Summary – Glaeser et al. - Do institutions cause growth?

Introduction
Survey article revisiting previous attempts to establish causality between institutions and econ
growth. Including two approaches in development:

1. Democracy and checks on gvt – secure PR

2. Human and capital accumulation that start the process. (democracy a consequence of this),
example south korea (good institutions here argued to be the outcome of econ growth),
Taiwan and china

Similarities: emphasize the role of PR, seeing the security of those as a public policy choice.

Measurement of institutions
1. Risk of expropriation by the gvt
2. Gvt effectiveness
3. Constraints on the executive

All three, by construction,

a. don’t describe pol inst – they are outcome measures (measure past performance in the first
case and quality in the second.
b. Are subjective measures – reflect what actually happened, rather than permanent rules of
the game. Also since there’s been a high reduction of the risk over a very short period of time
c. Rise sharply with the level of development – the causality could go the other way around!
d. Are extremely volatile (especially in developing countries) – cannot measure the durable
characteristics that institutions have.
e. Are uncorrelated with available constitutional measures of constraints on gvt from electoral
rules or courts.

The first two:

a. confound constraints on gvt with dictatorial choices (since a dictator can choose a “good”
policy), they don’t measure institutions, which in their essence are constraints.

The third:

a. Also reflect political outcomes rather than durable constraints

SO: these three are uncorrelated with constitutional constraints on gvt. – doubt that these
conventional measures of institutions reflect the “deep” parameters they want to measure, and that
they can be used to establish causality.
Political institutions, human capital & economic growth
Discussion of basic OLS evidence. Confirms: initial level of human capital+average level of institutions
predicts level of economic growth in the same period of time.

Overall, this evidence is unsupportive of approach 1, and supportive of approach 2 (more basic cause
of growth is human capital). From the OLS regressions, no proof that institutions cause growth as
opposed to growth improving institutions.

Policies and growth in poor countries (after 1960)

Looking at empirics. The countries had uneducated populations and were run by dictators in general.

BUT: show dispersion of growth rates – inconsistent with approach 1. The evidence is suggestive, but
suggest that focusing on factor accumulation (including growth in human capital) has been more
successful than putting constraints on the government.

IV:s
Has been used as a way to address the problem that growth might itself lead to better institutions.
Discussion the work of Acemoglu et al with settler mortality and population density. – critique: it
doesn’t establish a role for institutions. (might have been human capital and not institutions that
caused growth.) at an econometric level, predictors of settlement patterns not valid instruments for
institutions. Main critiques:

a. Difficult to assess that the asset being transplanted through settlement was institutions and
not just know-how and human capital.
b. Are the instruments valid? – settler mortality is basically uncorrelated with constitutional
measures of checks and balances, but we would expect the European influence on
institutions to be reflected in current “rules and procedures”.
c. The instruments are correlated with the modern disease environment as well, at least
according to Glaeser et al.
d. There is a chance that the IV, settler mortality, influence today’s development through
human capital, i.e. is correlated with the error term. In that case it isn’t a valid instrument.
Strong correlation is found btw settler mortality and years of schooling in 2000, which
indicates that this might be a problem.

Overall: IVs in literature are even more highly correlated with human capital (today and 1900), and
the specifications predicting econ growth perform better than institutions. The IV approach doesn’t
tell us what causes growth.

Conclusion
Looking at the timing of human capital accumulation and institutional quality. Evidence consistent
with example of south korea, which indicates that the causality goes econ growth + human capital
accumulation ---- institutional improvement,and not the other way around. The results are instead
consistent with a perspective (by Djankov et al) where institutions are an opportunity set based on
the human and social capital of the population in a society. Inst are points on this opportunity set,
determined by efficiency, history and politics. In this framework, inst only have a second order effect,
the first order comes from human and social capital.
Implications
Politically constrained gvt not a viable strategy for poor countries to secure PR. Instead they should
emphasize econ pol and choices that ensure such security (actual rules), even by dictators. Growth
might be feasible even without immediate inst improvement, and in turn the growth is likely to lead
to inst improvement.

Overall, current ,measurement strategies of inst has conceptual flaws, but inst may still matter in the
explanation of econ growth. Should focus more on actual laws, rules and compliance procedures.
Policy makers should focus more on policies favouring human and physical capital accumulation.