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The growth effects of institutional instability

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Author Info
Berggren, Niclas () (The Ratio Institute)
Bergh, Andreas () (The Ratio Institute)
Bjørnskov, Christian () (Aarhus University, Department of Economics)

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Abstract

Both institutional quality and institutional stability have been argued to stimulate economic growth. But to improve institutional quality, a country must endure a period of institutional change, which implies at least a little and possibly a lot of institutional instability. We investigate the growth effects of institutional quality and instability, using the political risk index from the ICRG in a cross-country study of 132 countries, measuring instability as the coefficient of variation. Using the aggregate index, we find evidence that institutional quality is positively linked to growth. While institutional instability is negatively related to growth in the baseline case, there are indications that the effect can be positive in rich countries, suggesting that institutional reform is not necessarily costly even during a transition period. Sensitivity analysis, e.g., decomposing the political risk index by using both its constituting components and the results of a principal components analysis, using other measures of institutional quality and excluding outliers, confirm the general results, with qualifications.

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Publisher Info
Paper provided by The Ratio Institute in its series Ratio Working Papers with number 135.

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Length: 36 pages
Date of creation: 02 Jun 2009
Date of revision:
Handle: RePEc:hhs:ratioi:0135

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Related research
Keywords: Institutions; Instability; Growth; Transaction costs; Uncertainty;

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Find related papers by JEL classification:
B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Institutional; Evolutionary
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
O43 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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