The geographic dimensions of institutions

In this paper we examine the role of institutions relative to economic performance, absolute geography and financial performance of a country. In order to do this, we use the spatial principal component analysis and a spatial canonical correlation analysis to obtain multi-dimensional measure of institutions, economic performance, absolute geography and financial performance of countries. Our analysis shows that the first canonical functions in all the cases give us results that conform to current literature. That is, we find that a higher level of development is correlated to a higher level of institutional quality, deeper financial structure as well as "good" geography of the Jeffery Sachs variety. From the second canonical functions we find that economic growth is correlated to market steering. We further find that geographic conditions need not define the institutional set up of countries. A similar institutional set up need not result in a similar financial structure in countries. We show that there is a necessity to take spatial interactions with neighbouring countries into account while analysing the relationships between institutions, geography, economic and financial performance of a country. We find that space indeed has a strong influence on the prevailing institutional and economic conditions of countries. While the impact of space on geography is very obvious, we find that it has no bearing on the financial performance of countries.

Keywords: economic performance; institutional quality; financial performance; geography; spatial principal components analysis; spatial canonical correlation analysis: spatial concentration

JEL Classification: O10, O16, O17, O43, R12, R15