Economic Growth: The Role of Institutions and Political Economy

Economic growth is a complex process involving many dimensions, causal forces and transmission mechanisms. In order to avoid spurious correlations and serious specification errors, it is necessary to place any empirical analysis of growth in a general equilibrium model framework. The institutional framework is just one of many potential causal forces, and institutions may, themselves, be shaped by economic growth. This paper reviews papers published in the mainstream economics journals over the last ten years which have estimated regression equations to explain differences in long-term rates of economic growth across countries. The review focuses on the role of institutions in growth, and it comments on methodological strengths and weaknesses of these types of empirical studies for better understanding the growth process. The scope of the study is narrowed in three main ways. First, reviewed studies apply to the whole economy. However, the implications could easily be applied to individual sectors or commodities. Second, the studies consider longer-term average growth rates. This enables cyclical and seasonal influences to be ignored. Third, most of the reviewed studies have drawn on the well recognized data banks reported by Summers and Heston (1984, 1988, 1991) which have a high degree of comparability from country to country and over time.