Institutions Rule? Reexamining Rodrik’s framework within the realm of poverty Samantha Kaminsky December 1, 2009

Motivation/Literature Rodrik, Subramanian, Trebbi (2004): “Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development” –Conclusions: Institutions Rule Geography exerts effects only through impacts on institutions Trade insignificant (typically negative coefficient) a) Institutions: Strong institutions have positive externalities and are significant in explaining cross-country income differentials (Douglas North (1990); Bhattacharyya, Dowrick and Golley (2009); Bosker and Garretsen (2009)) b) Geography: Climate, disease prevalence, agriculture, transportation and resource endowments are all consequences of geography, which is statistically significant with respect to cross-country income differentials (Sachs (2003); Gallup, Sachs, and Mellinger (1998)) c) Integration (Economic Openness): Trade has been shown to exert important influence as well as insignificant impacts on economic development. (Dollar and Kraay (2004); Do and Levchenko (2009))

Model Question: To what extent do differences in institutions explain poverty above and beyond their demonstrated effects on income? POV1PPP i =  + ρLOGGDPPC2007 i +  ABSGEOG i +  EFFECT2006 i +  LOGTRADEPC i + θPM10 i +  i POV1PPP -- the poverty gap ratio at US$1 a day (PPP) (%) (Source: UN Data) Size of the percent increase of per capita income needed to eliminate poverty LOGGDPPC The natural log of per Capita GDP at Current US Prices in (Source: UN Data) ABSGEOG -- measure of absolute latitude (Source: CIA Factbook) EFFECT captures government effectiveness (Source: Kaufmann et al. 2009, Pippa Norris) LOGTRADEPC -- The natural log of trade/population where trade equals imports plus exports. (Souce: UN Data, Penn World Tables) PM10 -- Urban population weighted average PM10 concentrations (in micro grams per cubic meter) in residential areas of cities larger than 100,000 in (Source: The World Bank, Development Economics Research Group Estimates)

Poverty Income

Poverty Government Effectiveness Economic Integration Geography Pollution Income (Fraction of Population Speaking English) (Ethnolinguistic Fractionalization) (British Legal Origin)

Conclusions Income most important determinant Institutions have two implications for poverty –Via income and independently of income (consistent with Rodrik et al.) Geography commands a positive effect Integration has a positive relationship with poverty (contradiction with Rodrik et al.) Pollution (or at least PM10) relatively insignificant Policy Implications: Pro-poor growth is appropriate for poverty reduction

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