Do institutions cause growthEdward L. GlasserRafael La PortaFlorencio Lopez-de-SilanesAndrei Shleifer Carefully thought out and presented by Gilbert Mbara Olexiy Polkovnikov Warsaw University October 2007
Pillars of Reasoning • Institutions are defined by North (1981) as: • “a set of rules, compliance procedures and moral and ethical behavioral norms designed to CONSTRAIN the behavior of individuals in the interests of maximizing the wealth or utility of principals” (p. 201 – 202). • Such constraints need to be: • Reasonably permanent and/or; • Durable
GPLS (2004) Critique • Widely used measures of institutions describe an outcome of the development and not the “deepness” of the constraints. • Highly correlated with per capita income and volatile, might be explained as the result of policy choices and not constraints. • Institutions are presented as the result of human capital endowment.
Our Critiques • Externality and Internality of constraints to different factors. • Benevolence and Malice of constraints. • Constraints are subject to changes. • High-human capital, lots of rent-seeking behavior.
Our Critiques cont. • Volatility is not problem itself. • Existence of practices. • Obedience to laws. • Comprehensiveness of laws and regulations for institutions’ definition.
Better approach • Cross county growth regressions generally help to identify the factors that explain cross country variation in growh performance. • Such studies are so numerous that the number of potential growth determinants probably exceed the number of countries in a cross country sample.
Approach cont. • Such problems can be addressed by focusing on the importance of a particurlar set of variables [e.g. FDI, Trade and Institutions] • Such a focus can then be used to design appropriate policy for a particurlar country.
Example • Using time series for a single country, regress yearly growth rates on: • Lagged values of educational attainments. • Investments. • Trade. • Linear combination of measures of institutional quality. • Other relevant variables, that can be affected by policy.