Publication Type: Conference Paper/Unpublished Manuscript
Review Method: Peer Reviewed
Abstract: Empirical testing of propositions developed in the New Institutional Economics has provided convincing evidence that neoclassical economic growth theory incorrectly assumes away the role of political institutions in growth and development. Findings of convergence between poorer and richer countries are stronger after controlling for indexes of institutional quality. Nevertheless, shortcomings exist with this work. First, there is an underlying assumption that the same growth model applies to all countries regardless of their current circumstances. Second, the tendency to measure institutional quality with broad indexes obscures the possibility that different facets of political institutions matter in different ways depending on country conditions. This paper adopts a framework proposed by Pritchett (2003) in which countries fall into one of six different growth states, each of which is assumed to have a unique underlying growth model. It tests the proposition that transitions between these growth states are governed in part by different aspects of political institutions. The tests support the notion that the effect of political institutions on economic growth and development is conditional on a country's circumstances. In particular, three aspects of state strength are considered: state legitimacy, administrative capacity, and the ability to contain civil unrest. State legitimacy is important for the transition away from poverty, while high levels of administrative capacity are more useful in distinguishing the advanced industrial economies from the rest. Low levels of civil unrest are associated with periods of rapid growth. A fourth institutional form, the degree to which a country is democratic, does not appear to be particularly helpful in supporting growth in poorer countries in that it is associated with a higher probability of economic implosion.