Institutions and economic development: new measurements and evidence

Abstract

We propose a new set of indices to capture the multidimensionality of a country’s institutional setting. Our indices are obtained by employing a dimension reduction approach on the institutional variables provided by the Fraser Institute (2018). We estimate the impact that institutions have on the level and the growth rate of per capita GDP, using a large sample of countries over the period 1980–2015. To identify the causal effect of our institutional indices on a country’s GDP we employ the Generalized Propensity Score method. Institutions matter especially in low- and middle-income countries, and not all institutions are alike for economic development. We also document non-linearities in the causal effects that different institutions have on growth and the presence of threshold effects.