Working Paper: CEPR ID: DP4653
Authors: Roberto Rigobon; Dani Rodrik
Abstract: We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East-West versus those aligned on a North-South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.
Keywords: growth
JEL Codes: O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Democracy (D72) | Economic Performance (P17) |
| Rule of Law (K00) | Economic Performance (P17) |
| Rule of Law (K00) | Income Levels (D31) |
| Openness (O36) | Income Levels (D31) |
| Openness (O36) | Democracy (D72) |
| Openness (O36) | Rule of Law (K00) |
| Distance from the Equator (N97) | Income (D31) |
| Larger Land Area (Q15) | Economic Performance (P17) |
| Larger Population Sizes (R12) | Economic Performance (P17) |
| Higher Income Levels (J31) | Institutional Quality (L15) |
| Rule of Law (K00) | Democracy (D72) |
| Distance from the Equator (N97) | Openness (O36) |
| Land Area (Q24) | Openness (O36) |