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The growth effects of institutional instability

  • Berggren, Niclas

    (The Ratio Institute)

  • Bergh, Andreas

    ()

    (Department of Economics, Lund University)

  • Bjørnskov, Christian

    (Aarhus School of Business)

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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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2009:8.

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Length: 36 pages
Date of creation: 02 Jun 2009
Date of revision:
Handle: RePEc:hhs:lunewp:2009_008
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Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden

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