Institutional change and persistence: what does the long-run evidence tell us?

There is a broad agreement that political and economic institutions matter for long-term development. Yet relatively little is known as to how to adopt good-quality institutions and reform weak institutions, for which one needs to know how they change. This paper provides a systematic econometric investigation of long-run patterns of institutional change, using panel time series methods allowing for different forms of country-specific heterogeneity and cross-section dependence. We focus on variables capturing the quality of four key political and economic institutions over 200 years and 161 countries from the Varieties of Democracy (V-Dem) database: electoral democracy and executive constraints, for political institutions; and the rule of law and property rights, for economic institutions. We test whether institutions change or persist, whether political and economic institutions tend to co-evolve, and whether changes in political institutions cause changes in economic institutions in the long run. We find that political and economic institutions are non-stationary, suggesting that institutional change is more the norm than the exception. We also find that they tend to co-evolve, although this is less evident for property rights, and that long-run causality runs mainly from political to economic institutions. We illustrate the cross-country evidence with discussions on Indonesia and Chile.