Stylized facts of governance, institutions and economic development. Exploring the institutional profiles database
Bart Verspagen
#2012-036
Stylized facts of governance, institutions and economic development. Exploring the institutional profiles database
Bart Verspagen
The empirical literature on economic growth agrees that institutions and
governance are important determinants of long-run economic growth rates.
As a stylized fact, this literature points to a strong correlation
between the level of GDP per capita and the general development level of
institutions and governance. However, the growth rate of GDP per capita
itself, as well as other indicators that are broadly associated with the
level of economic development, are generally much less strongly
correlated with the level of institutional development. We document
these correlations, and argue that there is a need for a broader set of
stylized facts about institutions, governance and economic development,
covering the broader set of economic indicators, including the growth
rate itself. To find such stylized facts, we use canonical correlation
analysis. We use a database on institutions and governance that has a
very large number of indicators, and our analysis produces a number of
aggregated measurements of institutions and governance that broadly
correlate with patterns of economic development. The analysis confirms
the correlation between the general level of economic development on the
one hand, and institutional development on the other hand, which is the
core stylized fact identified in the literature. In addition to this,
our analysis points to the general attitude towards markets, and the
level of financial development as specific dimensions of the
institutional and governance characteristics of a country that correlate
highly with specific development patterns. In particular, we find that a
positive attitude towards markets combined with a low level of financial
development goes together with growth rates, based on catching-up. We
also find that a tendency towards market steering combined with strong
financial development goes together with a high involvement in
international trade (openness), combined with a low investment rate.
Keywords: institutions, governance, economic development
JEL codes: O1, O16, O17
