The growth effects of institutional instability

Niclas Berggren (), Andreas Bergh () and Christian Bjornskov ()
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Andreas Bergh: The Ratio Institute, Postal: The Ratio Institute, P.O. Box 3203 , SE-103 64 Stockholm , Sweden

No 135, Ratio Working Papers from The Ratio Institute

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 (search for similar items in EconPapers)
JEL-codes: B52 D80 O11 O17 O43 (search for similar items in EconPapers)
Date: 2009-06-02
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Working Paper: The growth effects of institutional instability (2009)
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