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Does Balance Among Areas of Institutional Quality Matter for Economic Growth?

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  • J. Brandon Bolen
  • Russell S. Sobel

Abstract

Countries with better institutions, as measured by the Economic Freedom of the World index, have greater prosperity, growth, and well‐being. However, the previous literature has ignored interrelationships among the subareas, instead implicitly assuming substitutability and independence. We hypothesize that when some areas are weak, better scores in other areas are not a simple substitute. We find that including a simple measure of the within‐country standard deviation among coexisting area scores results in a meaningfully significant improvement in the empirical growth specifications. Based on our findings, this should become routine practice in future empirical work. We also explore interactions among areas and find ones with legal system and property rights most important to include. These findings suggest a need to reconsider the implicit assumption of independence among area scores, as well as a balanced approach to institutional reform in practice. Improving the worst areas is more beneficial to growth.

Suggested Citation

  • J. Brandon Bolen & Russell S. Sobel, 2020. "Does Balance Among Areas of Institutional Quality Matter for Economic Growth?," Southern Economic Journal, John Wiley & Sons, vol. 86(4), pages 1418-1445, April.
  • Handle: RePEc:wly:soecon:v:86:y:2020:i:4:p:1418-1445
    DOI: 10.1002/soej.12428
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    Cited by:

    1. Berggren, Niclas & Bjørnskov, Christian, 2024. "Economic freedom and academic freedom across nations," Journal of Institutional Economics, Cambridge University Press, vol. 20, pages 1-1, January.
    2. Michal Bernardelli & Mariusz Prochniak & Bartosz Witkowski, 2021. "Time stability of the impact of institutions on economic growth and real convergence of the EU countries: implications from the hidden Markov models analysis," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 16(2), pages 285-323, June.
    3. Danko Tarabar & Louis J. Pantuosco, 2023. "Reform complementarities and growth: Evidence and mechanisms," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(2), pages 271-294, April.
    4. Justin Callais & Kerianne Lawson, 2024. "Underperforming reformers: Examining disappointing cases of economic reforms," Kyklos, Wiley Blackwell, vol. 77(3), pages 593-615, August.
    5. Kwamivi Mawuli Gomado, 2024. "Impact of uncertainty on economic growth: The role of pro‐market institutions in developing countries," Post-Print hal-04725308, HAL.
    6. Niclas Berggren & Christian Bjørnskov, 2022. "Academic freedom, institutions, and productivity," Southern Economic Journal, John Wiley & Sons, vol. 88(4), pages 1313-1342, April.

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