Identifying the Effect of Institutions on Economic Growth
This chapter describes how institutional quality can be measured, quantifies the correlation between institutional and economic developments, and reviews and discusses the literature on the causal impact of institutions on growth. Identifying a causal eff
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Identifying the Effect of Institutions on Economic Growth Fre´de´ric Docquier
2.1
Introduction
An undeniably stylized fact of the last century is that, with a few exceptions, the poorest countries of the world did not catch up with industrialized nations in any meaningful way. Although a considerable amount of research has been devoted to the understanding of development disparities across countries, economists have not yet found out how to make poor countries rich. Still, in comparative growth studies, many renowned economists have seen the quality of institutions as a major explanation of cross-country inequality. Standard growth theories have shown that development depends on the accumulation of human capital, physical capital, and access to modern technologies. Accumulation of these factors is likely to be affected by institutional characteristics such as the organization and functioning of the productive sector, the distribution of political and civil rights, the quality of the legal system, government effectiveness, etc. However identifying a causal effect of institutions on development, quantifying its size, and understanding the technology of transmission of institutional quality to growth are challenging issues. This paper reviews the major insights of the literature, adds a few caveats, and provides a few suggestions for further research. Let me first clarify how the concept of “institutions” has been defined in the literature. Following North (1990), “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction”. Acemoglu et al. (2005) dismantled the engine and defined institutions as a combination of three interrelated concepts: • Economic institutions—They include factors governing the structure of incentives in society (i.e. incentives of economic actors to invest, accumulate factors, F. Docquier (*) IRES, Chercheur a` l’Universite´ catholique de Louvain, 3, Place Montesquieu, 1348 Louvain-la-Neuve, Belgium e-mail: [email protected] M. Schmiegelow and H. Schmiegelow (eds.), Institutional Competition between Common Law and Civil Law, DOI 10.1007/978-3-642-54660-0_2, © Springer-Verlag Berlin Heidelberg 2014
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make transactions, etc.) and the distribution of resources. For example, the structure of property rights, entry barriers, set of contract types for business offered in contract law, or redistributive tax-transfer schemes, are affecting economic performance and growth. • Political power—Economic institutions are themselves the outcome of collective choices of the society. A society is made of different groups with conflicting interests. The relative political power of these groups governs their capacity to decide the administration of resources and implement policies. The distribution of political power determines the design and the quality of economic institutions. It results from de facto political power (i.e. political power emerging from economic outcomes) and de jure political power.
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