Institutions and Economic Performance: A Review of the Theory and Evidence

Abstract

The aim of this article is to take stock of the theoretical debate and empirical findings concerning the impact of institutions on economic performance and the channels through which the institutional impact unfolds. The review is limited to work published until 2004 due to space limitations and the exponential increase in the literature after 2004 -a development that justifies a separate review in itself. We trace the evolution of the institutional approach, identify the channels through which institutional quality might affect economic performance, report the empirical findings, and assess the institutional approach's contribution to economic analysis and policy design. Our findings suggest that the institutional approach has made both theoretical and empirical contributions to economics research and has inspired policy debate, but the debate is lopsided with its focus on developing countries only.

Institutional Quality, Macroeconomic Stabilization and Economic Growth: A Case Study of IMF Programme Countries

“…As indicated earlier, NIE literature indicates that institutions have a significantly positive bearing on real economic growth (Rodrik et al, 2002;Ugur, 2010). Ugur (2010) for example, drew the same conclusion from many studies conducted between 1995-2004, indicating also at the same time that the direction of causation was significantly from institutions to economic performance (Ugur, 2010, p.16).…”

“…Ugur (2010) for example, drew the same conclusion from many studies conducted between 1995-2004, indicating also at the same time that the direction of causation was significantly from institutions to economic performance (Ugur, 2010, p.16). In the current analysis, the same is being premised for IMF programme countries:…”

Determinants of Institutional Quality: A Case Study of IMF Programme Countries

“…Sadly, neo-classical economics forgot this initial understanding by ignoring institutions, by assuming a free-market, perfect competition basis for Pareto optimality and by taking a production function including labour and capital (Ugur, 2010). Such a technical production function is incompatible with regard to the existence of property rights and efficient contract enforcement (Rodrik, 2000), and does not explain the difference between developing and developed world (Ugur, 2010).…”

“…Such a technical production function is incompatible with regard to the existence of property rights and efficient contract enforcement (Rodrik, 2000), and does not explain the difference between developing and developed world (Ugur, 2010). Attention on the significance of institutions was later on brought in the decade of 1980s 7 , and especially during the 1990s with the realization through the liberalization reform, that institutions were required for incentive system of price signal to work for increasing national welfare (Rodrik, 2000).…”

“…These macroeconomic problems, just like the volatility and the disappointing macroeconomic performance suffered by these countries, are symptoms of deeper institutional causes.' Ugur (2010) indicated that most of the studies conducted between 1995-2004, report a significant relation between institutional quality and economic performance; with some of them demonstrating that 'the direction of causation is from institutions to economic performance' (Ugur 2010;p. 16).…”