Institutions Über Alles North, Wallis, Weingast: Limited Access – Open Access – Doorstep conditions for transition Rajan: Rent Preservation – Beneficial changes blocked by vested interests Engerman & Sokoloff: Factor endowments  Institutions – Plantation economy  inequality  industrialization blocked – Hard-scrabble soil  family farms  open access  capitalism Acemoglu, Johnson, Robinson: Institutions as Fundamental – Reversal of fortune – can’t fault geography – Settler mortality – Settler institutions  open access  capitalism Levine & Renelt: Openness YES/Policies NO! Sala-i-Martin: 2 million regressions – More things matter…but not gov’t stance/price distortion/ethnic…

Sala-i-Martin: 2 Million Growth Regressions… What matters? 22 of 59 variables …and policy indicators except OPENNESS do not matter Variables always in his growth regressions: – Initial Year GDP  convergence – Initial Year Life Expectancy; Initial year primary school enrollment Variables that “often” enter significantly in Sala-i-Martin’s growth regressions Regional variables: Sub-Saharan Africa, Latin America, Latitude Political variables: Rule of law, Political Rights, Civil Liberties – Revolutions & coups/Wars hurt development – Gov’t spending in total or components don’t matter Religious variables: Confucian, Buddhist, Muslim help – Catholic, Protestant hurt Accumulation: Equipment investment, non-equipment investment – Found robust by Levine & Renelt Primary goods trap?: Primary goods/GDP hurts; Mining/GDP helps OPENNESS: Sach-Warner openness helps (found robust by Levine & Renelt) – Recall Lucas’ channel of convergence Other variables: Degree of capitalism (+)/Former Spanish Colony (-)

Easterly & Levine: Tropics, Germs and Crops Examine determinants of development (real gdp per capita), not growth Is it geography? – Tropical climate, landlocked location, commodity dependence – Geography championed by Sachs/Frankel & D. Romer (natural openness) Is it institutions? – Settler institutions vs. extractive institutions Protection of property rights Rule of law/lack of corruption… – AJR: Institutions proxied by germs (settler mortality) – ES: Institutions proxied by crops (sugar bad/wheat good) Do policies matter? Easterly’s priors: IMF/WB/UN policy advice pointless – Opposes Sachs Levine’s priors: Financial development…a “good” institution

Kaufmann Measures of Institutional Development Voice and accountability–citizens can choose their government, political rights, civil liberties, an independent press. Political stability / absence of violence—low likelihood gov’t overthrown by unconstitutional or violent means. Government effectiveness—quality of public service delivery, competence and degree of politicization of civil servants Light regulatory burden— absence of government controls on goods markets, government interference in banking system, excessive bureaucratic controls on starting new businesses, excessive regulation of business and int’l trade. Rule of law—protection of persons and property against violence or theft, independent and effective judges, contract enforcement. Freedom from graft—use of public power for private gain, corruption. Easterly and Levine include protection of property rights index among institutional quality measures.

Easterly and Levine Variables Explaining y = real gdp per capita Institutions – Kaufmann index Endowments (“geography”) – Settler mortality – Latitude – Landlocked (or gravity model natural openness) – Crop and mineral dummy variables Policies – Openness to trade: Sachs-Warner classification – Distortion: Real exchange rate overvaluation – Inflation Other “exogenous” variables…possible determinants of y – Ethno linguistic fractionalization – Religion – Legal origin

Easterly and Levine Findings and Conclusions Endowments (“geography”) explain economic development (y) – Settler mortality (germs) particularly effective explanatory variable BUT Endowments also explain institutions and y is explained by institutional quality as predicted by endowments – This exogenous component of institutional quality remains significant even when other explanatory variables entered (ethnic, legal origin, religion) – Once exogenous institutions used to explain y, endowments themselves are not significant CONCLUDE: Endowments  Institutions  Economic Development What about policies? – Once y is explained by institutions, policy variables individually and together are insignificant CONCLUDE: Policies may affect growth over a decade (as found by other studies) Bad policies viewed as symptoms of bad institutions INSTITUTIONS MATTER FOR LONG-RUN DEVELOPMENT