Growth and Institutions: A Review of the Evidence

Abstract

Africa's disappointing economic performance, the East Asian financial crisis, and the weak record of the former Soviet Union have focused attention on the role of institutions in determining a country's economic growth. This article critically reviews the literature that tries to link quantitative measures of institutions, such as civil liberties and property rights, with growth of gross domestic product across countries and over time. An important distinction is made between indicators that measure the performance or quality of institutions and those that measure political and social characteristics and political instability. The evidence suggests a link between the quality of institutions and investment and growth, but the evidence is by no means robust. I wish to assert a much more fundamental role for institutions in societies; they are the underlying determinant of the long-run performance of economies. North 1990: 107 The role of institutions in promoting growth in developing and emerging economies has sparked renewed interest in recent years (World Bank 1993, 1997; Stiglitz 1998). A burgeoning literature thus seeks to determine the extent to which the quality of public and private economic institutions, the particular structure of governance, and the extent of social capital (or civic engagement) affect growth. Evidence from global crosscountry econometric studies is potentially important because the paucity and weakness of both macroeconomic and institutional data for many developing countries preclude robust policy interpretations on a country-by-country basis (Srinivasan 1995; Lai and Myint 1996). If there is clear evidence that weak political and economic institutions significantly hamper growth, policymakers might propose measures that strengthen institutions in particular ways or that encourage more appropriate political structures (Aron 1996). For instance, African countries usually form a significant part of the

Building institutions in post‐conflict African economies

“…For a recent survey and critique of such measures used in the growth literature, see Aron (2000). Related surveys include Alesina and Perotti (1994), Brunetti (1997), and Deaton and Miller (1996).…”

“…Private sector investment or risk ratings have achieved prominence in influencing the net flows of international private capital to these countries. Ratings comprise weighted indexes reflecting both a country's macroeconomic and financial performance and prospects, and subjective assessments of institutional factors such as the degree of bureaucratic delays, corruption, respect of property and contract enforceability (see Aron 2000: Table 1). …”

“…This created confusion in the literature, and at times strong and unjustifiable claims for the influence of institutions on growth. Nevertheless, on balance, the evidence is probably supportive of a role for institutions in promoting growth (survey in Aron 2000).…”

Determinants of Institutional Quality: A Case Study of IMF Programme Countries

“…Notwithstanding that some of the explanatory variables are not institutions and that institutional quality variables suffer for issues of aggregation, in his survey article, Aron (2000) pointed towards a number of studies that showed significant correlation between development measures and institutional quality variables (Shirley, 2008;p. 626).…”

How (Not) to measure institutions

“…1 Over the last decade, dozens of empirical papers purporting to present evidence in support of the claim have been published (Aron, 2000 is an early overview on the connection between institutions and growth). A more precise version of the phrase might be that 'institutions matter crucially for economic development'.…”