Growth Paradigms and Congruent Institutions: Estimating Context-Varying Effects of Political Institutions on Economic Performance

Abstract

Traditional economic growth regressions are not adequate to identify the role of political institutions because they assume a universal growth paradigm exists. Instead, there are distinct paradigms of investment- and innovation-based growth, and the effects of political institutions vary across them. Using a dataset covering 83 countries from 1965–2008, this study employs a mixture models estimation to identify these paradigms. It finds that state authority is critical for countries engaged in investment-based growth, and competitive political participation tempers the pace of capital accumulation but increases productivity growth. Conversely, where innovation-based growth predominates, state authority has little effect and competitive political participation slows the pace of growth. Constraints on rulers do not support investment in either paradigm.