Calibrating the Economic Impact of a Deficit in the Institutional Quality of Government: The Case of Spain

Abstract

The quality of government institutions and the absence of corruption are key factors of economic development. How could we quantify, for any given country, the overall monetary cost of poor-quality institutions? This paper compares the institutional quality in Spain with those of the rest of the world and assesses the economic cost of the deficit of institutional quality in the country. Although Spain is among the top 20% of countries worldwide in terms of the quality of governance institutions, the value of the Spanish governance indicators is below what corresponds to Spain’s economic development level. The authors calibrate the effect that a correction of the deficit of institutional quality would have on Spanish income under different parameter scenarios and always finds a high positive potential impact. The method we introduce to conduct these calibrations can serve as a useful blueprint for the analysis of other countries.