Growth and Institutions

Abstract

Amain development in growth economics in recent years has been to point at the fundamental role of institutions in the growth process. However, few studies have led so far to precise policy recommendations beyond the general claims about the importance of property right enforcement. This is largely due to the difficulty of defining the term ‘‘institutions’’. North and Thomas (1973) developed the notion that ‘‘social infrastructure’’ reduces uncertainty and diminishes transaction costs. Some authors have emphasized the importance of property right protection and its impact on entrepreneurship; others have concentrated on regulatory institutions in financial, labor, or product markets, but never with a detailed modeling of how those institutions impact the growth process which could be confronted to data. In this paper, we use the Aghion–Howitt model of growth with qualityimproving innovations, to look at more specific aspects of the relationship between institutions, institutional change, and productivity growth. The first section is devoted to the relationship between financial development and convergence, and argues that financial development is a main determinant of a country’s ability to converge in growth rates and/or in levels of GDP per capita towards the technological frontier. The following section looks at the relationship between productivity growth and product market competition. It shows the opposite effects that competition can have on innovation incentives in different types of sectors, and the implication for the overall effect of competition on productivity growth when the economy as a whole is considered. The last section develops the notion of appropriate institutions, showing how different types of institutions or policies maximize growth at different stages of technological development.