Institutions Über Alles• North, Wallis, Weingast: Limited Access – Open Access– Doorstep conditions for transition

• Rajan: Rent Preservation– Beneficial changes blocked by vested interests

• Engerman & Sokoloff: Factor endowments Institutions– Plantation economy inequality industrialization blocked– Hard-scrabble soil family farms open access capitalism

• Acemoglu, Johnson, Robinson: Institutions as Fundamental– Reversal of fortune – can’t fault geography– Settler mortality – Settler institutions open access capitalism

• Levine & Renelt: Openness YES/Policies NO!• Sala-i-Martin: 2 million regressions– More things matter…but not gov’t stance/price distortion/ethnic…

Sala-i-Martin: 2 Million Growth Regressions… What matters?22 of 59 variables

…and policy indicators except OPENNESS do not matter• Variables always in his growth regressions:

– Initial Year GDP convergence– Initial Year Life Expectancy; Initial year primary school enrollment

Variables that “often” enter significantly in Sala-i-Martin’s growth regressions• Regional variables: Sub-Saharan Africa, Latin America, Latitude• Political variables: Rule of law, Political Rights, Civil Liberties

– Revolutions & coups/Wars hurt development– Gov’t spending in total or components don’t matter

• Religious variables: Confucian, Buddhist, Muslim help– Catholic, Protestant hurt

• Accumulation: Equipment investment, non-equipment investment– Found robust by Levine & Renelt

• Primary goods trap?: Primary goods/GDP hurts; Mining/GDP helps• OPENNESS: Sach-Warner openness helps (found robust by Levine & Renelt)

– Recall Lucas’ channel of convergence • Other variables: Degree of capitalism (+)/Former Spanish Colony (-)

Easterly & Levine: Tropics, Germs and CropsExamine determinants of development (real gdp per capita), not growth• Is it geography?

– Tropical climate, landlocked location, commodity dependence– Geography championed by Sachs/Frankel & D. Romer (natural openness)

• Is it institutions?– Settler institutions vs. extractive institutions

• Protection of property rights• Rule of law/lack of corruption…

– AJR: Institutions proxied by germs (settler mortality)– ES: Institutions proxied by crops (sugar bad/wheat good)

• Do policies matter?

Easterly’s priors: • IMF/WB/UN policy advice pointless

– Opposes Sachs

Levine’s priors:• Financial development…a “good” institution

Kaufmann Measures of Institutional Development•Voice and accountability–citizens can choose their government, political rights, civil liberties, an independent press. •Political stability / absence of violence—low likelihood gov’t overthrown by unconstitutional or violent means. •Government effectiveness—quality of public service delivery, competence and degree of politicization of civil servants•Light regulatory burden— absence of government controls on goods markets, government interference in banking system, excessive bureaucratic controls on starting new businesses, excessive regulation of business and int’l trade. •Rule of law—protection of persons and property against violence or theft, independent and effective judges, contract enforcement. •Freedom from graft—use of public power for private gain, corruption.Easterly and Levine include protection of property rights index among institutional quality measures.

Easterly and Levine Variables Explaining y = real gdp per capita • Institutions

– Kaufmann index

• Endowments (“geography”)– Settler mortality– Latitude– Landlocked (or gravity model natural openness)– Crop and mineral dummy variables

• Policies– Openness to trade: Sachs-Warner classification– Distortion: Real exchange rate overvaluation – Inflation

• Other “exogenous” variables…possible determinants of y– Ethno linguistic fractionalization– Religion– Legal origin

Easterly and Levine Findings and Conclusions• Endowments (“geography”) explain economic development (y)

– Settler mortality (germs) particularly effective explanatory variable

BUT• Endowments also explain institutions

and• y is explained by institutional quality as predicted by endowments

– This exogenous component of institutional quality remains significant even when other explanatory variables entered (ethnic, legal origin, religion)

– Once exogenous institutions used to explain y, endowments themselves are not significant

CONCLUDE: Endowments Institutions Economic Development• What about policies?

– Once y is explained by institutions, policy variables individually and together are insignificant

CONCLUDE: Policies may affect growth over a decade (as found by other studies)Bad policies viewed as symptoms of bad institutions

INSTITUTIONS MATTER FOR LONG-RUN DEVELOPMENT