Does Balance Among Areas of Institutional Quality Matter for Economic Growth?

Countries with better institutions, as measured by the Economic Freedom of the World index, have greater prosperity, growth, and well‐being. However, the previous literature has ignored interrelationships among the subareas, instead implicitly assuming substitutability and independence. We hypothesize that when some areas are weak, better scores in other areas are not a simple substitute. We find that including a simple measure of the within‐country standard deviation among coexisting area scores results in a meaningfully significant improvement in the empirical growth specifications. Based on our findings, this should become routine practice in future empirical work. We also explore interactions among areas and find ones with legal system and property rights most important to include. These findings suggest a need to reconsider the implicit assumption of independence among area scores, as well as a balanced approach to institutional reform in practice. Improving the worst areas is more beneficial to growth.