Do institutions matter for economic growth?

Abstract

Using a unique dataset assembled from several sources, we examine the effects of democracy, corruption, and economic freedom on economic growth for over one hundred countries. To allow for heterogeneous effects, we use a quantile regression approach. Our results support some findings in the literature, but also provide some new conclusions. In many cases, quantile regression estimates are quite different from those from GMM. We find that the positive effect of democracy is lower for the countries with a higher growth rate of GDP per capita, which may sound counter-intuitive to conventional wisdom. Likewise, we find that corruption “sands the wheels” (“greases the wheels”) for the lowest (highest) GDP per capita growth countries. Economic freedom shows a positive effect on GDP per capita growth rate. Our results suggest that since democratic status is hard to change in the short run, certain current corruption control measures as well as economic freedom adjustment policies may be reconsidered, especially among the fastest and slowest growing countries.

Appendix

Notes:

• 1. World Development Indicators (WDI) is the primary World Bank collection of development indicators, compiled from officially recognized international sources. It presents the most current and accurate global development data available and includes national, regional and global estimates.

• 2. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in constant 2010 U.S. dollars.

• 3. Transparency International is an international non-governmental organization whose non-profit purpose is to take action to combat global corruption with civil societal anti-corruption measures and to prevent criminal activities arising from corruption.

• 4. The Polity IV dataset covers all major, independent states in the global system over the period 1800-2017 (i.e., states with a total population of 500,000 or more in the most recent year; currently 167 countries).

• 5. The operational indicator of democracy is derived from codings of the competitiveness of political participation, the openness and competitiveness of executive recruitment, and constraints on the chief executive using certain weights.

• 6. The mission of The Heritage Foundation is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.

• 7. Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. Economic freedom is measured based on 12 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom: (1) Rule of Law (property rights, government integrity, judicial effectiveness) (2) Government Size (government spending, tax burden, fiscal health) (3) Regulatory Efficiency (business freedom, labor freedom, monetary freedom) (4) Open Markets (trade freedom, investment freedom, financial freedom) Each of the twelve economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these twelve economic freedoms, with equal weight being given to each (Tables 9, 10).

Table 9 Variable Definitions and Data Sources

Table 10 Median GDP Per Capita Growth Rate by Country over 1995 - 2018