Long-term effects of institutional instability
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Long-term effects of institutional instability Simon Hartmann2 · Rok Spruk1 Received: 20 November 2019 / Accepted: 2 September 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract We examine the contribution of de jure and de facto institutional instability to longrun growth and development for a large panel of countries in the period 1820–2016. To this end, we extract the latent components of de jure and de facto instability of political institutions from several existing datasets. We distinguish between two types of instability where the positive type is associated with adaptive efficiency, while the negative type promulgates insecurity of property rights and institutional weakening. The evidence suggests that greater de jure and de facto institutional instability has a strong negative impact on income and growth, where de facto instability appears to be relatively more important than de jure instability. The negative effects of institutional instability operate independently of the positive effects of institutional quality, which implies that even second-best institutions are able to sustain a high-level growth path and economic development if they manage to maintain a minimum level of stability. The negative effects of greater institutional instability are robust across a variety of specification checks, and do not seem to be driven by sample selection bias. Instrumental variable estimates provide results with strong identification properties and suggest that the effect of institutional instability on long-run growth and development appears to be causal. Our instrumental variable estimates show that a modest increase in de facto instability is associated with 26 percent lower per capita income in the long run. Keywords Institutional instability · Long-run development · Panel data
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s00181-02 0-01934-z) contains supplementary material, which is available to authorized users.
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Rok Spruk [email protected]
1
University of Ljubljana, Ljubljana, Slovenia
2
Wirtschaftsuniversität Wien, Institute of International Business, Vienna, Austria
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S. Hartmann, R. Spruk
1 Introduction Countries with broad-based political institutions, robust rule of law and secure property rights are significantly more likely to achieve sustained long-run growth and inclusive development than those without such institutional environment (Mauro 1995; Rodrik 2000; Acemoglu and Johnson 2005; Cooter and Schäfer 2011). The empirical evidence on the notion that the institutional framework is the root cause of long-run growth abounds (Aron 2000; Rodrik et al. 2004; Durlauf et al. 2005). One well-established channel is posited by transaction costs. Lower transaction costs spur economic exchange, encourage trade and specialization, expand more sophisticated forms of economic transactions, and stimulate productive behavior (Baumol 1990). Perhaps, one of the most important characteristics of institutional framework to be a
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