Path Break versus Path Drift: A Comparative Approach to Explain Variations in Institutional Effects on Economic Growth

Tamilina, Larysa and Tamilina, Natalya (2018): Path Break versus Path Drift: A Comparative Approach to Explain Variations in Institutional Effects on Economic Growth. Forthcoming in:

Abstract

This study introduces a comprehensive model of institutional grafting wherein cultural, structural, and political forces shape new legal institutions. The model is used to argue that a country’s growth rates are a function of the distance that the new legal institutions develop to these three forces. We further argue that the distance’s size varies depending on the mode of institutional change: drift phase or path break. We demonstrate that the distance is usually large during a path break but tends to be significantly smaller for institutions emerging in the drift phase. As such, the new legal institutions strongly impact economic growth in the drift phase and only modestly influence growth rates during institutional path change. In the latter case, the political dimension’s quality determines the success of both a country’s growth trajectories and institutional reforms. These propositions are tested empirically based on a sample of 106 countries derived from the POLITY IV Project’s website.

• Item Type: MPRA Paper
• Language: English
• Keywords: Institutional economics, formal institutions, institutional change, institutional grafting
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O57 - Comparative Studies of Countries

References

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., & Robinson, J.A. (2012). Why nations fail: The origins of power, prosperity and poverty. New York: Crown Publishers.

Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-component model. Journal of Econometrics, 68(1), 29–51.

Aslund, A. (2007). How capitalism was built: The transformation of Central and Eastern Europe, Russia and Central Asia. Cambridge: Cambridge University Press.

Barro, R.J. (1997). Determinants of economic growth: A cross-country empirical study. Cambridge, MA: MIT Press.

Berg, A., Borensztein, E., Sahay, R., & Zettelmeyer, J. (1999). The evolution of output in transition economies: Explaining the differences. IMF Working Paper WP/99/73, International Monetary Fund.

Blundell, R., & Bond, S. (1998). Initial conditions and moment conditions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.

Boettke, P.J., Coyne, C.J., & Leeson, P.T. (2008). Institutional stickiness and the new development economics. American Journal of Economics and Sociology, 67(2), 331–358.

Boudreaux, K., & Alicia, P.D. (2007). Paths to property: Approaches to institutional change in international development. London: Institute of Economic Affairs.

Davis, L.S. (2010). Institutional flexibility and economic growth. Journal of Comparative Economics, 38(3), 306–320.

Easterly, W. (2008). Design and reform of institutions in LDCS and transition economies. Institutions: Top or bottom up? American Economic Review: Papers and Proceedings, 98(2), 95–99.

Eggertsson, T. (1997). The old theory of economic policy and the New Institutionalism. World Development, 25(8), 1187–1203.

Eicher, T.S., & Leukert, A. (2009). Institutions and economic performance: Endogeneity and parameters heterogeneity. Journal of Money, Credit and Banking, 41(1), 197–218.

Falcetti, E., Raiser, M., & Sanfey, P. (2000). Defying the odds: Initial conditions, reforms and growth in the first decade of transition. EBRD Working Paper No. 55, European Bank for Reconstruction and Development.

Fischer, S., Sahay, R., & Vegh, C.A. (1996). Stabilisation and growth in transition economies: The early experience. Journal of Economic Perspectives, 10, 45–66.

Gorodnichenko, Y., & Roland, G. (2010). Culture, institutions and the wealth of nations. CEPR Discussion Paper 8013, Centre for Economic Policy Research, London.

Gorodnichenko, Y., & Roland, G. (2011). Individualism, innovation, and long-run growth. Proceeding of the National Academy of Sciences of the United States of America, 108(4), 21316–21319.

Islam, N. (2004). Settler mortality rate as an instrument for institutional quality. Working Paper Series Vol. 2004-28, International Centre for the Study of East Asian Development.

Jong-A-Pin, R. (2009). On the measurement of political instability and its impact on economic growth. European Journal of Political Economy, 25(1), 15–29.

Kyriazis, N.C., & Zouboulakis, M.S. (2005). Modelling institutional change in transition countries. Communist and Post-Communist Studies, 38(1), 109–120.

Lee, K., & Kim, B.-Y. (2009). Both institutions and policies matter but differently for different income groups of countries: Determinants of long-run economic growth revisited. World Development, 37(3), 533–549.

Nelson, R.R., & Sampat, B.N. (2001). Making sense of institutions as a factor shaping economic performance. Journal of Economic Behavior and Organization, 44(1), 31–54.

North, D.C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.

Olson, M. (1982). The rise and decline of nations. Economic growth, stagnation and social rigidities. New Haven, CT: Yale University Press.

Pääkkönen, J. (2010). Economic freedom as driver of growth in transition. Economic Systems, 34(4), 469–479.

Pejovich, S. (1999). The effects of the interaction of formal and informal institutions on social stability and economic development. Journal of Markets and Morality, 2(2), 164–181.

Platteau, J-Ph. (1996). The evolutionary theory of land rights as applied to Sub-Saharan Africa: A critical assessment. Development and Change, 27(1), 29–86.

Portes, A. (2006). Institutions and development: A conceptual re-analysis. Population and Development Review, 32(2), 233–262.

Przeworski, A., & Limongi, F. (1993). Political regimes and economic growth. Journal of Economic Perspectives, 7(3), 51–69.