Working Papers, Department of Economics, Lund University
Niclas Berggren, Andreas Bergh
The growth effects of institutional instability
() and Christian Bjørnskov
Abstract: Both institutional quality and institutional stability
have been argued to stimulate economic growth. But to improve institutional
quality, a country must endure a period of institutional change, which
implies at least a little and possibly a lot of institutional instability.
We investigate the growth effects of institutional quality and instability,
using the political risk index from the ICRG in a cross-country study of
132 countries, measuring instability as the coefficient of variation. Using
the aggregate index, we find evidence that institutional quality is
positively linked to growth. While institutional instability is negatively
related to growth in the baseline case, there are indications that the
effect can be positive in rich countries, suggesting that institutional
reform is not necessarily costly even during a transition period.
Sensitivity analysis, e.g., decomposing the political risk index by using
both its constituting components and the results of a principal components
analysis, using other measures of institutional quality and excluding
outliers, confirm the general results, with qualifications.
Keywords: Institutions; Instability; Growth; Transaction costs; Uncertainty; (follow links to similar papers)
JEL-Codes: B52; D80; O11; O17; O43; (follow links to similar papers)
36 pages, June 2, 2009
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