Economic Growth and Institutions: Some Sensitivity Analyses, 1961–2000

Abstract

Do institutions help explain macroeconomic performance? This article addresses two issues. First, especially given the practical implications of the literature, measurement of institutions should avoid tautologies, and therefore this study uses econometrics to estimate the effect of objectively measurable institutions such as labor market organization, financial development, fiscal federalism, and political regime-type. Second, the growing literature on these promising factors, in turn, is unfortunately incommensurable because previous studies fail to control for other institutional and, in some cases, standard economic variables. Given data on up to ninety-four countries from 1961 through 2000, extreme-bound analysis (EBA), an econometric technique that addresses the sensitivity of previous findings to alternative assumptions about model specification, suggests that some institutions associated with the organization of labor and capital are robust correlates of investment. Few data support the view that variables related to the organization of the state, including fiscal federalism and political regime-type, affect macroeconomic performance.Without implication, the author thanks Richard Nelson, Doug Chalmers, Robert Shapiro, Alessandra Casella, Brendan O'Flaherty, Geoffrey Garrett, Alexander Hicks, Brett Hammond, Mark Kesselman, the editor (Lisa Martin), and two anonymous referees for helpful comments. Also, Ross Levine, Peter Rousseau, Geoffrey Garrett, and Torben Iversen were very helpful in locating data. The views expressed in this article do not necessarily reflect those of the Board of Governors of the Federal Reserve System or any member of its staff.