A Review of The Recent Literature On The Institutional Economics Analysis of The Long-Run Performance of Nations

doi: 10.1111/joes.
12186
A REVIEW OF THE RECENT LITERATURE

ON THE INSTITUTIONAL ECONOMICS ANALYSIS
OF THE LONG-RUN PERFORMANCE OF NATIONS
Peter Lloyd
University of Melbourne
Cassey Lee*
ISEAS – Yusof Ishak Institute
Abstract. This paper reviews the recent (post-2000) literature that assesses the importance of
institutions as a factor determining cross-country differences in growth rates or in the contemporary
level of “prosperity.” It first sketches how institutional economics has evolved. It then examines
critically the methods of analysis employed in the recent literature. The paper finds that this literature
has made a major contribution to the analysis of the causes of economic growth but the relative
importance of institutions as a determinant of long-run growth and prosperity is still a wide open
question.
Keywords. Institutions; Instruments; Long-run performance; Policies
1. Introduction
What explains the economic prosperity of nations? This seemingly simple question has been asked since
ancient times. Rulers in the major capitals across the ancient world sought the advices of sages on ways
to strengthen their power and legitimacy through actions that would bring prosperity to their lands. At the
core of many of the advices rendered were rules relating to how societies should be ordered. These may
be loosely translated to mean “institutions.” For modern economies, the starting point is Adam Smith,
whose great book The Wealth of Nations (1776) was seminal. In his lectures and writings, Smith paid
attention to the role of institutions through a theory of social development that linked the different level
of subsistence (hunting, pasturage, farming, and commerce) with distinct social and political structures
(Skinner, 2008). Smith’s theory clearly influenced the work of Marx that advanced a theory of capitalism
driven by inherent conflicts. These early ideas, either directly or indirectly, influenced many variants of
“institutional economics” broadly defined – some of which were directly at odds with each other. American
institutionalism was especially influential.1 The shift from classical economics (with its emphasis on the
long run) to neoclassical economics (short run) heralded a period of relative neglect of the role of
institutions.
By the 1950s, questions relating to the prosperity of nations were mainly couched in terms of growth
theories that emphasized the role of capital accumulation. Subsequent refinements sought to unpack the
unexplained residual by incorporating the role of technological change and human capital.
∗ Corresponding author contact email: [email protected]; Tel: +65-68704505
Journal of Economic Surveys (2018) Vol. 32, No. 1, pp. 1–22

C 2016 John Wiley & Sons Ltd.
2 LLOYD AND LEE
This leads us to the curious story of the current interest in institutions and growth. Empirical quantitative
analyses of the historic problem of explaining differences in the economic prosperity of nations have used
new methods of analysis and came to new conclusions. Early works include Olson (1982) and Choi
(1983) with a resurgence since the early 2000s, making this a mostly 21st century economics. These
writers find that institutions are important determinants of cross-country differences in prosperity. As
Acemoglu et al. (2005, p. 402) expressed it, “institutions matter.” In some cases, authors claim they are
the main determinant. In their survey of the literature, Acemoglu et al. (2005, p. 386) contrast the power
of the explanation of three possible “fundamental” causes of long-run economic growth: institutions,
geography, and culture. They claim that differences in economic institutions are “the fundamental
cause of differences in economic development.” This argument is repeated in Acemoglu and Robinson
(2012, chapter 2) where geography and culture are dismissed as “theories that don’t work.” Similarly,
Rodrik et al. (2004) claim that “the quality of institutions trumps everything else” [which in this case
is geography and trade integration]. Later, however, Rodrik (2006, p. 979) called this “institutions
fundamentalism” and compares it to “market fundamentalism” as in the Washington Consensus
view.
From the point of view of analysis, one of the major contributions of the recent literature on institutional
determinants of national long-run macroeconomic performance is the development of explicit models and
the testing of the hypotheses generated. Outstanding examples are Acemoglu et al. (2001), Easterly
(2005), Rodrik et al. (2004), and Besley and Persson (2011). These authors also emphasized the need to
establish true causation rather than spurious causation. A third development in post-North institutionalism
is the attempt to endogenize some institutions, to explain the origins of economic institutions in terms of
political institutions and mechanisms (e.g., Acemoglu et al., 2001, 2005, 2012).
There are a number of lengthy reviews of the recent literature on institutions and growth, for example,
Acemoglu et al. (2005), Shirley (2005), Ogilvie and Carus (2014), and Leite et al. (2014). We seek to add
to these surveys by first, as background, sketching how institutional economics has evolved and second, by
examining critically the methods of empirical analysis employed in the recent literature. This is followed
by an examination of patterns of growth of countries in the world economy since 1950. Some features of
the growth record pose additional difficulties for institutional explanations of cross-country differences
in long-run performance. Throughout we focus on contributions that are seminal for the development of
the ideas and methods of analysis or illustrative of different aspects of analysis.
2. The Mainstream Turn to Institutions

Institutions have, without question, become more important in the economics literature. The mainstream-
ing of the role of institutions can be seen in the number of published articles on institutional economics
and in the awarding of four Nobel Prizes (Coase, North, Williamson, and Ostrom) for those work in
the area. How did institutions become an important topic of study in economics amidst the generally
institution-barren landscape of 20th century neoclassical economics?
There are a number of potential sources for the “rediscovery” of institutions by mainstream economists.
The term “New Institutional Economics” (NIE) has been used to denote this literature on the economics
of institutions. A key source of influence for the NIE was Ronald Coase’s contributions to the theory of
firm and externalities. In “The Nature of the Firm,” Coase (1937) highlighted the role of contracts and
transaction costs in the vertical boundaries of the firm. In a later work entitled “The Problem of Social
Cost,” Coase (1960) examined that how the problem of externalities can be solved via bargaining without
any government intervention provided the transaction costs are zero. The paper highlights the importance
of defining and enforcing property rights2 – an aspect that continues to dominate studies attempting to
link institutions and economic growth.
Coase’s insights were later extended and deepened by Oliver Williamson who in the 1970s and 1980s
focused on factors affecting transaction costs such as hold-up and asset specificity. Collectively, the
INSTITUTIONAL ECONOMICS ANALYSIS OF LONG-RUN PERFORMANCE 3
Table 1. Williamson’s Framework for Institutional Analysis
Speed of change
Level of analysis Phenomena (years) Method of analysis
1. Embeddedness Informal institutions, customs, 100–1000 Social theory

traditions, norms, religion
2. Institutional Formal rules of the game: 10–100 Economics of property
environment polity, judiciary, constitutions, law, rights, positive
property rights political theory
3. Governance Play of the game: 1–10 Transaction cost

private ordering – aligning governance economics
structures with transactions
4. Resource allocation Prices and quantities; incentive Continuous Neoclassical

and employment alignment economics
Source: Adapted from Williamson (2000).
contributions of Coase and Williamson focused on the role of transaction costs, property rights, and
incomplete contracts (Ménard and Shirley, 2014). In his later works, Williamson was keen to develop a
broader theory framework for analyzing institutions. Williamson (2000) proposed a framework comprising
four levels of social analysis with each level being characterized by the speed of change in various
economic phenomena (norms, contracts, and incentives). This framework is summarized in Table 1. An
important feature of this framework is the interactions between the phenomena across different levels.
Williamson has also pointed out that much of the work from the NIE relate to level 2 and level 3 in the
framework. It is important to note here that one aspect of level 2 – polity – is linked to the literature on
political economy and positive political science.
In addition to the work of Coase and Williamson, the work of Douglass North has been central to
the revival of economists’ interest in institutions. North’s contribution has been to elevate the analysis
of institutions to a more macro level – linking institutions to economic growth and development. During
the period of the 1960s and 1970s, North’s thinking evolved from a neoclassical emphasis on the
role of technological change to organizational and institutional innovation (Ménard and Shirley, 2014).
Subsequently, North (1990, 2005) focused on the determinants of institutions – why institutions emerge,
prevail, and change in societies. This has led to at least two important dimensions in the analysis of
institutions, namely the role of politics and, perhaps even more fundamentally, informal constraints such
as norms and belief systems that are shaped by cognitive factors. The former focus on politics and political
institutions remained important in North’s more recent work. North et al. (2009) put forward a macro
level framework to analyze the long-term change in human societies. A key feature of their approach
is the role of the elite (dominant political coalition) that finds resonance in the works of Acemoglu and
Robinson.
2.1 Recent Institutional Economics

A large body of literature on institutional economics this century has built on the works of Coase,
Williamson, and North. This literature is very diverse. Given the plethora of sources from which
institutional economics has drawn, this is not surprising. Four major approaches can be discerned in
this recent literature.
4 LLOYD AND LEE
The first approach is represented by the collective works of Rafael La Porta, Florencio Lopez-de-Silanes,
Andrei Shleifer, and Robert Vishny.3 This literature is characterized by its focus on legal institutions and
their relationship to growth and development. A key finding of this literature is the importance of legal
origins or traditions.
In addition to legal institutions, recent scholars have revisited the role of political institutions in
influencing economic policies. This second approach has been labeled “New Political Economy”
(NPE). Key contributors to the literature include Persson and Tabellini (2000, 2003). A key
finding of the literature is that electoral rules (proportional vs. majoritarian) and legislative regimes
(presidential vs. parliamentary) have systematic effects on public policy outcomes such as government
spending.
There has been a recent resurgence in the topic of culture as an important determinant of growth –
which forms the third approach. Empirical studies of the relationship between culture and economic
growth date back to the 1990s (see the survey by Adkisson, 2014). More recent work includes that of
Tabellini (2010), Gorodnichenko and Roland (2010, 2011a, 2011b, 2015), Spolaore and Wacziarg (2013),
and Alesina and Giuliano (2015).4 The framework used by each these authors is different from that of the
others. Tabellini argues that culture plays an important role as a “channel of historical influence within
countries” (p. 678). Spolaore and Wacziarg (2013) explore the role of the ancestry of different groups
in one location (nation). They look at how human traits are transmitted across generations over the very
long run. For Gorodnichenko and Roland, individualist culture can lead to higher levels of innovation (an
important source of growth). In a more recent work, Gorodnichenko and Roland (2015) have extended
their research to individualism and democratization. A key challenge of this literature has been how
to define and measure culture. Tabellini focused on trust and respect for others, and confidence in the
virtues of individualism whereas Gorodnichenko and Roland used measures of individualism. In the
work of Spolaore and Wacziarg, the two channels of transmission are biological and cultural, the latter
is via behavioral or symbolic (using language, writing, art) transmission. Adkisson (2014) surveys the
problems of quantifying culture. While some institutionalists regard culture or cultural variables a part
of institutions, they are more commonly regarded as separate and, therefore, a rival for institutions as an
explanator of growth patterns. Interactions between culture and institutions are bidirectional and, as in
the analyses of growth and multiple factors considered below, raise the issue of causality. Alesina and
Giuliano (2015) examine this issue.
3. The Analysis of Recent Institutional Economics

A fourth approach is the set of contributions by Acemoglu, Robinson, and their coauthors. There are
two strands of literature associated with these authors. The first is an empirical one that focuses on the
relationship between “initial” institutions established during colonial times5 and long-term economic
performance (Acemoglu et al., 2001, 2005). Institutions that are extractive (rather than participatory)
have detrimental long-term effects on economic growth. This can take place through their negative effects
via property rights institutions (Acemoglu and Johnson, 2005). The second strand is more theoretical in
nature. A key preoccupation of this strand has been the role of power in politics and how this affects
economic growth (Acemoglu and Robinson, 2000, 2001, 2006). This takes the form of the conflict and
balance of power between the elites and the poor masses (citizens) that explains dictatorship, oligarchy,
democratization, and democratic reversals (coups). Flachaire et al. (2014) support this view. They find
that political institutions are one of the deep determinants of growth. They set the stage in which economic
institutions and other variables affect growth. Acemoglu, Robinson, and coauthors have followed this up
by more recent empirical work linking democracy, income per capita and economic growth (Acemoglu
et al., 2008; Acemoglu et al., 2014). Many other subsequent empirical investigations have followed the
method and instrumentation used by Acemoglu, Robinson, and coauthors.
3.1 What are Institutionalists Trying to Explain?

Recent institutionalists have chosen a variety of dependent variables for long-run national macroeconomic
performance. Acemoglu et al. (2001) and Besley and Persson (2011) both try to explain differences in real
incomes (“prosperity” and “poverty”) across nations at the present time, à la Adam Smith. Similarly other
recent books written for a more popular audience such as Morris (2010), Norris (2012), and Hannan (2013)
are devoted to the cross-country simultaneous comparisons of levels of “prosperity” or “welfare.” Others
examine the vulnerability of nations to crises and volatility (Rodrik, 1999) or cross-country differences
in indices of “human development” like literacy and longevity or the UNDP Human Development Index
(Bardhan, 2005). The literature is, however, dominated by the study of cross-country differences in level
of prosperity/income.
Some of the literature is concerned with comparing relative levels of prosperity at some time. In
particular, some authors compare levels of prosperity of certain countries relative to that in the United
States, for example, Easterly (2005).
Comparisons of absolute or relative levels of prosperity are almost the same thing as comparisons
of long-run rates of growth of real GDP per capita. Some NIE studies have examined long-run rates of
growth, for example, Rodriguez and Rodrik (2001) and Glaeser et al. (2005).
A little formality is useful. Let Pi (T) be the level of prosperity, however measured, at time T for country
i ∈ S, where S is the sample set of countries. The distribution of these levels among the set of countries
at any time is what we are seeking to explain. Now choose some initial starting point in past time, t = 0.
For each country,
Pi (T ) = Pi (0) i (1 + rit ) = Pi (0) i (1 + ri ) = Pi (0) (1 + ri )T (1)
where rit is the actual annual rate of growth in year t and ri is the rate of growth, which if maintained at
a constant rate from time t = 0 to t = T will reproduce the current level of prosperity in the country. If
we compare the levels of current prosperity across the countries and chose some common starting point,
then the ordering of countries by current level of prosperity depends on two variables, the initial level of
prosperity in each country, Pi (0), and its compound rate of growth over the interval (T – 0), ri . When one
goes back a century or more, the ordering by prosperity is essentially the ordering by long-term growth
rates.
Similarly, for some country i ࣔ US and the US, prosperity relative to the United States can be compared
with the same relativity at some date in the past. Taking some interval of time T, we have, from Equation
(1):
{Pi (T ) /PUS (T )} / {Pi (0) /PUS (0)} = {Pi (T ) /Pi (0)} / {PUS (T ) /PUS (0)}
= (1 + ri )T /(1 + rus )T (2)
>1asr > r
< i < us
The per capita income of a country converges to (diverges from) that of the United States over a period
of time if and only if it grows at a faster (slower) rate than the United States.
We call all measures of absolute and relative prosperity or comparative rates of growth the long-run
performance of nations for short. We focus on this as the dependent variable of the analysis.
3.2 Methods of Analysis

Recent institutionalists have used a variety of methods to demonstrate that institutions are an important or,
in some cases, the main determinant of cross-countries differences in long-run national macroeconomic
performance.
The most common method used is historical narrative with a comparison of economies or groups
of economies with different performances and a documentation of the origin and development of those
6 LLOYD AND LEE
institutions that purportedly matter. For example, this is the method used by more popular book authors
such as Morris (2010), Norris (2012), and Hannan (2013) who take a broad and long-term view of the
relative prosperity of nations. It is also the method used by Acemoglu and Robinson (2012) though their
account in this book is derived from the model and regressions developed at length in their earlier work,
especially Acemoglu et al. (2001).
These narratives are stimulating and revealing but they do not provide general proof of the importance
of institutions relative to other factors. Case studies are sui generis, as Shirley (2004, p. 627) neatly put
it. There is a danger too that the historical case studies may be chosen to fit the hypothesis, leaving out
other case studies that do not fit as well.
Moreover, the interpretation of the history of institutions and economic growth requires detailed
examination of the economic history of each case. Ogilvie and Carus (2014) have critically reviewed
the interpretation of many of the cases used in historical narratives, including the Glorious Revolution,
serfdom, guilds, and many of other favorites of the institutionalists. They find that “ . . . a specific institution
that matters for economic growth will often not operate similarly across different societies and time
periods. Private property rights, for instance, are embedded in broader institutional systems that differ
greatly across societies, with the result that they will not affect growth identically everywhere” (Ogilvie
and Carus, 2014, p. 468). Detail is important. For example, in examining the role of secure property rights,
it is necessary to distinguish between rights of ownership, use, and transfer and between generalized and
particularized variants.
A refinement of the comparative approach is a detailed comparison of pairs of countries. Acemoglu
et al. (2001, 2005) and Acemoglu and Robinson (2012) make use of a number of what they call “natural
experiments” involving a pair of neighboring economies that share many geographic features but have
different histories. They begin their book with a dramatic comparison of Nogales in Sonora, Mexico with
the town of the same name in Arizona. They also use North and South Korea and East and West Germany
as pairs. The examples are persuasive but, unfortunately, they are severely limited in number.
Beginning with Mauro (1995), Hall and Jones (1999), and Acemoglu et al. (2001), a new method of
testing the view that institutions matter for long-run macroeconomic performances developed, which is
rooted in modern economic modeling and econometric hypothesis testing. It is based on the recognition
that institutions may themselves be endogenously determined. To get around this problem, they use
instrumental variables. For example, Acemoglu et al. (2001) chose the variable “protection against
expropriation risk” as a measure of current institutions. They find a statistical association between higher
quality of institutions (lower risk of appropriation of property rights) on the one hand and higher income
on the other. However, they rightly point out that this could be due to reverse causation – higher incomes
leading to reduced risk of appropriation – or to omitted variable(s) that might explain both variables
and lead to a spurious conclusion of causation. There are fundamental problems of causality in this
area of analysis. They sought a source of exogenous variation in institutions in the past that could be
used as an instrument for the current institutional variables in the countries in their sample. They chose
the variable “settler mortality rate” in the early days of colonization of the modern economies. They
posit that differences in this variable led to differences in early settlement experience, which led to
differences in settlement institutions, which in turn led to differences in current institutions. Using the
obtained relationship between current institutions (expropriation risk) and colonial institutions (settler
mortality rates), their two-stage regression estimates find institutions to be a highly significant cause of
contemporary cross-country differences in income per capita in their sample of countries.
These authors have begun a new form of “growth regression.” Other scholars have used multistage
regressions and instrument variables in the same manner. For example, Rodrik, et al. (2004) explore
the role of institutions along with geography and trade variables. In addition to the instrument of settler
mortality used by Acemoglu and Robinson, they use two other instruments, the fraction of the population
speaking English and Western European languages as the first languages. Rodrik et al. (2004, p. 154)
rightly note “if colonial experience were the key determinant of income levels, how would we account for
the variation in incomes among countries that have never been colonized by Europeans.” Their alternative
instrumentation enables them to expand the set of countries from 79 when using the Acemoglu–Robinson
instrument to 137 countries. This instrument choice and the expanded country set confirm the “primacy”
of institutions as the explanatory of growth differences among the countries. But, it should be noted that
the model explains only about one half of the variation across countries in income levels
In their exploration of the relative roles of institutions and economic policies as determinants of long-
run macroeconomic performance, Easterly (2005) and Rodriguez and Rodrik (2001) also emphasize the
issue of causality. These studies see the previous attribution of economic success to policy differences
as spurious. It is the result chiefly of omitted variables, namely institutions, and the misspecification of
explanatory trade policy variables.
Rodrik (2005) developed a four-way classification of institutions: market creating, market regulating,
market stabilizing and market legitimizing institutions. This classification has been used by Battacharyya
(2009) and Das and Quirk (2016) to try to ascertain which institutions are more important in promoting
growth. Both studies find that market creating and market stabilizing institutions are more important in
promoting growth.
Jellema and Roland (2011) look for clusters of institutional variables that have joint effect. They
consider political, judicial, and cultural variables and use principal components analysis. Few institutional
variables are significant on their own. The robust result they find is that political institutions of a limited
executive and checks and balances together with an antiauthoritarian democratic participatory culture are
what matters for long-run growth in income.
Besley and Persson (chiefly 2011 but also earlier papers) also look for clusters of variables in the
cross-country data. They draw their inspiration from Adam Smith:
“Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but
peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural
course of things.” (Quoted in Besley and Persson, 2011, dated 1755 but no source given. In Smith (1776,
p. xliii), it is attributed by the editor to a lecture given by Adam Smith.)
Their analysis centers on three closely related concepts – the fiscal capacity of the state, the legal
capacity of the state and political violence. The first capacity is “the necessary infrastructure – in terms
of administration, monitoring, and enforcement – to raise revenue from broad tax bases such as income
and consumption, revenue that can be spent on income support or services to its citizens.” The second
capacity is “the necessary infrastructure – in terms of courts, educated judges, and registers – to raise
private incomes by providing regulation and legal services such as protection of private property rights
or the enforcement of contracts.” This is a rendition of the standard appeal to the rule of law as a central
institution. Political violence is internal rather than external, that is, civil war and repression. Its opposite
is peaceful outcomes or peacefulness. They produce a political economy model of the determinants of
each of the three variables. Fiscal capacity, legal capacity, and peacefulness each promote development
and prosperity and all are measured on the unit interval. They define a Pillars of Prosperity Index as
the equal-weighted sum of state capacity (itself the equal weighted sum of legal and fiscal capacity),
peaceful outcomes, and per capita income. This is an odd measure in that the first three components are
determinants of prosperity and the last is the measure of prosperity but they find high or low values of
these components are clustered.
3.3 What are Institutions?

The starting point of any review of these methods of analysis of recent institutional economics must be
some comment on the meaning of “institutions.” This term is not as clear as it seems at first sight. Most
individual contributions have given, either explicitly or implicitly, a list of the institutions that they regard
as important. Almost all recent institutionalists center their analysis of institutions on the concepts of the
8 LLOYD AND LEE
rule of law and property rights. Acemoglu and Robinson (2012) distinguish between economic institutions
and political institutions in their book. They list many economic institutions but highlight property rights,
the law, freedom to contract, and exchange. Besley and Persson (2011) focus on more general notions of
fiscal capacity, state/legal capacity, and peace (defined as the absence of conflict rather than wars with
other nations). Rodrik (1999), Acemoglu et al. (2005), Bardhan (2005), and Ogilvie and Carus (2014,
lesson 8) emphasize institutions of coordination and conflict resolution. Some include cultural institutions
and human rights. One could construct a very long list of institutions. The length of this list reflects the
differences in the approaches noted in Section 1.
Douglass North (1990, p. 1) began his treatise with the definition: “Institutions are the rules of the
game in a society or, more formally, are the human devised constraints that shape human interaction.”
He distinguishes between informal constraints – such as conventions and codes of behavior – and
formal constraints, which include written laws and constitutions, judicial rules, and contracts. Many
institutionalists have adopted the North definition.6 For example, Acemoglu and Robinson (2013, p. 75)
define institutions, very sparsely, as “the rules influencing how the economy works.” Similarly, for the
special problem of managing common property resources, Ostrom defines institutions as the working
rules applying to the agents making decisions relating to a common property resource and the payoff to
the individuals dependent on their actions (Ostrom, 1990, 2005).
North’s definition gives institutions a meaning that is different than that of its common English usage
where an institution is a body or organization with designated members or constituents. North (1990,
p. 7) himself distinguishes between “institutions” and “organizations” though Hodgson (2006, p. 10)
argues that rules unavoidably exist within organizations and hence organizations must be regarded as a
special type of institution.
More recently, there have efforts to further clarify the definition of institutions. In the September
2015 issue of the Journal of Institutional Economics, there was an important debate on the definition of
institutions by philosophers as well as economists. A distinction is made between “institutions as rules”
and “institutions as the equilibria of games.” However, the concept of institutions as games equilibria has
yet to be applied to the field of institutions and the long-run economic performance of nations. Hodgson
(2015) argues that the rules-based definition is appropriate for the analysis of economic behavior.
A number of institutionalists have contrasted the role of institutions as a determinant of long-run
economic performance with the role of policies such as tax policies, openness to international trade,
overvalued exchange rates, and macroeconomic policies (see especially Rodriguez and Rodrik, 2001;
Acemoglu et al., 2003; Rodrik et al., 2004; Easterly, 2005; Rodrik, 2006; Rodriguez, 2007; Acemoglu
and Robinson, 2013, chapter 15). Plainly these writers do not regard “policies” as institutions. Yet
policies and policy parameters such as tax rates, tariffs, and fixed exchange rates are part of the rules
governing an economic system. Furthermore, North (1990, p. 1), in his definition of institutions, says that
institutions “structure incentives in human exchange, whether political, social or economic.” Following
North, subsequent institutionalists emphasize the incentives role of institutions.
Easterly (2005, p. 1033) bases the distinction between “institutions” and “policies” on the argument
that institutions such as property rights, rule of law, legal traditions, trust between individuals, democratic
accountability of governments, and human rights are “deep-seated” in contrast to “policies,” which can
be changed by “stroke of the pen” reforms. This assertion should be regarded as a testable hypothesis
rather than an unquestionable fact. Many policies are very hard to change politically as any economist
who has worked on the reform of a tax system or the reform of national barriers to international trade will
testify. In a similar way, Besley and Persson (2011, p. 12) note that “one cornerstone of our framework
is to distinguish between policymaking and institution building.” They note that the capacity of the state
is built up over time and current state capacity constrains the policies pursued by governments. Rodrik
et al. (2004, p. 156) note, wisely, that “the distinction between institutions and policies is murky as these
examples illustrate. The reforms that Japan, South Korea, and China undertook were policy innovations
that eventually resulted in a fundamental change in the institution underpinning of their economies.” They
then try to distinguish between policy and institutions by regarding the former as a flow variable and the
latter as a stock variable: “We can view institutions as the cumulative outcome of past policy outcomes”
(Rodrik et al., 2004, p. 156). This restricts the role of policies to one of determining institutions. It is
not a view of institution building that conforms to other attempts to endogenize institutions such as the
Acemoglu and Robinson’s notion of the hierarchy of institutions.
The basic problem with this binary division is that institutions, when defined to exclude policies, and
policies jointly determine incentives. To take just one example, taxes on incomes earned by persons
(either individuals or corporations or other legal persons) interact with tax-related institutions such as
the monitoring of tax avoidance and the enforcement of tax liabilities by courts to jointly determine the
effective tax rates paid by persons. To determine incentives, one must consider both “institutions” and
“policies” together.
3.4 Measuring Institutional Variables

Measuring institutions is difficult without doubt.7 Many writers do not try. Glaeser et al. (2005) conclude
that the variables used to measure institutions are not longstanding constraints on government behavior.
Shirley (2005, p. 627) criticizes the use of aggregate institutional variables. Kurtz and Schrank (2007)
find that measures of governance (the probity of public administration) are typically based on survey
instruments that introduce perception and selection biases. This applies to the World Bank indicators of
governance, which have been widely used in studies of institutions and growth.
Ogilvie and Carus (2014, p. 489) complain that “ . . . current institutional labels used in the analysis
of growth assume those institutions to be present or absent, with no gradations in between,” that is, they
are binary variables. This applies, for example, to institutions that supposedly guarantee property rights
or enforce contracts and those that do not. They regard the need to devise measures of institutions that
provide variations in intensity as one of the challenges of future research.
However, one feature of recent institutional economics is the attempt to develop new institutional
variables to be used as explanatory variables in empirical cross-country studies. Jellema and Roland
(2011, data appendix) list a number of institutional variables and their specification, most of them relating
to the political or justice systems. They comment (2011, p. 108) that:
First of all, measurement issues loom large. Most cross-country analyses of the effects of institutions
on economic performance use summary measures created by an ad hoc (and usually idiosyncratic)
weighting of several institution or categories of institutions. These aggregates are often based on
subjective evaluation, contain significant noise, are suspiciously volatile, and are likely to be biased or
contaminated by perceptions of a country’s economic performance.
When some variable is used to measure the rule of law or property rights, the choice is obviously
difficult and may be subject to criticism. In their hugely influential work, Acemoglu et al. (2001, 2005)
measure property rights by a proxy variable, the “risk of expropriation,” which is a measure of the risk
of expropriation for private foreign investors only, excluding domestic investors. Bardhan (2005) uses
a composite index of the rule of law with several components taken from the World Bank’s Worldwide
Governance Indicators.
Another example of measurement problems is the key instrumental variable, the settler mortality rate,
used by Acemoglu et al. (2001). They use the mortality rate of European-born soldiers, bishops, and
sailors in the settlements before 1850. This variable has been used by many other studies subsequently.
It is a constructed composite of the type criticized by Jellema and Rolland, and Shirley. It has been
comprehensively criticized by Albouy (2012). He concludes “this comment argues that there are several
reasons to doubt the reliability and comparability of their European settler mortality rates and the
10 LLOYD AND LEE
conclusions that depend on them” (p. 3060). In reply, Acemoglu et al. (2012) claim that their estimates
of this variable are robust and corroborated by other historical records and therefore reliable.
There is still a lot of noise in these variables but the quality of institutional indicators is improving.
3.5 Problems with Using Instrumental Variables

Beginning with Mauro (1995) and Hall and Jones (1999), many studies of institutions and economic
performance have used instrumental variables in order to sort out issues of causality. Valid instrumentation
requires that the instrument variable chosen for institutions does not influence the dependent variable (per
capita income or whatever) by any other channel, that is, it is not correlated with the error term. We again
use Acemoglu et al. (2001) as their instrumentation has been widely copied “We hypothesize that settler
mortality affected settlements,; settlements affected early institutions and early institutions persisted and
formed the basis of current institutions” and “The validity of our approach – i.e., our exclusion restriction
– is threatened if other factors correlated with estimates of settler mortality affect income per capita”
(Acemoglu et al., 2001, pp. 1373, 1372). Glaeser et al. (2004) reason that “the Europeans who settled
the New World may have brought with them not so much their institutions, but themselves, that is, their
human capital” Glaeser et al. (2004, p. 274). Their ordinary least square regressions then show that human
capital is a more basic source of the growth of GDP per capita over a 40-year period than institutions.
Spolaore and Wacziarg (2013, section 5) examine critically the use of instrument variables in the study
of institutions and growth. They take up the point raised by Glaeser et al. as to what the settlers brought
with them but they emphasize the culture inherited from settler ancestors. Their ordinary least square
regressions then show that culture is an important source of growth.
3.6 Are Institutions Constant or Constantly Evolving?

North (1990, chapter 10) argued that institutions are generally “stable” over time, changing only in
response to major changes in relative prices. Other post-North institutionalists also argue that institutions
are generally “persistent” over time (Acemoglu et al., 2001, p. 1376; 2005, p. 392) or “deep-rooted”
(Easterly, 2005) or “by their very nature deeply embedded in society” (Rodrik, 2006, p. 979).
On the other hand, a substantial number of institutionalists have emphasized the adaptability of
institutions. The political economist who shared the 2009 Nobel Prize in Economics with Oliver
Williamson, Elinor Ostrom, greatly influenced the analysis of institutions that govern common property
resources such as fisheries, oilfields or grazing land. For this subset of institutions, she showed how
institutions adapt to the special circumstances of each common property resource so that they could
be managed by collective action of the private agents using the resource (see especially, Ostrom et al.,
1994; Ostrom, 2005, and references therein). Subsequently she has developed an institutional analysis and
development framework (called IAD) for the analysis of institutional change. In this analysis institutions
are viewed as rules in the manner of North but here they are devised by the parties. She views institutional
change as an evolutionary process using trial and experimentation.
Harper (2014) had developed the elements of an evolutionary theory of property rights, this time for
property rights or rules created and granted by the state to regulate innovation and entrepreneurship.
Entrepreneurs bring about changes in intellectual property rights systems as markets and technologies
change. In a broadly parallel way, writing an obituary article, Nicita (2014) has reinterpreted the seminal
work of Coase (which has been subject to a large number of interpretations). He seeks a general theory
of institutions based on the role of transactions costs in defining and bargaining over property rights. As
transaction costs vary over time and place, he develops a theory of institutional “moving equilibrium.”
Change in institutions over the period of a study pose severe problems for analyzing the role of
institutions. At what time in the sample period do we examine the institutions and how do we measure
institutional change? If institutions do change over time, the econometric procedure of instrumenting
contemporary institutions by reference to an old historical variable, which has been used by many
empirical studies of economic growth, does not hold (Bardhan, 2005, p. 511).
With the recognition of institution change over time, it is not surprising that the possibility of reverse
causality has resurfaced, namely the possibility that economic growth (due to numerous factors) may
induce institutional change. This reverse causality is of course an old idea and it was the principal
reason why instrumental variables were introduced into the analysis. Having rejected the instrumentation
used by Acemoglu et al. and Glaeser et al. (2004) find evidence that economic growth induces
change in institutions. Chong and Calderón (2000) provide evidence that growth can affect institutional
quality.
Perhaps there is a global mechanism of institutional catch-up going on.
3.7 Patterns of Growth in the World Economy

To pursue further the analysis of cross-country differences in the long-run economic performance of
nations, we look now at the actual record of countries in terms of growth rates rather than contemporaneous
levels of prosperity. This shift has the virtue of focusing more on the factors that have affected the time
path of individual economies.
From a long-term perspective, the pattern of annual rates of growth of countries actually observed in
the world economy exhibits two features; first, annual growth rates are highly variable, and second, there
has been convergence of income levels among some countries.
Variability is borne out by long-run growth statistics. In a much-quoted paper, Pritchett and Summers
(2014) examine long-term growth patterns in the world economy since 1950. As the measure of output,
they use the series for GDP in PPP terms from Penn World Tables Version 8.0, which has 167 countries
in the database. They find that country growth rates are not persistent over time. Moreover, “Although
one might have thought that most of long horizon differences were due to the existence of slow and fast
growing countries (e.g., Argentina grows slow and Japan grows fast) – the opposite is true and nearly all
growth variation is due to differences within countries over time” (Pritchett and Summers, 2014, p. 5).
Second, there is convergence with a tendency for developing economies to exhibit faster growth
rates than the developed economies. This was noted by the World Bank Commission on Growth and
Development (World Bank, 2008). That is, despite within-country variability of growth rates in all
countries, there are sufficient differences in the average rates of growth between some countries over long
periods of time to produce convergence. There are two general exceptions to convergence of developing
countries. First, convergence has not applied to the lowest income group of countries, as noted by Collier
(2007). Second, there is a failure of countries which have progressed from low-income to middle-income
status to progress further to high-income status. This has become known as “the middle income trap”; see
Eichengreen et al. (2013).
We explore these growth patterns by examining the record in groups of countries that are of particular
interest. First, Figure 1 shows the convergence of the BRIC-3 countries, which are the more important
emerging developing countries, and the major developed economies. The BRIC-3 are China, India, and
Brazil but not Russia for which there are no statistics in these series for the period 1950–1989. The major
developed economies are the United States plus the EC-5 (the original EC-6 less Germany for which there
are no statistics in the series over the period 1950–1969) plus the United Kingdom and Japan. For the
period 1950–2010, we have charted the series of average real GDP per capita in PPP terms8 of the major
developed economies and the BRIC-3. This period is one of stability in terms of world governance as
the major Bretton Woods multilateral institutions that have set the rules for international commerce have
been constant, and in terms of the absence of major many-country wars. The income axis is in logarithms
and, consequently, the slope represents the rate of growth of per capita income at any point.
12 LLOYD AND LEE
12
10
Ln(Real GDP per capita)
6 lnDC-8
lnBRIC-3
0
1956
1977
1950
1953
1959
1962
1965
1968
1971
1974
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Figure 1. Convergence between BRIC-3 and Developed Economies-8.
Source: Penn World Table.
As shown in Figure 3, the growth rate of the US economy has slumped since about 1990 and particularly
since 2000. Similarly, the European per capita incomes have grown very slowly since about 2000
(“Eurosclerosis”). The growth rate in Japan slowed dramatically around 1990. Thus for the last 2½
decades, the growth rates in the aggregate of the major developed economies have slowed. On the other
hand, the growth rates have accelerated in the large emerging economies, the BRICs-3. Chinese growth
accelerated soon after the introduction of the Open Door policy in 1979 and India since about 2000 with
the Brazilian growth being much steadier. The average per capita real GDP of the BRICS-3 rose by more
than 10 times over the period from 1952 to 2010. In contrast, the average per capita real GDP of the DC-9
rose by less than four times.
Another group of countries of particular interest are the East Asian Economies. Many of them have
experienced rapid growth. From around 1970, the four Asian “tiger” Countries (Hong Kong, Singapore,
Korea, and Taiwan) experienced rapid growth. Then rapid growth appeared in many other countries in
East Asia. The World Bank (1993) study of The East Asian Miracle identified eight fast-growing or
“high-performing” economies over the period 1960–1985; these were Japan, the four Asian tigers, and
Indonesia, Malaysia, and Thailand. Rapid growth was identified as a sustained growth in real GNP per
capita at more than 5% per annum.
Some other countries in Asia, Central Asia and some in Latin America, and a few in Africa have also
experienced rapid growth. The annual rate of growth of rapidly growing economies had itself tended to
increase until the onset of the Global Financial Crisis.
Thus, convergence, where it has occurred, has been due both to a marked slowdown in the rates of
growth of major developed countries and to a marked long-term acceleration in the rates of growth
140
120
100
80
60
40
20
0
1950
1954
1952
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
China V1 Hong Kong India Indonesia Kazakh.
Korea Malaysia Singapore Taiwan Thailand
Figure 2. Per Capita Incomes Relative to the United States.

of middle-income developing countries. These changes in per capita income performance amount to a
profound change in the world economy in the last 30 years.
3.8 Some Implications of Growth Variability and Convergence for the Analysis of Institutions
This pattern of variability in growth rates and convergence raises several major difficulties for the analysis
provided by those who argue that institutions are the main determinant of cross-country differences in
prosperity or growth rates.
First, the convergence observed in the world economy has changed the relativities of the “prosperity”
ordering greatly in the last three or four decades. Many writers treat the income relativities as if they
are stable. Easterly observes that “The correlation of per capita income in 1960 with per capita income
in 1999 is 0.87. Most of the countries’ relative performance is explained by the point they had already
reached by 1960” (p. 1033).
14 LLOYD AND LEE
50000
45000
40000
35000
EC-5
Real GDP Per Capita
30000
JPN
UK
25000
USA
20000 CHN
Brazil
15000 IND
10000
5000
0
1950
2001
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2004
2007
2010
Figure 3. Real GDP Per Capita.
Fortuitously, the Penn World Tables 7.1 produces series of the PPP converted GDP per capita relative
to the United States (series y) from 1950 to 2010. These show big changes in the per capita income of
some countries relative to the United States, especially in Asia. The relative incomes of the four Asian
NICs have risen greatly since the early 1970s. More recently, this change has affected the relative incomes
of China and India, the two most populous economies in the world, relative to the United States. In 1960,
the year chosen by Easterly, the China Series 1 y series was 2.1% of that in the United States (5.0% for
series 2), in 2000 these had risen to 7.0 (7.8) and by 2010 to 17.5 (18.9). For India, the figure in 1960 was
4.7%, that in 2000 was 4.9%, and that in 2010 was 8.6%. Although less dramatic than the case of China,
this is still a big change in relative incomes. Figure 2 shows the change in relative per capita income for
10 selected rapidly growing Asian countries. For these countries, the correlation observed by Easterly
does not fit.
It is notable that some of the studies attributing the main differences in per capita income to institutions
include in their selection of countries few of the countries that have experienced large increases in
per capita incomes relative to that of the United States. For example, Acemoglu et al. (2001) have 64
countries in their sample of countries that were colonized. They include only 5 of the 10 countries
illustrated in Figure 2, omitting China, Korea, Taiwan, Thailand, and Kazakhstan. For the poor countries
with low incomes relative to those in the United States and other rich countries, their country selection
is dominated by African and Latin American countries that have not been among the growing number of
fast-growing developing countries. Their sample also omits more than 20 contemporary countries that are
“transition” economies. This omission is notable as these states have undergone a fundamental change in
institutions (see later in the text).
How do we explain the performance of those Asian and non-Asian economies that have improved
greatly relative to the United States? Have institutions really persisted in these countries or have they
been adapted to promote growth? The analysis of this question is severely handicapped by the absence of
long-term time series of institutional variables that allow variations in the magnitude of the institutional
variables. If it is not change in institutions, what other factor or factors explains these changes in relative
performance?
Some of the explanation of changed relativities lies with the US economy as its growth rate has
decelerated. Consider the US economy in the 20th century. Acemoglu and Robinson and others such as
the writers who aim at a more popular audience laud the institutions of the United States, its freedoms to
choose to work, innovate, invest, etc. The United States was a high performer in the prosperity stakes for
most of the 20th century and this led it to be the richest (and largest) economy after the Second World
War. But its growth rate has slumped since 2000. Yet, at first glance at least, the institutions of the United
States have remained remarkably constant throughout the 20th and 21st centuries. This is partly due to
a constitution that embeds many freedoms and is difficult to change and partly, one might conjecture, to
a high degree of policy conservatism in the United States. Whatever the cause, the performance slump
seems difficult to explain in terms of a level/growth theory that puts emphasis on institutions. On the other
hand, institutions may not persist. Ferguson (2013, chapters 2 and 3) states “Evidence that the United
States is suffering some kind of institutional loss of competitiveness can be found . . . ” (p. 100). He
identifies some changes in financial regulation and law enforcement. But these do not seem convincing
to explain such a huge shift in the relative rate of growth.
Second in the list of difficulties posed by the variability of growth rates and convergence, the United
States, Japanese, and EC economies have all experienced marked growth slowdowns since the onset of
the Global Financial Crisis (see Figure 3). This suggests there may be general factors at work in the world
economy. But what are they?
Third, there are many examples of economies that enjoyed a period of rapid growth and then experienced
a pronounced slowdown with little or no growth for a long period. These are mostly developing economies.
Pritchett and Summers (2014) find that “Regression to the mean is that single most robust and empirical
relevant fact about cross-national growth rates.” Episodes of rapid growth tend to be of short duration
and end in deceleration back toward the world average growth rate. What explains discontinued rapid
growth? Eichengreen et al. (2013) document slowdowns of two percentage points or more. There
were 12 countries that exhibited such slowdowns between the decades of the 1990s and the 2000s.
Nonpersistence of growth rates makes explanation of cross-country differences much more difficult,
whether in terms of institutions or other variables. For the period from 1960 to 1990, Rodrik (1999) offers
an institutionalist explanation for growth slowdowns in terms of external shocks interacting with social
conflict and weak institutions of conflict management. This explanation does not seem to apply to the
more recent cases of Japan and Thailand, where the growth problems are homegrown. For the period since
1990, Eichengreen et al. (2013) emphasize the importance of moving up the technology ladder to avoid
slowdowns.
Fourth, there is a large group of contemporary economies, the “transition” economies, which have
very definitely experienced huge and fundamental changes in institutions. There are more than 20 of
these: former republics of the USSR (including Russia), East European countries that were occupied
by the Soviet Union, states formed from the breakup of Yugoslavia, and other Communist states
such as Albania, Vietnam, China, and Cuba. They have, to varying degrees, moved from Communist
institutions to market-based institutions. This group would seem to be a fertile ground for testing
hypotheses on the importance of institutions. The results are very mixed. Some have experienced
rapid growth and a few are in the set of fast-growing countries but some have not had rapid
growth.
16 LLOYD AND LEE
The case of the Chinese economy has received a lot of attention because of its exceptionally rapid
growth and its consequential emergence as the world’s second largest economy. The Chinese economy
has maintained a high growth rate without interruption since 1980. Thus, it is a notable exception to the
general rule observed by Pritchett and Summers (2014) that period of superrapid growth rate tend to be
of short duration.9
The post-1979 Open Door takeoff occurred in a period that experienced a quite fundamental switch
of institutions and policies. In relation to institutions, private property rights replaced the communal
ownership of land and other resources, in both agriculture and industry. Institutional changes allowed
the establishment of markets. However, the rule of law continues to operate very differently than in
Western countries; contracts are difficult to enforce, intellectual property rights are frequently violated,
and corruption is widespread. There have been huge changes in policies too as the Chinese economy has
been opened up with respect to goods trade, mainly as a result of the Chinese accession to the WTO in
2000 and its adoption of the WTO’s trade rules. Opening also included the relaxation of restrictions on
foreign direct investments, first by permitting tightly controlled joint ventures and later other forms of
foreign direct investment. Other policy changes have applied to state-owned enterprises and indeed all
parts of the economy. Policies continue to change. These have been documented by economists based in
the West, see, for example, the recent books by Wao et al. (2012) and Garnaut et al. (2013), especially
Perkins (2013).
There is an emerging literature on the Chinese economic performance written by home-based
Chinese authors. Two notable recent books are Zhang (2012) and Lin (2014).10 These books have
a very different flavor from the Western literature. They pay scant attention to institutional change;
one exception is the recognition of the need for improved corporate governance of state-owned
enterprises (Lin, 2014, chapters 9–11). Both argue that the Chinese phenomenon calls for a new growth
model or paradigm. Lin emphasizes the importance of technological change, mostly older vintage
technologies imported from high-technology developed countries, over resource allocation. Because
much of technological change is capital-embodied, the rate of capital accumulation is also important.
He also emphasizes Chinese-style entrepreneurship. Zhang emphasizes the importance of culture and
a strong prodevelopment (and often interventionist) state. These views may be the vanguard of a
literature that challenges Western analyses of the Chinese growth performance.11 In the big global
picture, they challenge the views of both institutionalists and others as to the causes of economic
growth.
While Russia has received much less attention than China in the literature on institutions and economic
growth, Kirdina (2014 and references therein) has developed a model of institutions and economic
development. It involves a balancing of basic “historically stable” institutions with the development of
institutions appropriate to the contemporary economy. As a home-grown Russian model, it is another
attempt to develop a theory of institutions for a rapidly changing transition economy with a distinct
history. The development of natural resources has dominated recent Russian development but this factor
is absent from the Kirdina model.
India has received surprisingly little attention in this debate. As a result of colonization, it
has many of the institutions that are commonly regarded as growth-promoting, particularly a
rule of law and democratic institutions. Yet, its takeoff into rapid growth occurred later and
its growth rate in the last 40 years has been much lower than in China, which lacks these
institutions. This has been partly attributed to state failures by Swamy (1979) and Parthasarathi
(2011).
The leading role played by the state in promoting growth by altering institutions and adopting progrowth
policies is a common element in those countries whose per capita incomes have converged, especially
in East Asia (Wade, 1990; Evans, 1995; Stiglitz and Yusuf, 2001; Kohli, 2004). This is sometimes
described as “state capitalism.” There is a subset of literature searching for an “Asian model” to explain
the extraordinary success of this group of countries. The model is based on a set of policies, with elements
such as an active industrial policy, FDI promotion, and the undervaluation of exchange rates that are
believed to promote growth. Das (2014) surveys this literature.
In general, the examination of the growth performance of individual countries highlights the role of
country-specific institutions and policies.
3.9 The Relative Contribution of Institutions to Long-Run Economic Performance

The key question arising from this survey of the recent literature on institutional economics analysis of
the long-run performance of nations is whether “institutions” are a major factor, or even the main factor,
explaining cross-country differences in performance. The focus here must be on the subset of post-2000
papers reviewed here that have used large data sets and run regressions, which include institutional
variables, to ascertain the main explanators of these differences.
The growth regression literature, in both the earlier and the later phases, has shown that the explanators
or “factors” that explain growth patterns are sensitive to what hypothesized variables are included, the
particular measures used to represent these variables and other aspects of the specification of models.
For the recent institutionalist “growth regression” literature, we have reported criticism of some of the
measures used to represent institutions in these regressions and the specification of the models. Some
of those whose work has been severely criticized by the new institutionalists have struck back with
new regressions that purport to show the continued importance of noninstitution variables, for example,
Glaeser et al. (2004), McCord and Sachs (2013), Spolaore and Wacziarg (2013), and Estevadeordal and
Taylor (2013) have reasserted the importance of human capital, geography, culture, and trade policy,
respectively.
Doppelhofer et al. (2000) examined the methodological problems of finding the variables that are “truly”
related to growth when there are many models and potential regressors. Using a Bayesian approach, they
find that one-third of the 32 variables they tested have robust partial correlation with long-run growth.
Their variables included measures of human capital and trade sector policy measures such as measures of
openness, importance of primary exports and real exchange rate distortions, and some culture variables but
only two variables, civil liberties, and the degree of capitalism, which might be considered as institutional
variables. The task is to sort out the relationships among factors that are robustly connected to growth in
some way.
This task is particularly difficult if growth-promoting factors do not enter the equations in an independent
additive way, as assumed in least squares regressions. Factors such as (growth-promoting) policies and
(good) institutions and (growth-promoting) culture may be superadditive in that the joint introduction of
two or more has more effect their introduction singly. For example, Alesina and Giuliano (2015) explore
the relationships between culture and institutions as growth factors. They find “Culture and institutions
interact and evolve in a complementary way, with mutual feedback effects. Thus, the same institutions
may function differently in different cultures, but culture may evolve in different ways depending on the
type of institutions” (Alesina and Giuliano, 2015, p. 938). Similarly, institutions and policies may interact.
In such situations, it is wrong to claim the causal superiority of one factor over another, as much of the
literature has done.
4. Conclusions
Recent institutionalist analyses of the long-run performance of nations have made a major contribution
to the analysis of the causes of economic growth. They have reminded us that institutions matter. They
have constructed models of growth with institutional variables and shown the importance of pursuing
causality and endogenized the institutional variables themselves. This empirical research has shown that
institutions are a significant determinant of the long-run growth/prosperity performance of economies.
18 LLOYD AND LEE
But criticisms of the way in which institutions have been modeled and measured have increased. We
have identified a number of problems and issues with the institutionalists’ analyses. Institutions change
over time and vary over space. The measurement of institutional variables, especially their changes over
time, is often rudimentary. The distinction between institutions and policies is arbitrary and artificial in
that it is their combined effects on incentives that matter for individual choices. The sample of countries
in many empirical studies has been restricted.
We have also observed that the pattern of variability in annual growth rates raises several major
difficulties for the analysis of long run performance and its attribution to institutions or other factors.
It is not sufficient to look at cross-country differences at one point of time. Relative levels of
income/prosperity have changed markedly for some countries in recent years. One must also explain
why the growth rates have accelerated in some economies and decelerated in others and why in
some economies they have accelerated then decelerated, when institutions are supposedly stable over
time.
Claims by several leading institutionalists that institutions are the main determinant of cross-country
differences in prosperity/growth have been severely challenged. The importance of institutions as a
determinant of the long-run growth performance of nations relative to policy reforms and other factors
such as geography and culture is still a wide open question.
Notes
1. American institutionalism has also been labeled as “Old Institutional Economics.” Its contributors
include Thorstein Veblen, John Rogers Commons, Wesley Clair Mitchell, and Clarence E. Ayers.
2. The notion of “property rights” adopted by the institutional economics has recently come under
criticism; see Cole and Grossman (2002), Hodgson (2015), and Arruñada (2016).
3. Other occasional collaborators include Simeon Djankov, Andrei Shleifer, and Edward Glaeser.
4. Another related literature on culture and institutions is the relationship between religion and economic
growth. See Barro and McCleary (2003).
5. This line of research is itself part of an older body of economic history that considers colonialism as
the main cause of underdevelopment. Shirley (2005) calls this the “Colonial Heritage” view and the
developments in the work of Acemoglu and Robinson and coauthors as the “Colonial Heritage Plus”
view.
6. Leite, Silva, and Afonso (2014, n. 1) give some alternative but closely related definitions of
institutions.
7. North (1990, p. 107) himself avers that “we cannot see, feel, touch or even measure institutions.”
8. We have used data series from Penn World Tables Version 7.1 rather than Penn World Tables Version
8.1, which became available in April 2015, because the Version 7.1 reports series of the income levels
of countries relative to those in the United States. In any case, the 8.1 series extends the period by
only one more year.
9. This makes the following observation by Acemoglu and Robinson (2013, p. 151) surprising:
“China under the rule of the Communist Party is another example of society experiencing
growth under extractive institutions and is similarly unlikely to generate sustained growth unless
it undergoes a fundamental political transformation towards inclusive political institutions.” In
their view, the very rapid growth over more than 35 years – from the introduction of the Open
Door Policy in 1979 – is not long enough to be “sustained.” This is not a credible interpretation
of the Chinese record. From 1980 to 2010, a period of 30 years, China achieved an average
compound rate of growth of more than 8%. This means, its GDP per capita has increased by
a factor of about 10. It took the US 80–100 years to achieve a 10-fold increase in real GDP
percapita.
10. Lin, now at Beijing University, has a University of Chicago Ph.D. in Economics and is a former
Chief Economist and Senior Vice President of the World Bank whereas Zhang is a professor of
international relations at Fudan University.
11. For debates on the Beijing Consensus versus the Washington Consensus, see Huang (2010) and the
three papers in the special issue of the Journal of Contemporary China (Volume 19, Issue 65, 2010).
References
Acemoglu, D. (2013) Response to Jeffrey Sachs. Available at http://whynationsfail.com/blog/2012/11/
21/response-to-jeffrey-sachs.html.
Acemoglu, D. (2015) The rise and decline of general laws of capitalism. Journal of Economic Perspectives
29(1): 3–28.
Acemoglu, D. and Robinson, J. (2012) Why Nations Fail: The Origins of Power, Prosperity and Poverty.
London: Profile Books.
Acemoglu, D., Johnson, S. and Robinson, J. (2001) The colonial origins of comparative development: an
empirical investigation. American Economic Review 91(5): 1369–1401.
Acemoglu, D., Johnson, S., Robinson, J. and Thaicharoen, Y. (2003) Institutional causes, macroeconomic
symptoms: volatility, crises and growth. Journal of Monetary Economics 50: 49–123.
Acemoglu, D., Johnson, S. and Robinson, J. (2005) Institutions as a fundamental cause of long-run growth. In
P. Aghion and S.N. Durlauf (eds.), Handbook of Economic Growth, Vol. 1A. Amsterdam: Elsevier B. V.
Acemoglu, A., Johnson, S., Robinson, J.A. and Yared, P. (2008) Income and democracy. American Economic
Review 98(3): 808–842.
Acemoglu, D., Johnson, S. and Robinson, J. (2012) The colonial origins of comparative development: an
empirical investigation: reply. American Economic Review 91(5): 3077–3110.
Adkisson, R.V. (2014) Quantifying culture: problems and promises. Journal of Economic Issues 48: 89–107.
Albouy, D.Y. (2012) The colonial origins of comparative development: an empirical investigation: comment.
American Economic Review 102(6): 3059–3076.
Alesina, A. and Giuliano, P. (2015) Culture and institutions. Journal of Economic Literature 53: 898–944.
Arruñada, B. (2016) Coase and the departure from property. In C. Ménard and E. Bertrand (eds.), The Elgar
Companion to Ronald H. Coase. Cheltenham: Edward Elgar.
Arthur, B. (2013). Complexity economics: a different framework for economic thought. SFI Working Paper
No. 2013-04-012.
Bardhan, P. (2005) Institutions matter, but which ones? Economics of Transition 13: 499–532.
Barro, R.J. and McCleary, R.M. (2003) Religion and economic growth across countries. American Sociological
Review 68(5): 760–781.
Barro, R.J. and Sala-i-Martin, X. (1995) Economic Growth. New York: McGraw-Hill
Battacharyya, S. (2009) Unbundling institutions, human capital and growth. Journal of Comparative Economics
37: 106–120.
Besley, T. (2007) The new political economy. Economic Journal 117(524): F570–F587.
Besley, T. and Persson, T. (2008) Economic approaches to political institutions. In S.N. Durlauf and L.E. Blume
(eds.), The New Palgrave Dictionary of Economics, 2nd edn. Palgrave Macmillan.
Besley, T. and Persson, T. (2011) Pillars of Prosperity. Princeton and Oxford: Princeton University Press.
Choi, K. (1983). A statistical test of olson’s model. In D.C. Mueller (ed.), The Political Economy of Growth
(pp. 57–78). New Haven, CT: Yale University Press.
Cole, D. and Grossman, P.Z. (2002) The Meaning of Property Rights: Law versus Economics?. Land Economics
78(3): 317–330.
Chong, A. and Calderón, C. (2000) Causality and feedback between institutional measures and economic
growth. Economics and Politics 12(1): 69–81.
Coase, R. (1937) The nature of the firm. Economica 4(16): 386–405.
Coase, R. (1960) The problem of social cost. Journal of Law and Economics 3(1): 1–44.
Coase, R. (1992) The institutional structure of production. American Economic Review 82(4): 713–719.
Collier, P. (2007) The Bottom Billion: Why the Poorest Countries are Failing and What Can be Done About It.
Oxford: Oxford University Press.
20 LLOYD AND LEE
Das, D.K. (2014) The growth path of the dynamic Asian economies. Asian-Pacific Economic Literature 28:
178–186.
Das, K. and Quirk, T. (2016) Which institutions promote growth? Revisiting the evidence. Economic Papers
35(1): 37–58.
Diamond, J. (1997) Guns, Germs and Steel: the Fates of Human Societies. New York: Norton.
Diamond, J. (2012) What makes countries rich or poor. New York Review of Books 2(10): 1–8.
Doppelhofer, G., Miller, R.I. and Sala-i-Martin, X. (2000) Determinants of long-term growth: a Bayesian
Averaging of Classical Estimates (BACE) approach. National Bureau of Economic Research Working
Paper 7750.
Easterly, W. (2005) National policies and economic growth: a reappraisal. In P. Aghion and
S. Durlauf (eds.), Handbook of Economic Growth, Vol. 1 (pp. 1015–1059). Amsterdam:
Elsevier.
Easterly, W. (2006). The White Man’s Burden: Why Efforts to Aid the Rest Have Done So Much Harm and So
Little Good. The Penguin Press.
Eichengreen, B., Park, D. and Shin, K. (2013) Growth slowdowns redux: new evidence on the middle-income
trap. National Bureau of Economic Research Working Paper 18673.
Ekelund, R.B. and Hebert, R. (2007) A History of Economic Theory and Method, 5th edn. Long Grove, IL:
Waveland Press.
Estevadeordal, A. and Taylor, A.M. (2013) Is the Washington consensus dead? Growth, opennness, and the
great liberalization, 1970s-2000s. Review of Economic Statistics 95(5): 1669–1690.
Evans, P. (1995) Embedded Autonomy: States and Industrial Transformation. Princeton: Princeton University
Press.
Ferguson, N. (2013) The Great Degeneration: How Institutions Decay and Economies Die. London: Penguin
Books.
Flachaire, E.C., Garćia-Peñalosa, C. and Konte, M. (2014) Political versus economic institutions in the growth
process. Journal of Comparative Economics 42: 221–229.
Fukuyama, F. (2012) Acemoglu and Robinson on why nations fail. The American Interest 26: 1–8.
Garnaut, R., Fang, C. and Song, L. (eds.) (2013) China: A New Model for Growth and Development. ANU
Press. Ebook.
Glaeser, E.L., La Porta, R., Lopez-De-Silanes, F. and Shleifer, A. (2004) Do institutions cause growth? Journal
of Economic Growth 9(3): 271–303.
Gorodnichenko, Y. and Roland, G. (2010) Culture, institutions and the wealth of nations. NBER Working Paper
No.16368.
Gorodnichenko, Y. and Roland, G. (2011a) Which dimensions of culture matter for long-run growth? American
Economic Review 101(3): 492–498.
Gorodnichenko, Y. and Roland, G. (2011b) Individualism, innovation and long-run growth? Proceedings of
National Academy of Sciences 108(Suppl. 4): 21316–21319.
Gorodnichenko, Y. and Roland, G. (2015). Culture, institutions and democratization. NBER Working Paper
21117.
Grabowski, R. (2012) The politics of rapid growth. Asian-Pacific Economic Literature 26(2): 29–40.
Hall, R. and Jones, C. (1999) Why do some countries produce so much more output per worker than others?
Quarterly Journal of Economics 114(1): 83–116.
Hannan, D. (2013) How We Invented Freedom and Why It Matters. London: Bookworld. (Published in the
USA and Canada under the title Inventing Freedom: How the English-speaking Peoples Made the Modern
World.)
Harper, D.A. (2014) Property rights as a complex adaptive system: how entrepreneurship transforms intellectual
property structures. Journal of Evolutionary Economics 24: 335–355.
Hodgson, G.M. (2004) The Evolution of Institutional Economics. London: Routledge.
Hodgson, G.M. (2006) What are institutions? Journal of Economic Issues 40(1): 1–25.
Hodgson, G.M. (2015) Much of the “economics of property rights” devalues property and legal rights. Journal
of Institutional Economics 11(4): 683–709.
Huang, Y. (2010) Debating china’s economic growth: the Beijing consensus or the Washington consensus.
Academy of Management Perspectives 24(2): 31–47.
Jellema, J. and Roland, G. (2011) Institutional clusters and economic performance. Journal of Economic
Behavior and Organization 79: 108–132.
Kirdina, S. (2014) Institutions and the importance of social control in a nation’s development. Journal of
Economic Issues 47: 309–322.
Kohli, A. (2004) State-Directed Development: Political Power and Industrialization in the Global Periphery.
Cambridge: Cambridge University Press.
Leite, D.N., Silva, S.T. and Afonso, O. (2014) Institutions, economics and the development quest. Journal of
Economic Surveys 28: 491–515.
Lin, J. (2014) New Paradigm for Interpreting the Chinese Economy. Hackensack, NJ: World Scientific.
Livingston, S. (2013) Making Democratic Governance Work: How Regimes Shape Prosperity. Welfare and
Peace by Pippa Norris. Why Nations Fail: The Origins of Power, Prosperity and Poverty, by Daron
Acemoglu and James Robinson. Political Communication 30: 654–665.
Mauro, P. (1995) Corruption and growth? Quarterly Journal of Economics 110(3): 681–712.
McCord, G.C. and Sachs, J.D. (2013) Development, structure and transformation: some evidence on comparative
economic growth. NBER Working Paper Series 19512, October.
McLeod, W.B. (2013) On economics: a review of Why Nations Fail by D. Acemoglu and J. Robinson and
Pillars of Prosperity by T. Besley and T. Persson. Journal of Economic Literature 51: 116–143.
Ménard, C. and Shirley, M. (2014) The contribution of Douglass North to new institutional economics. In S.
Galiani and I. Sened (eds.), Institutions, Property Rights, and Economic Growth: The Legacy of Douglass
North. Cambridge: Cambridge University Press.
Morris, I. (2010) Why the West Rules for Now. New York: Farrar, Straus and Giro.
Nicita, A. (2014) The legacy of R. coase (1910-2013): toward a theory of institutional ‘moving equilibrium.
International Review of Economics 61: 93–108.
Norris, P. (2012) Making Democratic Governance Work: How Regimes Shape Prosperity, Welfare and Peace.
New York: Cambridge University Press.
North, D. (1990) Institutions, Institutional Change, and Economic Performance. New York: Cambridge
University Press.
North, D. (1991) Institutions. Journal of Economic Perspective 5(1): 97–112.
North, D. (2005) Understanding the Process of Economic Change. Princeton: Princeton University Press.
North, D. and Thomas, R.P. (1973) The Rise of the Western World: A New Economic History. New York:
Cambridge University Press.
North, D., Wallis, J.J. and Weingast, B.R. (2009) Violence and Social Orders: A Conceptual Framework for
Interpreting Recorded Human History. Cambridge: Cambridge University Press.
Ogilvie, S. and Carus, A.W. (2014) Institutions and economic growth in historical perspective. In Handbook of
Economic Growth, Vol. 2A. Amsterdam: Elsevier.
Olson, M. (1982) The Rise and Decline of Nations. New Haven, CT: Yale University Press.
Ostrom, E. (1990) Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge:
Cambridge University Press.
Ostrom, E. (2005) Understanding Institutional Diversity. Princeton: Princeton University Press.
Parthasarathi, P. (2011) Why Europe Grew Rich and Asia Did Not: Global Economic Divergence, 1600–1850.
New York: Cambridge University Press.
Perkins, D. (2013) New institutions for a new development model. In R. Garnaut, C. Fang and L. Song (eds.),
China: A New Model for Growth and Development. ANU Press. Ebook.
Persson, T. and Tabellini, G. (2000) Political Economics: Explaining Economic Policy. Cambridge MA: MIT
Press.
Persson, T. and Tabellini, G. (2003) The Economic Effects of Constitutions. Cambridge MA: MIT Press.
Pritchett, L. and Summers, L.H. (2014) Asiaphoria meets regression to the mean. National Bureau of Economic
Research Working Paper 20573.
Rodriguez, F. (2007) Openness and growth: what have we learned? In J.A. Ocampo, K.S. Jomo and R. Vos
(eds.), Growth Divergences: Explaining Differences in Economic Performance. New York: Zed Books.
Rodriguez, F. and Rodrik, D. (2001) Trade policy and economic growth: a skeptic’s guide to the cross-national
literature. In B.S. Benanke and K. Rogoff (eds.), NBER Macroeconomic Annual 2000 (pp. 261–324).
Cambridge, MA: MIT Press.
22 LLOYD AND LEE
Rodrik, D. (1999) Where did all the growth go? External shocks, social conflicts, and growth collapses. Journal
of Economic Growth 4: 385–412.
Rodrik, D. (2006) Goodbye Washington consensus, hello Washington confusion? a review of the world banks’s
economic growth in the 1990s: learning from a decade of reform. Journal of Economic Literature 45:
937–987.
Rodrik, D. (2007) One Economics: Globalization, Institutions and Economic Growth. Princeton: Princeton
University Press.
Rodrik, D. (2008) Second-best institutions. American Economic Review 100–104.
Rodrik, D. (2014) The past, present, and future of economic growth. Challenge 57: 5–39.
Rodrik, D., Subramaniam, A., and Trebbi, F. (2004) Institutions rule: the primacy of institutions over geography
and integration in economic development. Journal of Economic Growth 9: 131–165.
Sachs, J.D. (2012a) Government, geography and growth. Foreign Affairs 91: 142–150.
Sachs, J.D. (2012b) Reply to Acemoglu and Robinson’s response to my book review. Available at
http://jeffsachs.org/2012/12/reply-to-acemoglu-and-robinsons-response-to-my-book-review.
Shirley, M.M. (2005) Institutions and development. In C. Ménard and M. Shirley (eds.), Handbook of New
Institutional Economics (pp. 611–638). Dordecht: Springer.
Shleifer, A., Lopez-de-Silanes, F. and La Porta, R., (2008) The economic consequences of legal origins. Journal
of Economic Literature 46(2): 285–332.
Skinner, A. (2008) Smith, Adam (1723–1790). In S.N. Durlauf and L.E. Blume (eds.) The New Palgrave
Dictionary of Economics, 2nd edn. Palgrave Macmillan.
Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. The Modern Library Edition,
edited by E. Cannan. New York: The Modern Library.
Spolaore, E. and Wacziarg, R. (2013) How deep are the roots of economic development. Journal of Economic
Literature 51(2): 325–369.
Stiglitz, J. and Yusuf, S. (eds.) (2001) Rethinking the East Asian Miracle. New York: World Bank and Oxford
University Press.
Subramaniam, A. (2012) Which nations failed? The American Interest 30: 1–4.
Swamy, S. (1979) The response to economic challenge: a comparative economic history of China and
India,1870-1952 Quarterly Journal of Economics 93(1): 25–46.
Tabellini, G. (2010) Culture and institutions: economic developments in the regions of Europe. Journal of the
European Economic Association 8(4): 677–716.
Tsuru, S. (1993) Institutional Economics Revisited. Cambridge: Cambridge University Press.
Wade, R. (1990) Governing the Market: Economic Theory and the Role of Government in East Asian
Industrialization. Princeton: Princeton University Press.
Wao, W.T., Lu, M., Sachs, J. and Chen, Z. (eds.) (2013) A New Growth Engine for China. Singapore: World
Scientific.
World Bank (1993) The East Asian Miracle: Economic Growth and Public Policy. Washington, DC: World
Bank.
World Bank (2008) Report of the Commission on Growth and Development. Washington, DC: World Bank.
Williamson, O.E. (1975) Markets and Hierarchies: Analysis and Antitrust Applications. New York: The Free
Press.
Williamson, E.O. (2000) The new institutional economics: taking stock, looking ahead. Journal of Economic
Literature, 38(3): 595–613.
Zhang, W. (2012) The China Wave: Rise of a Civilizational State. Singapore: World Scientific.


A Review of The Recent Literature On The Institutional Economics Analysis of The Long-Run Performance of Nations

Uploaded by

Copyright:

Available Formats

A Review of The Recent Literature On The Institutional Economics Analysis of The Long-Run Performance of Nations

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

A Review of The Recent Literature On The Institutional Economics Analysis of The Long-Run Performance of Nations

Uploaded by

Copyright:

Available Formats

doi: 10.1111/joes.

A REVIEW OF THE RECENT LITERATURE

Keywords. Institutions; Instruments; Long-run performance; Policies

Journal of Economic Surveys (2018) Vol. 32, No. 1, pp. 1–22

2. The Mainstream Turn to Institutions

Table 1. Williamson’s Framework for Institutional Analysis

1. Embeddedness Informal institutions, customs, 100–1000 Social theory

3. Governance Play of the game: 1–10 Transaction cost

4. Resource allocation Prices and quantities; incentive Continuous Neoclassical

2.1 Recent Institutional Economics

3. The Analysis of Recent Institutional Economics

3.1 What are Institutionalists Trying to Explain?

3.2 Methods of Analysis

3.3 What are Institutions?

3.4 Measuring Institutional Variables

3.5 Problems with Using Instrumental Variables

3.6 Are Institutions Constant or Constantly Evolving?

3.7 Patterns of Growth in the World Economy

Figure 2. Per Capita Incomes Relative to the United States.

3.9 The Relative Contribution of Institutions to Long-Run Economic Performance

Journal of Economic Surveys (2018) Vol. 32, No. 1, pp. 1–22

You might also like