There is now broad consensus – supported by substantial evidence – that inclusive institutions are important for growth, poverty reduction, development and peaceful societies. Establishing the direction of causality between institutions and outcomes, and pinpointing which institutions cause what outcomes and how is, however, very difficult.
Evidence of the development impact of institutions
A DFID literature review syntheses key evidence on the impact of institutions (Evans & Ferguson, 2013).
Economic institutions shape the rights, regulatory framework, and degree of rent-seeking and corruption, in land, housing, labour and credit markets (Acemoglu & Robinson, 2012; Leftwich & Sen, 2010: 17; World Bank, 2013a: 8). Examples of formal economic institutions include property rights and labour laws. Many cross-country statistical studies find that more inclusive economic institutions improve economic outcomes. One often cited, rigorous study is Rodrik et al. (2004). The authors find that the quality of institutions – such as security of property rights and strength of the rule of law – is a strong determinant of income levels (stronger than geography or trade). Another is Acemoglu and Johnson (2005), who find a link between inclusive property rights and economic growth and investment. However, other cross-country studies suggest the reverse order of causality; specifically, that income levels, educational attainment and economic growth all lead to stronger institutions, not the other way around (see Glaeser et al., 2004 and Hawkes & Ugur, 2012).
Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development
This cross-country econometric study estimates the contributions of institutions, geography and trade in determining income levels around the world. Based on a sample of over 200 countries, it indicates that the quality of institutions ‘trumps’ everything else. Once institutions are controlled for, geography has at best a weak direct effect on incomes, although with a strong indirect effect on influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant.
Source: Rodrik et al., 2004.
A review of the evidence finds that, while there is evidence that democratic political institutions tend to have growth-enhancing and growth-stabilising effects, there is no clear evidence that democracy causes higher incomes, or vice versa (Evans & Ferguson, 2013: 35, 51). There is also mixed evidence on the impact of inclusive political institutions on poverty reduction. Some find no systematic relationship between democracy and similar measures of development, in spite of increased public expenditure (Moore & Putzel, 1999; Ross, 2006). Other cross-country econometric studies find that better – more inclusive – governance reduces poverty and improves human development outcomes relating to, for example, infant mortality, literacy, and health (Halperin et al., 2010; Kaufmann et al., 1999; evidence identified by Evans & Ferguson, 2013).
To a degree, these findings on the relationship between democracy, good governance and development may hinge on how ‘democracy’ and ‘good governance’ are defined. Evans and Ferguson (2013: 38-39) find that the evidence shows that holding elections alone has no significant impact on development, but that deeper measures of political inclusion – including political competition, issues-based political parties, and competitive recruitment to these parties – are significant.
Fewer cross-country studies have looked at the impact of inclusive social norms. One study suggests social trust has a strong positive effect on economic growth (Knack & Keefer, 1995). Norms of non-discrimination against women, ethnic, religious and caste minorities may be particularly important in this regard (Foa, 2008).
- Acemoglu, D. & Johnson, S. (2005). Unbundling institutions. Journal of Political Economy, 113(5), 949-995. See document online
- Acemoglu, D. & Robinson, J. (2012). Why nations fail: The origins of power, prosperity, and poverty. New York: Crown Publishers. See document online
- Evans, W. & Ferguson, C. (2013). Governance, institutions, growth and poverty reduction: a literature review. London: Department for International Development. See document online
- Foa, R. (2008). Social institutions and human development. Social Development Working Papers No. 006. Washington D.C.: World Bank. See document online
- Glaeser, E.L., La Porta, R., Lopez-de-Silanes, F. & Shleifer, A. (2004). Do institutions cause growth? Journal of Economic Growth, 9(3), 271-303. See document online
- Halperin, M., Siegle, J., & Weinstein, M. (2010). The democracy advantage: How democracies promote prosperity and peace. Revised edition. Abingdon: Routledge.
- Hawkes, D. & Ugur, M. (2012). Evidence on the relationship between education, skills and economic growth in low-income countries: A systematic review. London: EPPI-Centre, Social Science Research Unit, Institute of Education, University of London. See document online
- Kaufmann, D., Kraay, A. & Zoido-Lobaton, P. (1999). Governance matters. Policy Research Working Paper No. 2196. Washington D.C.: World Bank Institute. See document online
- Knack, S. & Keefer, P. (1995). Institutions and economic performance: Cross-country tests using alternative institutional indicators. Economics & Politics, 7(3), 207-227.
- Leftwich, A. & Sen, K. (2010). Beyond institutions: Institutions and organizations in the politics and economics of poverty reduction – Thematic synthesis of research evidence. DFID-funded Research Programme Consortium on Improving Institutions for Pro-Poor Growth (IPPG). Manchester: University of Manchester. See document online
- Moore, M. & Putzel, J. (1999). Politics and Poverty. A background paper for the World Development Report 2000/2001. Washington D.C.: World Bank.
- Rodrik, D., Subramanian, A. & Trebbi, F. (2004). Institutions rule: The primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9(2), 131-165. See document online
- Ross, M. (2006). Is democracy good for the poor? American Journal of Political Science, 50(4), 860-874. See document online
- World Bank (2013a). Inclusion matters: The foundation for shared prosperity. Washington D.C.: World Bank. See document online