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Institutional Clusters

This paper aims to identify robust clusters of institutions that matter for economic growth by using factor analysis on existing objective institutional measures. The study explores the trade-off between including more variables and ensuring robustness in the results. The main findings suggest that broad clusters, such as limited executive with checks and balances and anti-authoritarian culture, have a significant impact on long-run growth. However, legal institutions and cultural variables are more influential than specific institutions.

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Institutional Clusters

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  1. Institutional Clusters Jon Jellema and Gérard Roland UC Berkeley

  2. Introduction • Growing consensus among economists on importance of Institutions following work of North and others • Institutions matter for growth (Acemoglu et al., 2002) • However, • aggregate measure of institutions used very often. Does not tell which institutions matter. • Aggregate measures usually based on subjective evaluation of institutions which contains noise (see e.g. Glaeser et al., 2004)

  3. Which institutions matter more? • This paper: more comprehensive attempt at answering that question by using factor analysis (principal component) on existing objective institutional measures. • Justification: • Many correlated measures of institutions • Noisy measures. • Principal component analysis allows to come up with a small number of orthogonal clusters. • Difficulty: interpretation not always easy.

  4. We gathered all existing cross-country institutional databases to see if we could identify robust clusters of institutions that matter for growth. • Main trade-off: inclusion of more variables reduces the set of countries. • Robustness is important concern. Clusters change with variable changes. Necessary to try many combinations of variables to get a sense of robust results.

  5. Two approaches: • principal component for political, judicial and cultural variables (advantage: flexibility in choice of variables; cost: possible correlation – we find correlation between political and cultural variables) • principal component clusters of objective measures of institutions.

  6. Main results: • Institutional clusters obtained are quite intuitive. Broad clusters rather than specific institutions. • Few variables are robustly significant. • Legal institutional variables rarely significant, political and cultural more often. • Robust results: political institutions of limited executive and checks and balances; also, anti-authoritarian, democratic, participatory culture. • IV estimation (with different instruments) tends to strengthen these results.

  7. Conclusion • Robust result: limited executive with checks and balances, anti-authoritarian culture, secularism associated with long run growth and has a causal effect. • Broad set of institutions of separation of powers matter rather than a few single institutions. • Other institutions, including legal origins, do not appear to have an effect. • Political institutions and culture intertwined: suggests that political reforms not supported by adequate cultural change may not work well.

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