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Rule of Law, Democracy, Openness and Income: Estimating the Interrelationships

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  • Rigobon, Roberto
  • Rodrik, Dani

Abstract

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East-West versus those aligned on a North-South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

Suggested Citation

  • Rigobon, Roberto & Rodrik, Dani, 2004. "Rule of Law, Democracy, Openness and Income: Estimating the Interrelationships," CEPR Discussion Papers 4653, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4653
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    References listed on IDEAS

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    1. Roberto Rigobon & Brian Sack, 2003. "Spillovers Across U.S. Financial Markets," NBER Working Papers 9640, National Bureau of Economic Research, Inc.
    2. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction of Monetary Policy to the Stock Market," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 639-669.
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    Keywords

    growth;

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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