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Institutions and Growth: Time Series Evidence from Natural Experiments

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  • Theo Eicher
  • Till Schreiber

Abstract

Documenting the long term impact of institutions on economic performance has generated tremendous interest in the development literature. Contemporary or intermediate term effects of institutions over time are difficult to establish, however, since institutions seldom change significantly in the short run. In addition, accepted instruments that control for endogeneity of institutions in cross sections are inappropriate for time series analysis. In this paper we utilize an eleven year panel of 26 countries with sufficient institutional variation to identify large and significant short and intermediate effects of institutions. To control for endogeneity, we utilize the hierarchy of institutions hypothesis and find that it holds strong explanatory power. A 10 percent change in institutional quality towards OECD standards is shown to raise annual growth by 3.5 percent. In discriminating between short run and intermediate term effects, we can also document that early reformers reap the greatest benefits, but that it is never too late to begin institutional reform. *We thank Sascha Becker, Christa Heinz, Stephan Klasen, Chris Papageorgiou, Charles Nelson, Richard Startz, Farid Toubal, Steve Turnovsky, and especially John Temple for helpful comments. Any remaining errors are our own. Theo Eicher thanks the German Science Foundation for financial support. … i

Suggested Citation

  • Theo Eicher & Till Schreiber, 2010. "Institutions and Growth: Time Series Evidence from Natural Experiments," Working Papers UWEC-2007-15-P, University of Washington, Department of Economics.
  • Handle: RePEc:udb:wpaper:uwec-2007-15-p
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    Cited by:

    1. Dawid Piątek & Katarzyna Szarzec & Michał Pilc, 2013. "Economic freedom, democracy and economic growth: a causal investigation in transition countries," Post-Communist Economies, Taylor & Francis Journals, vol. 25(3), pages 267-288, September.
    2. Theo S. Eicher & Andreas Leukert, 2009. "Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 197-219, February.
    3. Adnan Efendic & Naida Trkic-Izmirlija, 2013. "Effects of the global economic crisis and public spending on income distribution in Bosnia and Herzegovina," wiiw Balkan Observatory Working Papers 108, The Vienna Institute for International Economic Studies, wiiw.
    4. Efendic, Adnan & Pugh, Geoff & Adnett, Nick, 2011. "Institutions and economic performance: A meta-regression analysis," European Journal of Political Economy, Elsevier, vol. 27(3), pages 586-599, September.
    5. Mamoun Benmamoun & Kevin Lehnert, 2013. "Financing Growth: Comparing The Effects Of Fdi, Oda, And International Remittances," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 43-65, June.
    6. Hans J. Czap & Kanybek D. Nur-tegin, 2011. "Big Bang vs. Gradualism – A Productivity Analysis," EuroEconomica, Danubius University of Galati, issue 29, pages 38-56, August.

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