Institutional differences as sources of growth differences

Until recently, most studies investigating the determinants of growth failed to incorporate the importance of institutions into the empirical analysis. This paper highlights the importance of institutions on growth and development and evaluates the empirical results on the effect of institutions on growth and investment. It provides ample evidence that the institutional environment in which an economic activity takes place is an important determinant of economic growth. This paper uses alternative measures of institutional quality to capture the role of institutions in explaining growth differences across countries. When these institutional variables are incorporated into the core regression equations as additional explanatory variables in two different sample periods, both samples yield similar results. The empirical results reveal that countries with high levels of economic growth are characterized by high levels of economic freedom and judicial efficiency, low levels of corruption, effective bureaucracy, and protected private property. Copyright International Atlantic Economic Society 2003