Economic Modelling 76 (2019) 243–259

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Economic Modelling
journal homepage: www.journals.elsevier.com/economic-modelling

The double trap: Institutions and economic development☆

Sabyasachi Kar a, Amrita Roy a, Kunal Sen b, *
a
Institute of Economic Growth, Delhi, India
b
Global Development Institute, University of Manchester, UK

A R T I C L E I N F O A B S T R A C T

Keywords: The empirical growth literature has established that institutional quality is a deep determinant of economic
Club convergence growth. We examine whether institutional quality in low income countries converges to the level witnessed in
Low income traps high income countries, or whether they are trapped in convergence clubs that stagnate or even deteriorate over
Institutional quality time. Using the log-t-test suggested by Phillips and Sul (2007), we find evidence of multiple equilibria in insti-
Cross-sectional heterogeneity tutional quality, with several countries stuck in poor quality institutions traps. We further find that per capita
Log t-test
incomes of some of the developing countries are also stuck in low-level traps. Finally, using bivariate probit
Bivariate probit estimation
estimations, we establish that poor institutional traps are major determinants of low income traps. These results
indicate that these countries are caught in a double trap where their incomes are stuck in low-level traps from
which it is difficult to escape, because the institutions that enable growth are also stuck in low-quality traps.

1. Introduction
One of the most important findings in the empirical literature on
economic growth is that across countries, institutions are an important
determinant of long run economic development (Hall and Jones, 1999;
Acemoglu et al., 2001; Rodrik et al., 2004). Rich countries, especially
those located in North America, Western Europe, Australia and New
Zealand, have better quality institutions than countries in the developing
world. As Acemoglu (2009, p. 123) argues, “there is convincing empirical
support for the hypothesis that differences in economic institutions, more
than luck, geography or culture, cause differences in incomes per capita”.
If institutional development is indeed the driver of long run growth,
then understanding the nature of institutional development is critical for
an insight into the growth process. Several contributions to the empirical
growth literature have attempted to throw light on this by testing
whether institutional quality in developing countries converges towards
those in developed ones. For example, Knack (1996) and Knack and
Keefer (1995) find that the difference in institutional quality is one
important reason that the poor countries are unable to converge with the
high income countries. More recent studies have found that countries
with lower institutional quality improve their institutional capabilities
faster than countries with better institutional quality (Elert and Hal-
varsson, 2012). Savoia and Sen (2016) found that countries with initially
poor institutions tended to slowly catch up with those with high insti-
tutional quality, irrespective of the initial conditions of the institutions.1
A salient feature of all these contributions is that they are based on
some version of the sigma or β-convergence tests. A key limitation of
these tests is that they are based on the idea of the presence of one single
long run steady state. This ignores the possibility of the existence of
multiple steady state (or club-convergence) in the economy for different
groups of countries. In order to take this possibility into account, Phillips
and Sul (2007) suggest a regression based method for analyzing eco-
nomic transition. This approach overcomes the deficiencies in the earlier
approaches and accommodates a broader concept of convergence
compared to the earlier studies of Quah (1997) and Chatterjee (1992).
Most importantly, this econometric framework allows for the possibility
of either absolute or sub-group (club) convergence under a variety of
possible transition paths. Specifically, it allows us to test whether the
quality of institutions of poorer countries steadily converge over time
towards those of richer countries, or get stuck in low-level institutional
traps, where the quality of their institutions may stagnate or even dete-
riorate over time. In this paper, we ask the question: do we observe

☆
We acknowledge the comments received from the editor and two anonymous referees. The usual disclaimer applies.
* Corresponding author.
E-mail address: kunal.sen@manchester.ac.uk (K. Sen).
1
The large literature on institutional economics differentiates between economic and political institutions. The institutions and growth literature led by Acemoglu
(2009) however, focuses on economic institutions. This is also the focus of this paper as we attempt to understand the relationship between economic institutions and
output. For brevity however, we use the term institutions throughout the paper instead of economic institutions.

https://doi.org/10.1016/j.econmod.2018.08.002
Received 3 March 2018; Received in revised form 30 July 2018; Accepted 6 August 2018
Available online 11 August 2018
0264-9993/© 2018 Elsevier B.V. All rights reserved.
S. Kar et al.
convergence clubs in institutional quality where some countries are stuck
in low institutional quality traps? Our answer is in the affirmative – we
find clear evidence of institutional quality traps among several countries,
and our results do not suggest that institutions in poor countries converge
to the level witnessed in rich countries over time. This is the first
important contribution of the paper.
From a theoretical standpoint, one should expect multiple equilibria
in institutional quality, with some countries stuck in low equilibrium
institutional quality traps.2Acemoglu and Robinson (2006, 2008) argue
that there may be persistence of extractive economic institutions such as
insecure property rights and regulations that limit entry to markets and
extractive political institutions. These institutions concentrate power in
the hands of a few with limited checks and balances, as political elites
who benefit from these institutions would not have any incentives to
change them. Similarly, Blackburn et al. (2006) show that economic
development and corruption may be jointly determined such that there
may exist multiple long-run equilibria where it is difficult to switch from
a state of high corruption and low economic development to a state of
low corruption and high economic development.
If institutions are indeed vulnerable to low-level traps, then this im-
plies that they exhibit multiple equilibria, where some countries are stuck
with low-level institutions while others converge to the higher institu-
tional quality of developed countries. This result, however, immediately
leads to an apparent contradiction with the current consensus that in-
stitutions have a causal relationship with income. On the one hand, we
find institutions exhibiting multiple equilibria. On the other hand, the
literature on income convergence seems to imply that per capita income
has a single long-term steady-state equilibrium. How then do we explain
a causal relationship between a variable with multiple equilibria and
another that has a single equilibrium? The only logical explanation could
be (i) that per capita income itself exhibits multiple equilibria (income in
some countries are stuck in low-level traps while others converge to the
level of developed countries) rather than convergence and (ii) that the
institutional traps are significant determinants of these income traps. Put
together, these two outcomes would again reinforce the strong causal
relationship between institutions and income, but the dynamics of this
relationship would be significantly different compared to how it is
envisaged in the current literature.
Does the cross-country data actually provide any evidence of these
possibilities? This is the second question addressed by this study. We find
that the per capita incomes of some of the developing countries are also
stuck in low-level traps. Moreover, using bivariate probit regressions, we
show that institutional traps are a significant determinant of these in-
come traps. To sum up, this paper contributes to the empirical growth
literature in two important ways. Firstly, to the best of our knowledge,
this study is the only attempt to show that in many developing countries,
the quality of institutions are stuck in low level traps rather than
converging to the level of developed countries. Next, the paper estab-
lishes a strong causal relationship between institutional quality and
growth, but one that is distinctly different from the one discussed in the
current literature. More specifically, we show that not only do countries
with poor institutions have lower incomes, but their incomes are stuck in
low-level traps from which it is difficult to escape, because the in-
stitutions that enable growth are also stuck in low-quality traps. Estab-
lishing this particular nature of the institution-income relationship is the
second important contribution of this paper.
We attempt to undertake this study in two stages. In the first stage, we
apply the Phillips and Sul (2007) method in order to identify the low
level equilibrium traps in both measures of institutional quality and per
capita incomes, for a large group of countries, over a period of three
2
In the theoretical literature, some papers have shown that multiple equi-
libria is possible in neoclassical growth models (e.g., Ben David (1998)). How-
ever, these papers do not examine the role of institutions in contributing to the
convergence clubs in per capita incomes.
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Economic Modelling 76 (2019) 243–259
decades (1985–2015). Our study shows that over this time period, these
countries do not exhibit absolute convergence, either in terms of the
measures of institutional quality or in terms of per capita income.
Instead, for both variables, most countries converge to more than one
club that emerges over time, while a handful of countries diverge from
these clubs. Furthermore, the clubs characterized by lower institutional
quality or income do not show any tendency to converge towards the
higher club, indicating that these countries are indeed stuck in low
institutional traps and low income traps respectively.
In the second step, we use bivariate probit regressions to test whether
belonging to a poor institutions club is an important causal determinant
of belonging to a low income club. Our results imply that low income
traps are indeed caused by low level institutional traps, although factors
like the investment ratio, human capital and land-lockedness also matter.
This indicates that in order to escape from low income traps, countries
have to break out of the conditions that trap them in poor quality
institutions.
The paper is divided into six sections. The next section reviews the
relevant literature. Section 3 describes the Phillips and Sul (2007)
methodology that is used to identify convergence clubs and low level
traps in institutional quality and income. Section 4 presents the results of
the convergence tests using the Phillips and Sul method. Section 5 reports
the results related to the relationship between poor institutional traps
and low income traps using bivariate probit estimation. Section 6 con-
cludes the paper.
2. Related literature
There are two strands of the literature that is relevant for this paper.
The first deals with studies that have focused on the nature of institu-
tional development. Elert and Halvarsson (2012) use the ‘Economic
Freedom of the World’ index, for 141 countries, to study this phenome-
non over the period 1970–2009. This is a composite index reflecting a
country's institutional quality with respect to size of government, legal
structure and security of property rights, access to money, freedom to
trade internationally, and regulation of credit, labour and business. The
study found that countries with lower institutional quality improve faster
than countries with higher institutional quality. Savoia and Sen (2016)
test absolute and conditional convergence in institutional quality, based
on measures of legal, bureaucratic and administrative quality, for the
period 1970–2010. For absolute convergence, average annual growth
rate in institutional quality was regressed on the observed institutional
quality at the beginning of the sample period. A negative estimated
co-efficient confirmed the existence of absolute convergence. They
repeated the same exercise for conditional convergence, where a set of
explanatory variables (e.g., initial per capita GDP, initial level of edu-
cation, democracy, regional fixed effects, geographical effect, legal origin
dummies, religion, ethnic fractionalization etc.) accounting for long run
determinants of institutional change were included in the regression.
Both their convergence tests, i.e., absolute and conditional, clearly show
a significant negative correlation between the initial institutional quality
measure and the average annual growth rate in institutional quality.
Based on these findings, they conclude that countries with initially poor
institutions tended to slowly catch up with countries with high institu-
tional quality, irrespective of the initial conditions of the institutions.
However, neither of these two studies allow for the possibility of
convergence clubs in institutions, with the implicit assumption that all
countries will converge to same level of institutional quality over time. In
this paper, we relax this assumption and allow for the possibility in
multiple equilibria in institutional quality, consistent with the theoretical
predictions of Acemoglu and Robinson (2006, 2008).
The second strand deals specifically with the methodological devel-
opment of various measures of convergence, leading to the development
of techniques that can be used to identify convergence clubs and low-
level traps. The literature on convergence of output goes back to Bau-
mol (1986). However, it was Barro and Sala-i-Martin (1992, 1995), who
S. Kar et al.
first introduced the concepts of β and σ convergences. β-convergence
implies that poorer countries grow faster than the richer ones and catch
up with them in the long run. σ convergence implies that the dispersion
of income diminishes over time. Subsequently, these pure cross-sectional
approaches were criticized on the grounds that they do not account for
unobserved differences across countries (cross-sectional heterogeneity),
and they are susceptible to measurement errors, endogeneity biases and
spatial autocorrelation (Temple, 1999). As a result, many recent testing
procedures for the convergence hypothesis have been developed using
time series or panel data techniques. Bernard and Durlauf (1995) and
Evans and Karras (1996) noted the importance of time-series and panel
data methods instead of cross-sectional approach.
Conceptualizing convergence within a panel data framework, Phillips
and Sul (2007) provide an important breakthrough in tests of conver-
gence, as their methodology takes care of a number of shortcomings
found in the previous tests described above. Firstly, they capture het-
erogeneous cross-sectional behaviour, by adopting a model involving one
common factor (representing the long-term trend) and idiosyncratic ef-
fects (representing short-run cross-sectional heterogeneity). Previous
studies having a similar structure focused on analyzing the asymptotic
properties of the common factors in asset pricing models (Chamberlin
and Rothschild, 1983; Connor and Korajczyk, 1986, 1988). Other studies
have accommodated non-stationary common factors and idiosyncratic
errors (Bai and Ng, 2002, 2004; Stock and Watson, 1999; Moon and
Perron, 2004). Phillips and Sul (2007) extend these models to capture
heterogeneous agent behaviour by allowing the systematic idiosyncratic
element to evolve over time. The test of convergence then reduces to a
regression based econometric test of whether these heterogeneous time
varying idiosyncratic components converge over time to a constant. The
Phillips and Sul (2007) approach also takes care of other shortcomings in
the earlier methodology. As opposed to time-series based approaches,
their test does not need to make any assumptions about the stationarity of
the variable or the common factor. Moreover, this is the only approach
that allows the researcher to differentiate between a wide range of
convergence possibilities - absolute convergence, transitional divergence
with long-run convergence, club convergence and finally, absolute
divergence. Based on this technique, Phillips and Sul (2007) finds that
across a large cross-section of nations, there is overwhelming evidence of
convergence clubs and hence, low income traps.
3. Methodological approach
In this section, we describe the Phillips and Sul (2007) methodology
which has been used in subsequent sections in order to identify conver-
gence clubs. This approach consists of a regression based convergence
test, also known as the 'log t-test', and is similar to other recent econo-
metric studies that have given significant importance to modelling
cross-sectional heterogeneity while studying panel data. As explained
earlier, this methodology captures heterogeneous cross-sectional
behaviour, by adopting a model involving a common factor (represent-
ing the long-term trend) and idiosyncratic (i.e., unit specific) effects
(representing short-run cross-sectional heterogeneity). Such a model may
be represented as
Xit ¼ αi μt þ εit (1)
Here, αi represents the unit specific element, μt represents the factor
which is common for all the units and εitis the error term. It may be noted
that model (1) seeks to capture the evolution of the elements of Xit in
relation to the common factor μt, using two idiosyncratic (i.e., unit spe-
cific) elements, αi and εit. Alternatively, equation (1) can be written in
terms of time varying factor representation as:


εit
Xit ¼ αi þ μ ¼ bit μt (2)
μt t
Here, bit measures the distance of an individual unit Xit from the
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Economic Modelling 76 (2019) 243–259
common trend component μt. This time-varying component bit (which
includes all idiosyncratic movements in Xit) thus represents the country-
specific transition path of country i to the common trend μt. Clearly, the
extent to which individual characteristics differ across economies will be
reflected in the diverse shapes of economic transition defined by bit.
In the model described above, the difference between any two time
series variables is given by Xit– Xjt ¼ (bit– bjt) μt. Here, if bit and bjt
converge to some common b as t → ∞, Xit and Xjt are asymptotically
convergent. However, if the speed of divergence of μt is faster than the
speed of the convergence of bit, the residual (bit– bit)μt may retain non-
stationary characteristics. In other words, if the rate of convergence of
bit to b is very slow and data is limited, then the standard cointegration
tests typically have low power in detecting asymptotic convergence. In
order to take care of this problem that arises due to individual hetero-
geneity and evolution of that heterogeneity over time and across groups,
Phillips and Sul (2007) propose an alternative way to define relative long
run equilibrium or convergence between such series by defining them in
terms of their ratios rather than their differences.
In equation (2), testing for convergence requires estimating bit as well
as μt. In this general case however, the number of observations in the
panel is less than the number of unknowns in the model, making it
impossible to estimate bit. In order to solve this problem, Phillips and Sul
(2007) defines convergence in terms of a relative transition coefficient
given by
Xit bit
hit ¼ Pn ¼ Pn (3)
1=N Xit 1=N bit
i¼1 i¼1
The last part of equation (3) shows that like bit, hit also traces out the
transition element for economy i, but does so relative to the cross-section
average. It may be noted that, by focusing on hit, the framework elimi-
nates the common growth path μt, and is defined completely in terms of
the idiosyncratic part of the variable. For convergence, this framework
needs a common transition behavior across all economies, with hit→1, for
all cross sectional units i, as t→∞. In this relative transition framework,
the curves traced out by hit may differ across the cross sections in the
short run, while allowing for ultimate convergence (when hit→1, for all i,
as t→∞) in the long run. Next, the methodology defines the cross-
sectional variance of hit, by
1 XN
Ht ¼ ðhit 1Þ2 (4)
N i¼1
And the statistical convergence property Ht → 0 translates into the
null hypothesis of economic convergence between countries in the panel.
To formulate a null hypothesis of convergence, the method needs to
impose some more structure on bit. Phillips and Sul (2007) assume that bit
follows a decay model which has the following semi-parametric form
σ i ξit
bit ¼ bi þ (5)
LðtÞt β
where bi is a fixed value that bit may reach in the long run, σ i is an
idiosyncratic scale parameter, and ξit is a random variable that is iid (0,1)
across i, but may be a weakly dependent time series. L(t) is a slowly
varying function (like log t) for which L(t) →∞ as t→∞ and β is the decay
rate. β governs the rate at which the cross section variation over the
transitions decays to zero over time.
In terms of the semi-parametric form assumed above, the null hy-
pothesis of overall convergence may be written as
H0 : bi ¼ b for all i and β  0
This implies that all the idiosyncratic effects have a common long-run
value and that they all converge toward this value.
The alternative hypothesis is given as
S. Kar et al.
HA : Either ðiÞbi ¼ b for all i and β < 0 ðAbsolute DivergenceÞ
Or ðiiÞbi 6¼ b for some i and β  0 ðClub ConvergenceÞ
In either of the two cases, the null hypothesis of absolute convergence
breaks down. It may be noted that in case (i) this is due to the fact that the
cross-sections exhibit absolute divergence (i.e., they do not all converge
towards the common value) while in case (ii) this is due to the fact that
the cross-sections exhibit club convergence (i.e., although there is
convergence towards long-run values, there are, in fact, more than one
long-run value). Therefore, the alternative hypothesis also includes the
possibility of club convergence.
Finally, to test for convergence, the methodology proposes a regres-
sion model that tests whether Ht, the cross sectional variance of the
relative transition coefficient hit, tends to zero in the long run. Phillips
and Sul (2007) prove rigorously that using equations (3)–(5), the above
condition can be reduced to the regression equation
logðH1 =Ht Þ  2 log LðtÞ ¼ p þ q log t þ ut for t ¼ ½rT; ½rT þ 1; …T (6)
With bq ¼ 2b β, where β is the decay rate in equation (5)
Equation (6) is the log t-test regression,3 where H1 represents the
variance of the relative transition coefficient at the beginning of the
sample (i.e., t ¼ 1), and Ht represents the same at any point in time t (i.e.,
t ¼ 1,2, …, T). Since any convergence of the relative transition co-
efficients would require Ht to fall continuously as a proportion of H1, the
term log(H1 =Ht ) is a measure of this convergence. L(t) is assumed to be a
slowly varying function of time and Phillips and Sul (2007) suggest using
the log function for this variable (i.e., L(t) ¼ log(t)). Note that the
equation is estimated on a truncated sample which is defined by the size
of the total sample T, and a parameter r, such that the truncated sample
goes from r*T (or the closest integer to r*T) to T. Although r can lie
anywhere between zero and one, the limit distribution and power
properties of the test depend on the value of r and hence, r has to be
chosen to balance between the two. Phillips and Sul (2007) run simula-
tion experiments that suggest r ¼ 0.3 is a satisfactory choice in terms of
both size and power, and they suggest using this for all log t tests. Based
on this truncated sample, equation (6) is estimated using a hetero-
scedasticity and autocorrelation consistent one sided t-test. It is then
applied to test the inequality of the null hypothesis i.e., β  0. The null
hypothesis of convergence is rejected if tbq < 1.65 (5% significance
level).
As discussed above, this methodology embeds the possibility of club
convergence in the absence of absolute convergence. In the actual
application of this methodology, we confirm the outcome - absolute
convergence, club convergence or absolute divergence - through a two-
step approach. The first step involves testing for absolute convergence
for the entire sample using the log t-test. If the null hypothesis of
convergence cannot be rejected, we accept that the cross sections exhibit
absolute convergence over the period. If the null is rejected, it could
either be a case of club convergence or absolute divergence. The second
step tests for club convergence. This involves identifying sub-groups of
the whole sample for which the log t-test shows convergence. If such sub-
group or clusters can be identified, we conclude that the data exhibits
club convergence. Otherwise we conclude that the data exhibits absolute
divergence.
The identification of clubs or subgroups (if absolute convergence has
been rejected) is itself a multi-step process involving a clustering mech-
anism procedure. First, the cross-sectional units are sorted in descending
order of the value of the variable of interest (say, per capita income) in
the last period for which data is available (Phillips and Sul (2007) argue
that convergence is usually most apparent in the final time period of the
sample). Next, the method tries to identify the first convergence club. For
this, first the core group of the club has to be identified. This is done by
3
For detailed derivation of log t regression equation refer Phillips and Sul
(2007), appendix, pp. 44–48.
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Economic Modelling 76 (2019) 243–259
selecting the k highest units in the panel of size N, where N > k  2. The
value of k is chosen such that it maximizes the t-statistic (from the log
t-test), amongst all those subgroups that do not reject the null of
convergence. Once this core is selected, more units are added until an
additional unit shows a rejection of the null of convergence for that
group. The core and the additional units thus identified make up the first
convergence club. After the first convergence club is identified, there
may be many more units left in the sample. The approach then attempts
to identify a second and a third and a fourth convergence club and so
forth - using the same steps that had identified the first convergence club
- until the sample is exhausted or there are some units left that do not
converge to any club. These units exhibit absolute divergence.
Finally, in case the above process identifies more than one conver-
gence club, tests are conducted to determine whether some of these clubs
can be merged to form larger convergence clubs. To test for the merging
of clubs, the procedure starts with the two highest clubs. Taking all units
from the set of convergence clubs, the log t-test is run, and if the t-statistic
does not reject convergence, both clubs are merged to form one larger
club. Then the test is repeated after adding the next highest club etc., and
the process is continued until the t-statistic indicates that the conver-
gence hypothesis is rejected. Once the first merger is complete the pro-
cess attempts to identify more mergers from the rest of the convergence
clubs. The process is concluded when all possible mergers have been
completed.
4. Club convergence: identifying low level traps for income and
institutional quality
We start by looking for evidence of absolute convergence in both per
capita income and measures of institutional quality. Per capita income
data is taken from Penn World Tables Version 9. For institutional quality,
we use data from the International Country Risk Guide database (ICRG,
2016), constructed by Political Risk Services, which covers the period
1985 to 2015. The ICRG provides data on twelve institutional variables
as components of its index on political risks. Of these twelve, four vari-
ables capture economic institutions. The first two are Contract Viability
(CV), which measures property rights institutions, and Law & Order (LO),
reflecting contract-enforcing institutions. The next two are
governance-related institutional measures. These are Bureaucratic
Quality (BQ) that measures state capacity, and Corruption (CORR),
measuring levels of corruption in government. The rest of the ICRG
variables (including democratic accountability etc.) capture political
institutions. In this paper, we restrict our analysis to the four economic
institutional measures, i.e., Bureaucratic Quality (BQ), Law & Order
(LO), Contract Viability (CV)4 and Corruption (CORR).5 Test results for
absolute convergence for the five variables (per capita income and the
four institutional measures) using the logt test is reported in Table 1.
In the Table, we find that the value of t-statistic is less than 1.65 for
4
Contract viability is a combination of two variables, i.e., risk of repudiation
of contracts and expropriation risk. It may be noted that while the ICRG provides
data for bureaucratic quality and law & order from 1984 onwards, data on
contract viability is available only since 2001. However, data on both repudi-
ation of contract and expropriation risk is available for the earlier period and we
have combined those giving equal weights to both the variables.
5
These set of measures have been widely used in the empirical literature that
looks at the effect of institutions on economic growth (for example, see Knack
and Keefer, 1995, Mauro, 1995, and Acemoglu et al., 2001). While there are
other data sets available on institutional quality (such as the Fraser Institute
Index of Economic Freedom), ICRG offers two advantages over other data-sets:
firstly, it covers a much larger number of countries for a longer period of time
(see Savoia and Sen, 2016); and secondly, the methodology for constructing
these measures is the same across different dimensions of institutional quality –
bureaucratic quality, contract viability, corruption and law and order – which
guards against criticism of the adhoc nature of the some of the measures of
institutional quality used in the literature (see Savoia and Sen, 2015).
S. Kar et al. Economic Modelling 76 (2019) 243–259

Table 1 applying the merging test procedure are presented in Table 3.

Log-t test for Absolute Convergence. In Table 3, we find that the t-statistics for the four merged clubs for all
Variable Per Bureaucratic Law & Contract Corruption the variables are greater than 1.65, indicating convergence within
Capita Quality Order Viability them. Our attempts at further merging of clubs were not supported by the
Income corresponding tests. This is also indicated by the relative transition paths
Sample 111 117 117 117 117 for the four clubs for each of the four measures of institutional quality
Size depicted in Fig. 2. The relative transition curves of the upper convergence
t-statistic 9.89 20.9 21.48 18.17 38.29 clubs and the other clubs in each of these Figures show a clear evidence of
Note: t-statistic smaller than 1.65 indicates divergence. divergence i.e., over time, they are moving away from each other.
The lists of countries for each of these clubs are reported in the ap-
all the variables, so the null hypothesis of overall convergence is rejected pendix, Tables A.3–A.6. As in the case of per capita income earlier, we
at the 5% level of significance for both per capita income and measures of find that some of the countries with relatively weaker institutions
institutional quality. Next, we proceed to explore the presence of manage to improve their institutional quality over time and ultimately
convergence clubs for all these variables. converge to the highest club. However, these tables show that there are a
significant number of countries that converge to the clubs with weaker
institutions, which indicate that they are caught in institutional traps.
4.1. Convergence clubs in per capita income
Figs. 1 and 2 show that, for income and four alternative measures of
institutional quality, the three convergence clubs at the bottom not only
Using the clustering mechanism discussed in the methodology sec-
diverge from the highest club, they also show a distinctly stagnating or
tion, we find that there exist nine clubs and four diverging units. Next we
declining trend for most or all the years that we study. Since this
test for mergers among these nine clubs. The results after applying the
behaviour of the lower clubs prevent the corresponding countries from
test procedure for all possible mergers are presented in Table 2. We find
converging to the higher steady state, we define them as income and
that the t-statistics for the four clubs are greater than 1.65 indicating
institutional traps. This is described in detail in the next section.
that there is convergence within each of them. We checked for the pos-
sibility of merging of the remaining clubs. We find that the t-statistics for
5. The relationship between poor institutional quality traps and
the clubs 5, 6 and clubs 7, 8 are greater than 1.65 indicating that there
low income traps
is convergence within each of them. Our attempts at further merging of
clubs were not supported by the corresponding tests.
In this section, we examine whether there is a relationship between
The lack of any further possibilities of merger is also indicated by the
income and institutional traps and whether any such relationship is
relative transition paths for each of these four clubs. The relative tran-
causal, i.e., whether low income traps are significantly determined by
sition curves are the time paths of the cross sectional means of the
poor institutional traps. In order to do this, we need a regression model
members of the convergence clubs as a ratio of the cross sectional means
that will estimate and test the hypothesis that a country stuck in a poor
of the whole sample. In Fig. 1, we show the relative transition paths for
institutional trap is also likely to get stuck in a low-income trap. We use
the four clubs identified in Table 2. The Figure shows clear evidence of
binary dummy variables to capture income and institutional traps (zero if
divergence among the clubs i.e., the gaps among the relative transition
the country is trapped in low income or institutional convergence clubs,
paths of the clubs do not show any tendency towards declining over time,
one otherwise), based on our identification of countries in income and
since they are moving away from each other.
institutional clubs in the last section. Specifically, the countries in the
A list of the countries forming different clubs has been reported in the
lowest three income convergence clubs are considered to be a low in-
appendix, Tables A.2. If we look at the countries representing different
come trap. For the institutional trap, we consider both specific measures
clubs (converging to the same steady state), we see that over time, many
based on each one of the four institutional variables as well as an overall
of the low income countries converge to the steady state income level of
institutional measure based on all four variables. In each of the specific
the high income club of countries, i.e., club1, while some of them seem to
measures, a country is defined to be in a poor institutional quality trap if
be stuck in the low income clubs 2, 3 or 4, which do not converge to club
it belongs to the three lower convergence clubs for that variable (i.e.,
1. This indicates that these countries are caught in a low income trap.
bureaucratic quality, law and order, contract viability or corruption), other-
wise not. For the overall institutional measure, a country is considered to
4.2. Convergence clubs in institutional quality be in a poor institutional quality trap if it belongs to any of the three
lower convergence clubs for any of the four measures of institutional
The clustering mechanism generates seven clubs and seven divergent quality, otherwise it is considered not trapped.
units for the variable Bureaucratic Quality. For the variable Law & Order,
six clubs are found and there are seven divergent units. For the variable 5.1. Estimation strategy
Contract Viability, we find five clubs and three divergent units. Finally,
for the variable Corruption, we find seven clubs and two diverging units. Since there is a possibility of endogeneity bias in the explanatory
Finally, we test whether some of these clubs can be merged among variable, i.e., institutional traps, we have to use an appropriate estima-
themselves to form larger clubs. Using the merging procedure, we find tion procedure to take care of this problem. It may be noted that both the
that the variables, Bureaucratic Quality, Law & Order, Contract Viability income and institutional trap dummies are binary variables and hence,
and Corruption finally get four clubs each. The convergence results after they are discrete rather than continuous variables. The instrumental
variables methods (IV) or the IV-Probit method, the standard workhorses
Table 2 for correcting the endogeneity bias, becomes invalid for discrete
Merging of clubs in per capita income. explanatory variables. For binary endogenous explanatory variables, the
Club/ Club 1 Club 2 Club 3 Club 4 Divergent appropriate estimation technique is the bivariate probit model (See
Divergent (merging (merging (merging (initial Units Greene, 2008, p. 716). This is due to the fact that, unlike the two-step
Units initial clubs initial initial club 9) instrumental variable approach, the bivariate probit framework models
1,2,3,4) clubs 5,6) clubs 7,8)
the joint distribution of the two variables and estimates the structural
Club Size 74 21 10 2 4 model using the maximum likelihood estimator. According to Greene
t-statistic 0.79 0.42 0.63 0.103
(2012), in this case “the endogenous nature of one of the variables on the
Note: t-statistic larger than 1.65 indicates convergence. right hand side of the second equation can be ignored in formulating the

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S. Kar et al. Economic Modelling 76 (2019) 243–259

Fig. 1. Relative transition path for income clubs. Note: Convergence clubs 1, 2, 3 and 4 represents the upper, middle, lower and lowest convergence clubs
respectively.
Source: our estimates.

Table 3
Merging of clubs for institutional quality.
Bureaucratic Clubs/Divergent Club 1 (merging initial clubs 1,2 Club 2 ( initial club Club 3 ( initial club Club 4 (merging initial clubs Divergent
Quality Units and 3) 4) 5) 6, 7) Units
Club Size 77 17 12 4 7
t-statistic 0.62 1.60 2.93 1.66

Law & Order Clubs/Divergent Club 1 (merging initial clubs 1,2,3) Club 2 (initial club Club 3 (initial club Club 4 (initial club 6) Divergent
Units 4) 5) Units
Club Size 53 23 28 6 7
t-statistic 5.26 1.80 2.57 2.64

Contract Viability Clubs/Divergent Club 1 (merging initial clubs 1,2) Club 2 (initial club Club 3 (initial club Club 4 (initial club 5) Divergent
Units 3) 4) Units
Club Size 72 24 11 7 3
t-statistic 1.01 0.30 1.28 1.93

Corruption Clubs/Divergent Club 1 (merging initial clubs 1,2,3 Club 2 (initial club Club 3 (initial club Club 4 (initial club 7) Divergent
Units and 4) 5) 6) Units
Club Size 37 41 32 5 2
t-statistic 2.35 2.94 0.38 ¡1.02

Note: t-statistic larger than 1.65 indicates convergence.

log-likelihood” as the model is identified and can be consistently and
efficiently estimated using the full information maximum likelihood
estimator. Therefore, in this study, we have used the bivariate probit
model.6
The estimation of the bivariate probit model is based on a two-
equation structural latent variable model capturing the effect of an
endogenous binary regressor on a binary outcome variable.
The model may be represented as,
0
z* ¼ α x1 þ ε1 ::::::::::::::::::ð1Þ
0
y* ¼ β x2 þ γz þ ε2 ::::::::::ð2Þ
Where z* and y * are continuous latent variables and z and y are the
corresponding dichotomous variables representing whether a country is
in a (institutional and income) trap or not according to the rule,
z ¼ 1 if z* > 0 and z ¼ 0 otherwise
6
While the bivariate probit model was originally used to study endogenous
choice at the micro level, there is a now a growing literature that applies this
model to macroeconomic issues such as in this paper – see Glick and Michael
(2005), Nyberg (2014). In the context of our paper, the variables representing
income and institutional traps are both discrete and dichotomous. Moreover,
we hypothesize (and prove by the "rho" test) that the institutional traps are
indeed endogenous explanators of income traps. For this reason, the bivariate
probit model is found to be the most appropriate estimator for the issue at hand.
y ¼ 1 if y * > 0 and y ¼ 0 otherwise
In our analysis, z ¼ 0 if a country belongs to the low-institutional
quality trap and z ¼ 1 if it does not. Similarly, y ¼ 1 if a particular
country does not belong to the low-income trap, otherwise y ¼ 0. In
equations (1) and (2),x1 and x2 are the column vectors of exogenous
variables,α, β are vectors of unknown parameters,γ is an unknown scaler
and ε1 and ε2 are the error terms. The joint distribution of y and z is fully
determined once the joint distribution of ε1 and ε2 is known. In the
bivariate probit model, it is assumed that the errors ε1 and ε2 have a joint
bivariate standard normal distribution with coefficient of correlation
ρ 6¼ 0. If ρ 6¼ 0, z is considered to be endogenous and joint estimation is
required. If ρ ¼ 0, equations (1) and (2) can be estimated
independently.7
In order to run the bivariate probit regressions, we need to choose
appropriate exogenous variables for the column vectors x1 and x2 above.
For these, we consider variables from the relevant literature. Studies on
the determinants of income (as a proxy for long run growth) have argued
that, apart from initial levels of income (as a proxy for convergence),
other robust determinants include investment ratios, human capital and
the extent of globalization of a country (Hall and Jones, 1999; Rodrik
7
An alternate approach would have been to estimate ordered probit models
where the dependent variables were the convergence clubs that we have iden-
tified in the previous section, ordered from the highest to the lowest club.
However, the focus of this paper is on institutional and income traps, which
makes the bivariate probit model suitable in our case.

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S. Kar et al.
Fig. 2. Relative transition path of convergence clubs Bureaucratic Quality (BQ), Law & Order (LO), Contract Viability (CV) and Corruption (CORR).
Source: our estimates.
et al., 2004). Geographical factors like land-lockedness have also been
found to be a significant factor (Sachs and Warner, 1997; Mitton, 2016).
We include all these as exogenous explanatory variables of income traps.
Studies on the determinants of institutional quality have broadly
identified five sets of explanatory factors. These are (i) political in-
stitutions (whether the state is democratic and hence inclusive) (Besley
and Persson, 2011; Cooray et al., 2017); (ii) historical conditions such as
the length of statehood in the country (Bockstette et al., 2002); (iii)
geographical factors (whether the country is located in a tropical region
and hence suitable for European settlement) (Acemoglu et al., 2001;
Sachs, 2001); (iv) extent of globalization (associated with more compe-
tition and facilitating imitation of good practices from the world) (La
Porta et al., 2008) and (v) ethnic fractionalization, where more ethnically
fractionalised societies may see lower long-term growth (Easterly et al.,
2006). We use the same variables as exogenous explanatory variables of
institutional traps.
Table 4 reports the bivariate probit estimates of the determinants of
income and institutional traps. Models 1 to 5 corresponds to estimating
the two probit equations (one each for institutional and income traps and
represented in panel A and panel B respectively) for alternative
249
Economic Modelling 76 (2019) 243–259
definitions of institutional quality. The significance of rho (Panel C in
Table 4) is that it represents the correlation of the errors of the two probit
models. Thus a non-zero value of rho indicates that the unobserved fac-
tors which influence the probability of a country being in an institutional
trap also affect the probability of the country being in an income trap.
The probability of the chi square statistic for the Wald test that rho ¼ 0
(last row, Panel C, Table 4) indicate that the null hypothesis of the in-
dependence of the two probit equations are rejected for Models 1 to 5.
Hence the application of the biprobit technique is appropriate in this
context.
Panel A of Table 4 reports the estimated coefficients of the de-
terminants of institutional trap. These coefficients capture the relation-
ship between the likelihood that a country will not be in an institutional
trap, and a set of explanatory factors. We find that the variables geog-
raphy (latitude) and globalization are strongly significant with the ex-
pected sign in a number of equations. The other three explanatory
variables, i.e., state history, ethnic fractionalization and democracy are
also significant in more than one equation, although the results are
weaker than the other two variables.
Panel B reports the estimated coefficients of the determinants of a low
S. Kar et al. Economic Modelling 76 (2019) 243–259

Table 4
Determinants of income and institutional traps.
Alternative Measures of Institutional Traps

MODEL 1 (Bureaucratic MODEL 2 (Law & MODEL 3 (Contract MODEL 4 MODEL 5 (Overall Inst.
Quality) Order) Viability) (Corruption) Quality)

Panel A: Estimation Of Institutional Trap Equation

State History 2.32 1.23 0.18 1.37 0.35

(1.90)* (2.39)** (0.31) (1.77)* (0.33)
Geography (Latitude) 0.31 2.45 3.57 0.54 4.22
(-0.25) (2.85)*** (2.73)*** (0.50) (3.38)***
Ethnic Fractionalization 1.95 0.93 0.85 0.84 2.43
(-2.10)** (1.86)* (1.13) (-1.17) (-1.67)*
Democracy 0.11 0.09 0.10 0.08 0.18
(2.22)** (1.92)* (1.91)* (1.20) (2.09)**
Globalization 0.02 0.02 0.02 0.03 0.10
(1.82)* (1.64) (2.20)** (2.74)*** (3.56)***
Constant 0.86 3.17 2.42 2.84 8.06
(-0.72) (-4.84)*** (-3.19)*** (-4.40)*** (-3.86)***

Panel B: Estimation Of Income Trap Equation

Initial Per Capita Income 0.53 0.37 0.19 0.38 0.56

(1.56) (1.32) (0.66) (0.90) (1.33)
Investment Ratio 0.06 0.06 0.06 0.04 0.08
(1.68)* (2.40)** (3.77)*** (1.48) (2.93)***
Human Capital 0.28 0.25 0.24 0.21 0.28
(1.57) (1.75)* (2.07)** (1.64) (1.92)*
Globalization 0.01 0.01 0.01 0.02 0.01
(-0.38) (-0.79) (-0.41) (-1.08) (-0.74)
Land-lockedness 1.18 0.62 1.05 1.11 0.92
(-2.47)** (-1.07) (-2.67)*** (-2.26)** (-2.29)**
Institutional Trap 1.72 1.90 1.51 2.23 7.41
(5.38)*** (5.05)*** (5.64)*** (3.79)*** (20.37)***
Constant 7.69 5.67 4.37 4.63 7.11
(-3.74)*** (-2.80)*** (-2.23)** (-1.39) (-2.19)**
Number of Observations 80 78 80 80 82

Panel C: Wald Test Of Rho ¼ 0

Chi-square (1) 212.16 23.82 181.71 194.60 7.02

Probability 0.00 0.00 0.00 0.00 0.01

income trap. These coefficients capture the relationship between the
likelihood that a country will not be in a low income trap, and a set of
explanatory factors, including a measure of an institutional trap.8 We find
that in all the five regressions (Model 1 to 5), the variable measuring
institutional traps is statistically significant at one percent level of
8 levels may be affecting subsequent development. As far as globalization
It should be noted that due to availability of data for the covariates in the
bivariate probit analysis, the sample size is reduced to 80 as opposed to 111
countries used in the club convergence analysis. This raises the question as to
whether the results will remain stable when both the club convergence analysis
and the institutional determinants of club status analysis are conducted with the
smaller sample of 80 countries. In order to check this, we re-do the convergence
analysis with the smaller sample of 80 countries and find that, as with the
original sample of 111 countries, there are four convergence clubs for institu-
tional quality and income and that the higher convergence club follows a
divergent path from the other three clubs. This allows us, as before, to classify
the three lower convergence clubs for institutional quality and income as
institutional quality and income traps. Re-estimating the bivariate probit
equations for the institutional quality and income traps, we find that institu-
tional quality traps remains the significant determinant of income traps, sug-
gesting that the results are not sensitive to sample size and alternate
classifications of the institutional quality and income traps.
9
In order to test the robustness of the results for institutional measures from
other databases, we have repeated the econometric exercise for two additional
measures of economic institutions taken from sources other than the ICRG
database. These are (i) the economic freedom index provided by Freedom House
Database and (ii) the political corruption index provided by the Varieties of
Democracy Database. The results are similar to those in the paper. However the
sample sizes for these tests are different from those reported in the paper and
hence, these results are not reported in detail. These results can be obtained
from the authors upon request.
significance and has the expected sign.9 The other variables that have an
equally strong effect on the low income trap variable are investment
ratios and land-lockedness. The measures of human capital are also found
to be significant in some of the regressions, although it is a weaker result.
Interestingly, initial income and globalization are found to be statistically
insignificant. The insignificance of initial income may be due to the in-
clusion of investment ratios, the main channel through which income
is concerned, it seems that its impact on a country's ability to escape from
a low income trap works mostly by enabling it to escape from institu-
tional traps.10
6. Concluding remarks
The empirical growth literature has two very distinct and significant
strands. One of these strands has established that institutional quality is
the most significant determinant of economic growth. The other strand
shows that countries tended to exhibit club convergence, and hence some
of them are stuck in low income traps. In this paper, we bring these two
10
In Appendix Table A.8, we perform a series of robustness tests, where we see
whether our results change when we have different combinations of control
variables. Further, we also include additional controls such as natural resource
exports and colonial origins as additional determinants of institutional quality
traps and financial depth and foreign direct investment/GDP as additional de-
terminants of income traps (including these controls does lead to a reduction in
our sample). We find that no matter which set of control variables we include in
our institutional quality and income trap equations, our finding that institutional
quality is a significant determinant of income traps remains robust to alternate
specifications.

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S. Kar et al. Economic Modelling 76 (2019) 243–259

strands together to ask, are countries stuck in low income traps because
economic institutions in these countries are similarly stuck in low quality
institutions traps? In other words, are these countries stuck in a double
trap? This paper looks into this issue by adopting a two-step approach. In
the first step, we identify convergence clubs in income and institutional
quality using the log t-test suggested by Phillips and Sul (2007) for a large
set of countries (111 for income and 117 for institutions) over the period
1985–2015. Countries with per capita income and institutional quality
that belong to the lowest convergence clubs and that exhibit divergence
from the highest club are identified as those that are stuck in low-level
income traps and poor quality institutions traps respectively. In the
second step, we investigate whether the poor institutional quality trap
can explain the existence of the low income trap. Using bivariate probit
regressions on a sample of about 80 countries (for which data is avail-
able), we have estimated the likelihood of a country to be in a low income
trap given that the country also belongs to the low institutional quality
trap. We have found that if a country belongs to the convergence clubs
identified as institutional traps, then there is a high probability that the
country will also belong to those income convergence clubs identified as
income traps.
If it is indeed true (as our results suggest) that countries are stuck in
low income traps because they are primarily in poor institutions traps,
then policies for growth will have to focus on getting them out of these
traps. Since it is the nature of traps that they do not allow countries to
escape from them by making small incremental changes - in this case to
their institutions - this implies that major institutional reforms may be
necessary for sustained growth in these countries. What can developing
countries do to make such reforms more successful? Our paper throws
some light on this as well. The equation that estimates institutional traps
in the bivariate probit shows that apart from history (state history), ge-
ography (temperate regions) and social factors (ethnic fractionalization)
which are exogenous, the levels of democracy and extent of economic
globalization has a strong correlation with the trap variable. Our results
show that weaker democracies seem to be associated with low quality
traps of bureaucracy, law and order and viability of contracts. Similarly,
lower levels of globalization are associated with traps of bureaucratic
quality and viability of contracts but also corruption traps. These results
are not difficult to understand. Institutions traps are usually the result of
status quo-ist policies of the business and political elite, who find that
institutional developments are against their vested interests. In most
cases these vested interests are able to push their agenda in weaker de-
mocracies, despite there being popular demands for institutional change.
A stronger democratic framework can help countries get out of this kind
of a trap. Globalization, on the other hand, works mostly through
increased demand for better quality institutions from the international
stakeholders, including trading partners and foreign investors. Thus
policies of democratization and globalization, while having other effects
on growth, can definitely help in making institutional reforms more
successful in developing countries and can even help them escape the
double trap that some of them are stuck in.

Appendix

Table A.1
Initial Convergence clubs for Per Capita Income.

CLUBS/DIVERGENT UNITS CLUB SIZE t-statistic

Club 1 23 2.59
Club 2 15 0.82
Club 3 21 0.75
Club 4 15 0.21
Club 5 18 0.74
Club 6 3 0.83
Club 7 6 2.33
Club 8 4 3.79
Club 9 2 0.10
Divergent Units 4
Note: t-statistic larger than 1.65 indicates convergence.

Table A.2
List of countries in merged clubs for Per Capita Income.

CLUB 1 CLUB 5 CLUB 6 CLUB 7 CLUB 8 CLUB 9 Divergent

Units

Initial Club 1 Initial Club 2 Initial Club 3 Initial Club 4 Initial Club5 Initial Club 6 Initial Club Initial Club Initial Divergent
7 8 Club 9 Units

Albania Austria Angola Algeria Bangladesh Kenya Burkina Guinea Niger Congo DR
Faso
Australia Belgium Argentina Bahamas Bolivia Syrian Arab Cameroon Haiti Togo Madagascar
Republic
Brunei Bulgaria Bahrain Brazil Congo Tanzania C^
ote Malawi Portugal
Darussalam d'Ivoire
China Canada Botswana Colombia El Salvador Mali Zimbabwe Qatar
Finland Chile Costa Rica Ecuador Ethiopia Senegal
Hong Kong Denmark Cyprus Egypt Gabon Sierra
Leone
Iceland Iraq Dominican Indonesia Ghana
Rep.
Ireland Malaysia France Jordan Guatemala
Kuwait Netherlands Greece Lebanon Honduras
Luxembourg New Zealand Hungary Liberia Jamaica
(continued on next column)

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S. Kar et al. Economic Modelling 76 (2019) 243–259

Table A.2 (continued )

CLUB 1 CLUB 5 CLUB 6 CLUB 7 CLUB 8 CLUB 9 Divergent
Units

Initial Club 1 Initial Club 2 Initial Club 3 Initial Club 4 Initial Club5 Initial Club 6 Initial Club Initial Club Initial Divergent
7 8 Club 9 Units

Myanmar Oman India Mexico Mozambique

Norway Saudi Arabia Iran Morocco Nicaragua
Panama Sri Lanka Israel Nigeria Pakistan
Poland United Italy South Africa Paraguay
Kingdom
Romania Viet Nam Japan Venezuela (Bolivarian Philippines
Republic of)
Singapore Peru Sudan
(Former)
South Korea Spain Uganda
Sweden Thailand Zambia
Switzerland Tunisia
Taiwan Turkey
Trinidad and Uruguay
Tobago
UAE
United States

Table A.3
List of countries in merged clubs for Bureaucratic Quality.

MERGED CLUB 1 CLUB 2 CLUB 3 MERGED CLUB 4 Divergent Units

Initial Club 1 Initial Club 2 Initial Club 3 Initial Club 4 Initial Club 5 Initial Club 6 Initial Club 7

Albania Algeria Angola Bahrain Burkina Faso Korea,DPR Somalia Austria

Argentina France Botswana Brazil Cameroon Sierra Leone Togo Botswana
Australia Greece Bulgaria Colombia Dominican Republic China
Austria Hong Kong China Congo Gabon Colombia
Bangladesh Hungary Costa Rica Kenya Libya Gabon
Belgium India Cuba Myanmar Madagascar Israel
Bolivia Jamaica Ecuador Nicaragua Mozambique Kenya
Canada Poland Egypt Oman Nigeria
Chile Portugal Ghana Papua New Guinea Paraguay
Cyprus South Korea Indonesia Romania Senegal
Denmark Spain Iran South Africa Venezuela
El Salvador Taiwan Italy Sudan Zimbabwe
Ethiopia Uruguay Jordan Syria
Finland Vietnam Kuwait Tanzania
Guatemala Morocco Thailand
Guinea Niger Turkey
Guyana Pakistan Zambia
Honduras Qatar
Iceland Saudi Arabia
Iraq Sri Lanka
Ireland Tunisia
Israel
Japan
Lebanon
Luxembourg
Malawi
Malaysia
Mexico
Netherlands
New Zealand
Norway
Panama
Peru
Philippines
Singapore
Sweden
Switzerland
Trinidad & Tobago
UAE
Uganda
United Kingdom
United States

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S. Kar et al. Economic Modelling 76 (2019) 243–259

Table A.4
List of countries in merged clubs for Law & Order.

MERGED CLUB 1 CLUB 2 CLUB 3 CLUB 4 Diverging Units

Initial Club 1 Initial Club 2 Initial Club 3 Initial Club 4 Initial Club 5 Initial Club 6

Austria Algeria Angola Bolivia Albania Honduras Liberia

Ethiopia Australia Bahrain Botswana Argentina Venezuela Malawi
Ireland Bahamas Belgium Burkina Faso Bangladesh Pakistan
Israel Canada Brunei China Brazil
Korea, DPR Chile Japan Colombia Bulgaria
Sierra Leone Cyprus Jordan Costa Rica Cameroon
South Korea France Liberia Egypt Congo
Sweden Greece Libya Gabon Cote d'Ivoire
Taiwan Hong Kong Malaysia Hungary Cuba
Tanzania India Morocco Indonesia Dominican Republic
Tunisia Kuwait Mozambique Iran Ecuador
Lebanon Nicaragua Italy Ghana
New Zealand Peru Mali Guatemala
Oman Poland Myanmar Guinea
Pakistan Senegal Panama Iraq
Portugal Singapore Papua New Guinea Jamaica
Qatar Switzerland Romania Kenya
Saudi Arabia UAE Sri Lanka Madagascar
Spain Uganda Sudan Malawi
Syria United Kingdom Togo Mexico
Zambia United States Turkey Niger
Vietnam Nigeria
Zimbabwe Paraguay
Philippines
South Africa
Thailand
Trinidad & Tobago
Uruguay

Table A.5
List of countries in merged clubs for Contract Viability.

MERGED CLUB 1 CLUB 2 CLUB 3 CLUB 4 Divergent Units

Initial Club 1 Initial Club 2 Initial Club 3 Initial Club 4 Initial Club 5

Angola Albania Bangladesh Argentina Bolivia Ecuador

Australia Algeria Brazil China Cuba Venezuela
Austria Belgium Burkina Faso Egypt Guinea Zimbabwe
Bahamas Bulgaria Costa Rica Ethiopia Iran
Bahrain Cameroon Cote d'Ivoire Guyana Korea, DPR
Botswana Colombia El Salvador Haiti Somalia
Brunei Congo, DR Gabon Honduras Syria
Canada Cyprus Ghana Malawi
Chile Denmark Greece Myanmar
Congo Dominican Republic Libya Nigeria
Finland France Madagascar Zambia
Hong Kong Guatemala Mali
Iraq Hungary Niger
Japan Iceland Papua New Guinea
Liberia India Peru
Luxembourg Indonesia Senegal
Mozambique Ireland Sri Lanka
Netherlands Israel Tanzania
New Zealand Italy Thailand
Norway Jamaica Togo
Oman Jordan Tunisia
Saudi Arabia Kenya Turkey
Sierra Leone Kuwait Uganda
Singapore Lebanon Vietnam
Sweden Malaysia
Switzerland Mexico
Taiwan Morocco
Trinidad & Tobago Nicaragua
UAE Pakistan
United Kingdom Panama
United States Paraguay
Philippines
Poland
Portugal
Qatar
Romania
(continued on next column)

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S. Kar et al. Economic Modelling 76 (2019) 243–259

Table A.5 (continued )

MERGED CLUB 1 CLUB 2 CLUB 3 CLUB 4 Divergent Units

Initial Club 1 Initial Club 2 Initial Club 3 Initial Club 4 Initial Club 5

South Africa
South Korea
Spain
Sudan
Uruguay

Table A.6
List of countries in merged clubs for Corruption.

MERGED CLUB 1 CLUB 2 Divergent Units

Initial Club 1 Initial Club 2 Initial Club 3 Initial Club 4 Initial Club 5 Initial Club 6 Initial Club 7

Bahamas Australia Colombia Cyprus Argentina Albania Korea, DPR Israel

Bangladesh Austria Switzerland Kuwait Bahrain Algeria Libya Sweden
Belgium Botswana United Kingdom Portugal Brazil Angola Sudan
Chile Canada Spain Brunei Bolivia Venezuela
Denmark Congo, DR United States Burkina Faso Bulgaria Zimbabwe
Finland France Vietnam Cameroon Congo
Gabon Hong Kong China Costa Rica
Indonesia Iceland Cuba Cote d'Ivoire
Liberia Ireland Ecuador Dominican Republic
New Zealand Japan Egypt Greece
Norway Luxembourg El Salvador Guatemala
Qatar Netherlands Ethiopia Guinea
Singapore Saudi Arabia Ghana Guyana
UAE Honduras Haiti
Uruguay Hungary Iran
India Jamaica
Iraq Kenya
Italy Lebanon
Jordan Madagascar
Malaysia Malawi
Morocco Mali
Myanmar Mexico
Nigeria Mozambique
Oman Nicaragua
Pakistan Niger
Panama Papua New Guinea
Peru Paraguay
Philippines Somalia
Poland Syria
Romania Thailand
Senegal Trinidad & Tobago
Sierra Leone Uganda
South Africa
South Korea
Sri Lanka
Taiwan
Tanzania
Togo
Tunisia
Turkey
Zambia

Table A.7
Variables and Data sources.

Variable Definition Data Sources

Bureaucratic Quality
Trap
Law and Order Trap
Contract Viability Trap
Corruption Trap
Overall Institutional
Quality Trap
Income Trap
Human Capital
Countries in lowest three convergence clubs for Bureaucratic International Country Risk Guide database (ICRG, 2016), Political Risk Services
Quality ¼ 0, otherwise 1
Countries in lowest three convergence clubs for Law and Order ¼ 0, International Country Risk Guide database (ICRG, 2016), Political Risk Services
otherwise 1
Countries in lowest three convergence clubs for Contract Viability ¼ 0, International Country Risk Guide database (ICRG, 2016), Political Risk Services
otherwise 1
Countries in lowest three convergence clubs for Corruption ¼ 0, International Country Risk Guide database (ICRG, 2016), Political Risk Services
otherwise 1
Countries in lowest three convergence clubs for Bureaucratic Quality or International Country Risk Guide database (ICRG, 2016), Political Risk Services
Law and Order or Contract Viability or Corruption ¼ 0, otherwise 1
Countries in lowest three convergence clubs for Per Capita Income ¼ 0, Penn World Table, version 9 (www.ggdc.net/pwt)
otherwise 1
Average year of schooling
(continued on next column)

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S. Kar et al. Economic Modelling 76 (2019) 243–259

Table A.7 (continued )

Variable Definition Data Sources

Barro-Lee average years of schooling for aged above 15, Compiled from The
Quality of Government (QOG) Standard Dataset, 2017)(http://www.qog.pol.gu.
se)
State History Length of statehood State Antiquity Index (Statehist), 3.1, Bockstette et al., 2002
Geography Latitude opez-de-Silanes, Shleifer &Vishny-Latitude Compiled from The
(La Porta, L
Quality of Government (QOG) Standard Dataset, 2011)
Globalisation Economic Globalisation in 1985 opez-de-Silanes, Shleifer & Vishny-Latitude Compiled from The
(La Porta, L
Quality of Government (QOG) Standard Dataset, 2017)
Initial Income Per Capita Income in 1985 Penn World Table, version 9 (www.ggdc.net/pwt)
Land-lockedness Coastal or Land-locked Our own construction (landlocked ¼ 1, coastal ¼ 0)
Democracy Democracy in 1985 Polity IV-Revised Combined Polity Score, level of democracy (freedom house/
Polity) compiled from The Quality of Government (QOG) Standard Dataset,
2017)
Geddes B., Wright J. and Frantz E. (2014),“New data set: Autocratic breakdown
and regime transitions”, Perspectives on Politics 12 (1)
Ethnic Fractionalization Ethnic Fractionalization Compiled from The Quality of Government (QOG) Standard Dataset, 2017
Investment Ratio Total Investment (% of GDP) Compiled from The Quality of Government (QOG) Standard Dataset, 2017
Colonial origin UK or US colony ¼ 1 otherwise 0 Compiled from The Quality of Government (QOG) Standard Dataset, 2017
Financial sector depth Domestic credit to private sector by banks (% of GDP) World Development Indicators 2017
FDI ratio Foreign direct investment, net inflows (% of GDP) World Development Indicators 2017
Natural resource export Point source natural resource exports Compiled from The Quality of Government (QOG) Standard Dataset, 2017

Table A.8
Robustness Tests – Alternate Specifications of Institutional Quality and Income Trap Equations.

A.8.8.1: Bureaucratic Quality

Bureaucratic Quality

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

Panel A: Estimation Of Institutional Trap Equation

State History 1.88** 2.63** 2.32* 2.79** 2.82**

(0.81) (1.24) (1.23) (1.17) (1.26)
Geography (Latitude) 0.51 0.26 0.31 0.51 0.56
(1.1) (1.23) (1.24) (1.31) (1.24)
Ethnic Fractionalization 2.17** 1.46* 1.95** 2.55*** 1.98**
(0.93) (0.82) (0.93) (0.83) (0.98)
Democracy 0.11* 0.11** 0.09 0.12**
(0.06) (0.05) (0.06) (0.05)
Globalization 0.02* 0.02* 0.03** 0.03**
(0.013) (0.01) (0.01) (0.02)
Natural Resource Export 0.39 0.20
(0.52) (0.56)
Colonial Origin 1.03*** 1.04***
(0.34) (0.41)
Constant 0.64 1.34 0.85 0.92 1.68
(0.82) (1.18) (1.2) (0.96) (1.39)

Panel B: Estimation Of Income Trap Equation

Initial Per Capita Income 0.74** 0.61** 0.53 0.64* 0.96*

(0.32) (0.30) (0.34) (0.36) (0.50)
Investment Ratio 0.05** 0.04* 0.056* 0.06** 0.08**
(0.03) (0.03) (0.03) (0.03) (0.04)
Human Capital 0.17 0.15 0.28 0.28 0.26
(0.13) (0.14) (0.18) (0.19) (0.19)
Institutional Trap 1.9*** 1.96*** 1.72*** 1.63*** 2.13***
(0.38) (0.36) (0.32) (0.35) (0.44)
Globalisation 0.006 0.01 0.04**
(0.02) (0.02) (0.02)
Land-lockedness 1.18** 1.14** 0.49
0.47 0.5 0.755
Financial Sector Depth 0.04**
(0.02)
FDI Ratio 0.35
(0.24)
Constant 9.51*** 8.05*** 7.69*** 8.63*** 12.5***
2.51 1.94 2.06 2.16 3.94
Number of observation 82 80 80 80 75

Panel C: Wald test of Rho

Chi-square(1) 9.49 1.23 212.16 64.01 45219.7

Probability 0.00 .26 0.00 0.00 0.00
A.8.8.2: Law and Order

(continued on next column)

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Table A.8 (continued )

A.8.8.2: Law and Order

Law & Order

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

Law & Order

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

Panel A: Estimation Of Institutional Trap Equation

State History 0.83 1.22* 1.23** 1.45* 1.69**

(0.77) (0.65) (0.51) (0.80) (0.75)
Geography (Latitude) 3.07** 2.45*** 2.45*** 2.8** 3.57**
(1.24) (0.95) (0.86) (1.31) (1.49)
Ethnic Fractionalization 0.31 0.81 0.94* 1.01 1.28
(0.61) (0.59) (0.50) (0.74) (0.84)
Democracy 0.11*** 0.09** 0.07 0.06
(0.04) (0.04) (0.06) (0.06)
Globalization 0.01 0.01* 0.02** 0.02**
(0.01) (0.01) (0.01) (0.01)
Natural Resource Export 0.34 0.37
(0.45) (0.42)
Colonial Origin 0.47 0.48
(0.37) (0.37)
Constant 1.55*** 2.95*** 3.17*** 3.34*** 3.66***
(0.54) (0.71) (0.65) (0.80) (0.88)

Panel B: Estimation Of Income Trap Equation

Initial Per Capita Income 0.34 0.49** 0.368 0.494 0.76*

(0.28) (0.20) (0.28) (0.32) (0.43)
Investment Ratio 0.05** 0.05*** 0.05** 0.05* 0.08*
(0.03) (0.02) (0.02) (0.03) (0.04)
Human Capital 0.26*** 0.15* 0.25* 0.239 0.41**
(0.10) (0.09) (0.14) (0.15) (0.19)
Institutional Trap 1.83*** 1.85*** 1.9*** 1.89*** 2.74***
(0.38) (0.27) (0.37) (0.43) (0.67)
Globalisation 0.008 0.011 0.027
(0.01) (0.02) (0.02)
Land-lockedness 0.622 0.46 0.313
(0.58) (0.62) (0.65)
Financial Sector Depth 0.06**
(0.03)
FDI Ratio 0.39*
(0.25)
Constant 5.82*** 6.63*** 5.67*** 6.56*** 11.7***
(1.93) (1.76) (2.02) (2.49) (4.22)
Number of observation 80 78 78 78 73

Panel C: Wald test of Rho

Chi-square(1) .01 10.04 23.82 26.48 83.28

Probability .89 0.00 0.00 0.00 0.00
A.8.8.3: Contract Viability

Contract Viability

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

Panel A: Estimation Of Institutional Trap Equation

State History 2.28*** 1.95** 0.18 0.47 0.30

(0.79) (0.86) (0.59) (0.72) (0.76)
Geography (Latitude) 3.47*** 3.14** 3.57*** 3.91*** 3.01*
(1.30) (1.31) (1.31) (1.40) (1.58)
Ethnic Fractionalization 0.44 0.69 0.85 0.87 1.03
(0.63) (0.64) (0.76) (0.73) (0.81)
Democracy 0.02 0.10* 0.09* 0.14***
(0.03) (0.05) (0.05) (0.05)
Globalization 0.02*** 0.02** 0.03*** 0.03***
(0.01) (0.01) (0.01) (0.01)
Natural Resource Export 0.30 0.10
(0.24) (0.43)
Colonial Origin 0.64** 0.65**
(0.31) (0.32)
Constant 0.55 0.70 2.42*** 2.73*** 2.91***
0.54 (0.66) (0.76) (0.86) (0.92)

Panel B: Estimation Of Income Trap Equation

Initial Per Capita Income 0.47** 0.66*** 0.19 0.45 0.51

(0.22) (0.21) (0.28) (0.29) (0.33)
Investment Ratio
(continued on next column)

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Table A.8 (continued )

A.8.8.3: Contract Viability

Contract Viability

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

0.04 0.04 0.06*** 0.05*** 0.08***

(0.03) (0.03) (0.02) (0.01) (0.03)
Human Capital 0.22** 0.23*** 0.24** 0.21** 0.22
(0.10) (0.08) (0.12) (0.10) (0.17)
Institutional Trap 1.48*** 1.32*** 1.51*** 1.47*** 1.65***
(0.34) (0.33) (0.27) (0.21) (0.32)
Globalisation 0.01 0.01 0.02
(0.01) (0.01) (0.02)
Land-lockedness 1.05*** 0.77** 0.29
(0.39) (0.37) (0.45)
Financial Sector Depth 0.04*
(0.02)
FDI Ratio 0.01
(0.21)
Constant 4.91*** 6.66*** 4.37** 6.10*** 8.22***
(1.79) (1.80) (1.96) (2.18) (2.08)
Number of observation 82 80 80 80 75

Panel C: Wald test of Rho

Chi-square(1) .08 10.04 23.82 26.48 83.28

Probability .77 0.00 0.00 0.00 0.00
A.8.8.4: Corruption

Corruption

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

Panel A: Estimation Of Institutional Trap Equation

State History 0.63 0.89 1.37* 1.29* 0.69

(.78) (2.50) (0.77) (0.70) (0.77)
Geography (Latitude) 2.25** 0.68 0.54 0.33 1.11
(1.12) (1.00) (1.08) (1.11) (0.97)
Ethnic Fractionalization 0.77 0.98 0.84 0.58 0.11
(0.61) (0.72) (0.72) (0.71) (0.79)
Democracy 0.10 0.08 0.08 0.11
(0.07) (0.06) (0.07) (0.07)
Globalization 0.03** 0.03*** 0.03*** 0.03***
(0.01) (0.01) (0.01) (0.01)
Natural Resource Export 0.67 0.59
(0.46) (0.55)
Colonial Origin 0.16 0.11
(0.32) (0.49)
Constant 1.15** 2.48*** 2.84*** 2.52*** 2.99***
(0.54) (0.90) (0.65) (0.76) (1.01)

Panel B: Estimation Of Income Trap Equation

Initial Per Capita Income 0.42 0.41 0.38 0.37 0.59

(0.38) (0.52) (0.43) (0.30) (0.61)
Investment Ratio 0.04* 0.05 0.04 0.05* 0.09***
(0.02) (0.06) (0.03) (0.03) (0.03)
Human Capital 0.23 0.19 0.21* 0.24** 0.23
(0.13) (0.16) (0.13) (0.10) (0.18)
Institutional Trap 1.98*** 1.93*** 2.23*** 2.17*** 1.22**
(1.54) (1.75) (0.59) (0.58) (0.52)
Globalisation 0.02 0.02 0.02
(0.01) (0.02) (0.02)
Land-lockedness 1.11** 0.99** 0.27
(0.49) (0.49) (0.70)
Financial Sector Depth 0.04**
(0.02)
FDI Ratio 0.13
(0.22)
Constant 5.85** 5.71 4.63 4.80* 8.23*
(2.88) (5.43) (3.33) (2.70) (4.59)
Number of observation 82 80 80 80 75

Panel C: Wald test of Rho

Chi-square(1) 1.04 .21 194.60 332.28 9.95

Probability .30 .63 0.00 0.00 0.00
A.8.8.5: Overall Institutional Quality

Overall Institutional Quality

(continued on next column)

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Table A.8 (continued )

A.8.8.5: Overall Institutional Quality

Overall Institutional Quality

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

MODEL1 MODEL2 MODEL3 MODEL4 MODEL5

Panel A: Estimation Of Institutional Trap Equation

State History 0.37 0.13 0.35 0.43 0.13

(0.83) (1.42) (1.06) (1.28) (1.30)
Geography (Latitude) 5.27*** 4.22*** 4.22*** 3.11* 3.69**
(1.77) (1.73) (1.25) (1.75) (1.60)
Ethnic Fractionalization 0.83 2.60 2.43* 1.99 1.64
(0.70) (2.09) (1.45) (1.83) (1.70)
Democracy 0.18 0.18** 0.17 0.15
(0.13) (0.08) (0.12) (0.12)
Globalization 0.09*** 0.10*** 0.11*** 0.10***
(0.02) (0.03) (0.03) (0.03)
Natural Resource Export 0.30 0.48
(0.93) (0.86)
Colonial Origin 0.52 0.35
(0.89) (0.77)
Constant 1.98*** 7.28*** 8.06*** 7.64*** 7.20***
(0.74) (2.02) (2.09) (2.32) 1.99

Panel B: Estimation Of Income Trap Equation

Initial Per Capita Income 0.55 0.59 0.56 0.54 0.76

(0.37) (0.39) (0.42) (0.42) (0.60)
Investment Ratio 0.07*** 0.07*** 0.08*** 0.08*** 0.08**
(0.03) (0.03) (0.03) (0.03) (0.04)
Human Capital 0.21* 0.22 0.28** 0.27* 0.27
(0.12) (0.14) (0.15) (0.16) (0.19)
Institutional Trap 6.46*** 8.65*** 7.41*** 6.55*** 5.54***
(0.33) (0.37) (0.36) (0.46) (0.66)
Globalisation 0.01 0.01 0.02
(0.02) (0.02) (0.02)
Land-lockedness 0.92** 0.92 0.43
(0.40) (0.71) (0.71)
Financial Sector Depth 0.04***
(0.02)
FDI Ratio 0.23
(0.30)
Constant 7.09** 7.52** 7.11** 6.90** 9.71**
(2.94) (3.14) (3.25) (3.20) (4.72)
Number of observation 84 82 82 82 77

Panel C: Wald test of Rho

Chi-square(1) 2.51 .002 7.01 50.36 144.46

Probability .11 .96 0.00 0.00 0.00

Appendix B. Supplementary data

Supplementary data related to this article can be found at https://doi.org/10.1016/j.econmod.2018.08.002.

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