 18(3), 223 - 227.

Crafts, N. (1999). East Asian Growth before and after the Crisis. IMF Staff Papers, 46(2), 139-166.

Easterly, W., & Levine, R. (1998). Troubles with the Neighbours: Africa's Problem, Africa's Opportunity. Journal of African Economies, 7(1), 120-142.

Elhorst, J. P. (2003). Specification and Estimation of Spatial Panel Data Models. International Regional Science Review, 26(3), 244-268.

Elhorst, J. P. (2010). Applied Spatial Econometrics: Raising the Bar. Spatial Economic Analysis, 5(1), 9-28.

Elhorst, J. P., & Fréret, S. (2009). Evidence Of Political Yardstick Competition In France Using A Two-Regime Spatial Durbin Model With Fixed Effects. Journal of Regional Science, 49(5), 931-951.

Ertur, C., & Koch, W. (2006). Convergence, Human Capital and International Spillovers: Laboratoire d'Economie et de Gestion, CNRS UMR 5118, Université de Bourgogne.

Ertur, C., & Koch, W. (2007). Growth, technological interdependence and spatial externalities: theory and evidence. Journal of Applied Econometrics, 22(6), 1033-1062.

Faber, G., & Gerritse, M. (2009). External influences on local institutions: spatial dependence and openness: Utrecht School of Economics.

Florax, R. J. G. M., Folmer, H., & Rey, S. J. (2003). Specification searches in spatial econometrics: the relevance of Hendry's methodology. Regional Science and Urban Economics, 33(5), 557-579.

Gastil, R. D. (1978). Freedom in the world : political rights and civil liberties. Retrieved from http://www.nsd.uib.no/macrodataguide/set.html?id=17&sub=1 24

Glaeser, E., L. , La-Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2004). Do Institutions Cause Growth? Journal of Economic Growth, 9(3), 271-303.

Gleditsch, K. S., & Beardsley, K. (2004). Nosy Neighbors. Journal of Conflict Resolution, 48(3), 379-402.

Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others? Quarterly Journal of Economics, 114(1), 83-116.

Headey, D. D., & Hodge, A. (2009). The Effect of Population Growth on Economic Growth: A Meta-Regression Analysis of the Macroeconomic Literature. Population and Development Review, 35(2), 221-248.

Henisz, W. J. (2010). Political Constraint Index Dataset. from http://www-management.wharton.upenn.edu/henisz/

Hoeffler, A. (2002). The Augmented Solow Model and the African Growth Debate. Oxford Bulletin of Economics and Statistics, 64(2), 135-158.

Islam, N. (1995). Growth Empirics: A Panel Data Approach. The Quarterly Journal of Economics, 110(4), 1127-1170.

Kaminsky, G. L., & Reinhart, C. M. (2000). On crises, contagion, and confusion. Journal of International Economics, 51(1), 145-168.

Kelejian, H. H., Murrell, P., & Shepotylo, O. (2008). Spatial Spillovers in the Development of Institutions. Mimeo, University of Maryland.

Kogut, B., & Singh, H. (1988). The Effect of National Culture on the Choice of Entry Mode. Journal of International Business Studies, 19(3), 411-432.

Kostova, T. (1999). Transnational Transfer of Strategic Organizational Practices: A Contextual Perspective. The Academy of Management Review, 24(2), 308-324.

Kostova, T., & Zaheer, S. (1999). Organizational Legitimacy under Conditions of Complexity: The Case of the Multinational Enterprise. The Academy of Management Review, 24(1), 64-81.

Lall, S. V., & Yilmaz, S. (2001). Regional economic convergence: Do policy instruments make a difference? The Annals of Regional Science, 35(1), 153-166.

LeSage, J., & Pace, R. K. (2009). Introduction to Spatial Econometrics. Boca Raton, Florida: Chapman & Hall/CRC. 25

López-Bazo, E., Vayá Valcarce, E., & Artis, M. (2004). Regional Externalities and Growth: Evidence from European Regions. Journal of Regional Science, 44(1), 43-73.

Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107(2), 407-437.

Marshall, M. G., & Jaggers, K. (2008). Polity IV Project: Political Regime Characteristics and Transitions, 1800-2008. from http://www.systemicpeace.org/polity/polity4.htm

Murdoch, J. C., & Sandler, T. (2002). Economic Growth, Civil Wars, and Spatial Spillovers. Journal of Conflict Resolution, 46(1), 91-110.

PRS Group, T. (2009). International Country Risk Guide dataset.

Rodrik, D. (1997). TFPG Controversies, Institutions, and Economic Performance in East Asia, National Bureau of Economic Research, Inc.

Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: The primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9(2), 131-165.

Salehyan, I. (2008). No Shelter Here: Rebel Sanctuaries and International Conflict. The Journal of Politics, 70(01), 54-66.

Salehyan, I., & Gleditsch, K. S. (2006). Refugees and the Spread of Civil War. International Organization, 60(02), 335-366.

Scott, W. R. (1995). Institutions and Organizations: Theory and Research. Thousand Oaks CA: Sage.

Seldadyo, H., Elhorst, J. P., & Haan, J. D. (2010). Geography and governance: Does space matter? Papers in Regional Science, 89(3), 625-640.

Simmons, B. A., & Elkins, Z. (2004). The Globalization of Liberalization: Policy Diffusion in the International Political Economy. American Political Science Review, 98(01), 171-189.