Globalization or institution?

Thanks to globalization, some countries achieve economic growth despite underdeveloped institutions, raising the issue of whether institutions or other factors might contribute more to economic growth. With settler mortality during colonization as an IV for current institutions of former colonies, Acemoglu, Johnson, and Robinson found a tremendous, positive effect of institutions on economic performance. We argue that their study ignored an important factor, i.e. globalization, which may both relate to colonial history and affect current economic development, thus potentially biasing the estimate of the impact of institutions. This is because colonial history by English-speaking countries may affect a country’s English proficiency, which in turn may affect its economic globalization and social globalization and thus its economic development, with the United Kingdom and the United States as the world leader in succession. Correspondingly, we add globalization and examine the concomitant effects of globalization and institution on economic performance. With settler mortality and length of colonization by English-speaking countries as instrument variables, we find that globalization contributes greatly to economic performance and the effect of institutions becomes not statistically significant once globalization is taken into account. Of the sub-indices of globalization, the index of social globalization has the strongest and most stable impact on economic performance. Specifically, a one-point increase in overall globalization of a country or region corresponds to about 9.8% increase in its GDP per capita; and a one-point increase in social globalization corresponds to about 7.3% increase in GDP per capita.