Economic Institutions and Comparative Economic Development: A Post-Colonial Perspective

Abstract

Existing literature suggests that either colonial settlement conditions or the identity of colonizer were influential in shaping the post-colonial institutional environment, which in turn has impacted long-run economic development. These two potential identification strategies have been treated as substitutes. We argue that the two factors should instead be treated as complementary and develop an alternative and unified IV approach that simultaneously accounts for both settlement conditions and colonizer identity to estimate the potential causal impact of a broad cluster of economic institutions on log real GDP per capita for a sample of former colonies. Using population density in 1500 as a proxy for settlement conditions, we find that the impact of settlement conditions on institutional development is much stronger among former British colonies than colonies of the other major European colonizers. Conditioning on several geographic factors and ethno-linguistic fractionalization, our baseline 2SLS estimates suggest that a standard deviation increase in economic institutions is associated with a three-fourth standard deviation increase in economic development. Our results are robust to a number of additional control variables, country subsample exclusions, and alternative measures of institutions, GDP, and colonizer classifications. We also find evidence that geography exerts both an indirect and direct effect on economic development.

ECONOMIC FREEDOM & HAPPINESS INEQUALITY: FRIENDS OR FOES?

“…Although the magnitude of the EFW coefficient declines (in absolute value) to −0.062, it is also statistically significant at the 5% level. Given that economic freedom has been shown to be a strong positive determinant of economic development (Bennett et al , ; Faria and Montesinos ), this suggests that EFW is negatively associated with happiness inequality both directly and indirectly through the economic development channel.…”

Does Institutional Quality Foster Economic Complexity?

“…This indicator reflects a broad range of institutions and policies that co-evolve with economic development. As highlighted by Faria et al (2016) and Bennett et al (2017), this index is more informative for policymakers than unidimensional measures of institutions (e.g., constraints on the executive, rule of law, or risk of expropriation). Glaeser et al (2004) note that defining institutional quality as security of property rights is too narrow, which necessitates using better measures of institutions.…”

The Path of Reform: The Consequences of Institutional Volatility

“…5 See Dawson (1998), Carlsson and Lundström (2002), Gwartney et al (2006) and Rode and Coll (2012) for studies regarding economic freedom and growth. See Montesinos (2009), Faria et al (2016) and Bennett et al (2017) for instrumental variable estimates using the EFW index. See De Haan et al (2006), Doucouliagos (2005), Bergh and Karlsson (2010) and Hall and Lawson (2014) for surveys of the literature.…”