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Institutions vs. ‘first-nature’ geography: what drives economic growth in Europe's regions?

Tobias Ketterer () and Andrés Rodríguez-Pose ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The debate on whether institutions or geography prevail in driving economic growth has been rife (e.g., Sachs 2003 vs. Rodrik et al. 2004). Most of the empirical analyses delving into this debate have focused on world countries, whose geographical and institutional conditions differ widely. Subnational analyses considering groups of countries with, in principle, more similar institutional and geographical conditions have been limited and tended to highlight that geography is more important than institutions at subnational level. This paper aims to address whether this is the case by investigating how differences in institutional and ‘first-nature’ geographical conditions have affected economic growth in Europe's regions in the period 1995–2009. In the analysis we use a newly developed dataset including regional quality of government indicators and geographical charactersitics and employ two-stage least squares (2SLS) and instrumental variables-generalized method of moments (IV-GMM) estimation techniques with a number of regional historical variables as instruments. Our results indicate that at a regional level in Europe institutions rule. Regional institutional conditions – and, particularly, government effectiveness and the fight against corruption – play an important role in shaping regional economic growth prospects. This does not imply, however, that geography is irrelevant. There is evidence of geographical factors affecting regional growth, although their impact is dwarfed by the overriding influence of institutions.

Keywords: regional economic growth; institutions; geography; quality of government; NUTS 2 regions; Europe (search for similar items in EconPapers)
JEL-codes: N0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur, nep-geo, nep-gro, nep-sbm and nep-ure
Date: 2018-03-01
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Published in Papers in Regional Science, 1, March, 2018, 97(1), pp. 25-62. ISSN: 1056-8190

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Related works:
Journal Article: Institutions vs. ‘first‐nature’ geography: What drives economic growth in Europe's regions? (2018) Downloads
Working Paper: Institutions vs. "First-Nature" Geography - What Drives Economic Growth in Europe's Regions? (2016) Downloads
Working Paper: Institutions vs. ‘First-Nature’ Geography – What Drives Economic Growth in Europe’s Regions? (2016) Downloads
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