Political economics of institutions and development: a review of the current institutional change theory
Center for Economic Research, Shandong University, PRC
The current institutional change theory advance mainly in three ways: a. experimental analysis to find the evidence of the relations between the institutions and economic performance; b. normative analysis to understanding and modeling the institution change and economic performance. c. in other perspectives to understanding institutional change, for example, the institutional evolve, the culture and the institutional change, and the comparative institutional analysis. All of these papers pay attentions to the apply of mathematics, such as, some authors use econometric method to find the cause effect between the institution and performance in the experimental analysis, and more game theory model are developed in the normative analysis.
1.Experimental analysis: finding the Evidence of the relations between the institutions and economic performance
The experimental analysis consists of six parts: a) aggregate correlations between the institution and the economic performance; b) searching “exogenous” differences in institutions; c) measuring the effect of weak and strong institutions; d) surveying the effect of different elements of institution; e) work using within country variation; f) significant potential field: micro evidence.
(1) Aggregate correlations between the institution and the economic performance
Knack and Keefer (1995) is One of the earliest literature documenting a positive correlation between measures of institutions and good governance on the one hand, and economic performance on the other. They use measures of property rights, and find them to be strongly correlated with investment and growth, even after controlling for other potential determinants of growth. Other authors have found similar relationships using political instability, corruption, and measures of rule of law. These variables are all institutional outcomes. Barro (1997), Mulligan, Gill and Sala-i-Martin (2004) find that there are fewer consensuses about whether the presence or absence of democracy itself matters for economic outcomes or policy outcomes.
Prominent in the literature examining the effects of formal institutions has been the work of Persson and Tabellini (2003, 2004), who have shown how various aspects of formal democratic constitutions, for example whether or not the system is a presidential one or a parliamentary one, or whether or not legislators are elected using proportional representation, seems to matter for the level and composition of government spending. Their recent research (Persson and Tabellini, 2005) suggests that these types of institutional distinctions might matter for economic growth as well. They investigate the effect of electoral rules and types of political institutions on policy outcomes in a panel of 61 democracies. They find, for instance, that in presidential regimes, the size of government is smaller than in parliamentary regimes. They also find that majoritarian elections lead to smaller transfers than proportional representation systems.
These results are very suggestive, but these correlations do not establish that institutions have a causal effect on economic performance. The reasons are as follows: First, there could be the standard type of reverse causality. Moreover, There is an omitted-variables problem, so we may be assigning the effect of these omitted variables to institutional differences, greatly exaggerating the effect of institutions of economic performance. Thirdly, because most measures of institutions are “subjective”, and perhaps scholars see better institutions in places that perform better.
(2) Searching “exogenous” differenc
