WHY DON'T POOR COUNTRIES CATCH UP? A CROSS-NATIONAL TEST OF AN INSTITUTIONAL EXPLANATION

Early neoclassical analyses predicted that poor countries would grow faster than wealthy countries, because of technological advances and diminishing returns to capital in the latter. The reverse has occurred: poor countries are falling back rather than catching up. We suggest here that deficient institutions underlie this divergence. Employing various indicators of institutional quality, including the rule of law, the pervasiveness of corruption, and the risk of expropriation and contract repudiation, we show that the ability of poor countries to catch up is determined in large part by the institutional environment in which economic activity in these countries takes place. (JEL O00, O10)     

Foreign aid and the rule of law: Institutional diffusion versus legal reach

This paper examines the role of bilateral foreign aid in supporting the diffusion and enactment of common models and institutions of the rule of law among aid-recipient low- and middle-income countries. We ask whether aid targeted at security-sector reform and the rule of law influences the adoption of constitutional and legal reforms over time (institutional diffusion), and whether aid also supports more effective implementation of the rule of law, writ large (legal reach). We use event history and fixed-effects panel regression models to examine a sample of 154 countries between 1995 and 2013 to answer these questions. Our findings suggest that aid does increase the likelihood of adopting several rule of law reforms, but its effect on increasing the depth or quality of rule of law over time within countries is much less substantial. These findings suggest that though aid may play a role in supporting the diffusion of models contributing to state isomorphism among countries, it is less effective at increasing the pervasiveness and quality of such model’s implementation. This discrepancy between the effectiveness of bilateral aid in promoting law on the books versus law in action in aid recipient countries calls into question the current approach to rule of law reforms.     

Growth,Inequality and Poverty in Emerging and Transition Economies

This paper aims to explore the quality of economic growth in a sample of 50 emerging and transition economies (ETEs), which are countries experiencing a process of fast growth and institutional change. Economic growth during 1995–2006 is regressed against poverty, inequality and human development variables using OLS cross-country regression models. The main findings are that growth did not reduce poverty and income inequality worsened too. On the one hand, economic growth occurred despite the worsening of income inequality. However, this result does not identify a “U-shaped” Kuznets curve because even after a consistent period of growth, inequality did not decrease and it remained at higher levels. Only countries with higher education levels and public expenditure in strategic dimensions seem to escape from this trap. On the other hand, growth occurred at the expense of an important human development variable i.e., life expectancy, and of an important indicator of democracy, i.e., voice and accountability.     

Constraining Is Enabling? Exploring the Influence of National Context on Civil Society Strength

This article analyses the influence of national context on civil society strength based on four key dimensions: level of democracy, political stability, rule of law and economic development. Whereas existing studies mainly focus on Western and post-communist countries, we explicitly include developing countries in our analysis. We use associational membership as proxy for civil society strength and include data of 53 countries. Rule of law, economic development and (to a lesser extent) political stability emerge from our multilevel regression models as the main factors affecting civil society membership. Unlike previous studies, we show that these relations are quadratic instead of linear. This means that where existing theories predict a drop in memberships in developing countries, we find a rise. In other words, harsh conditions actually strengthen civil society in terms of membership levels. We argue that this could be the case because reasons for CSO membership are essentially different in the developed and in the developing world. Contrary to theoretical assumptions, democratic rights do not appear critically important for civil society membership.     

CLIMBING TO THE TOP? FOREIGN DIRECT INVESTMENT AND PROPERTY RIGHTS

This article operates at the interface of the literature on the impact of foreign direct investment (FDI) on host countries and the literature on the determinants of institutional quality. We argue that FDI contributes to economic development by improving institutional quality in the host country. This proposition is tested within a large panel data set of 70 developing countries for the period 1981–2005. We show that FDI inflows have a positive and highly significant impact on property rights. Results are very robust and not affected by model specification, different control variables, or estimation technique. To our knowledge this is the first article to empirically test the FDI—property rights linkage. (JEL F23, O43, P48)     

The Effect of Globalization on Financial Development in the MENA Region

This paper provides new evidence that sheds light on the effect of globalization on financial development using data from 9 MENA countries over the period 1991?C2007. The empirical results based on the Panel-data Vector Autoregression and Fully Modified Ordinary Least Squares methods reveal that globalization affects financial development and economic growth in the MENA region while globalization does not play any role in institutional reforms, which promote financial development and economic growth. Hence, governments can play a crucial role in improving the necessary economic conditions for the benefits of globalization to be felt in the MENA region. Also institutional reform policies can be important for policy makers who are attempting to accelerate globalization and financial development.     

Resources management in India and China — an overview

India and China reached national sovereignty at the end of the 1940s. Since that time the two countries have made significant industrial progress and they have, relative to other Third World countries, a large number of well-educated people. However, the agricultural developments in India and China have been very different, though the two countries have a similar resources base. While the Chinese peasants, through hard work upon the rural land, have seen a substantial increase in their standard of living, the mass of Indian peasants are still living under severe circumstances and poverty. Furthermore, the rational management of land and water resources are much more advanced in China than in India. An important part of the difference in the agricultural and resources development of the two countries is related to the various guidelines of national economic performance and institutional settings. China has adopted a self-reliant basic-needs-oriented approach of national economic performance, which has given due attention to agricultural development and resources management. India has followed a Western-inspired liberal economic growth model of national economic performance, which has emphasised industrial development directed toward fastgrowing isolated economic enclaves within a basically subsistence economy. The cooperative ownership approach has improved resources management in China, whereas the small peasant/tenant approach in India has been unable to improve the resources management situation. The paper suggests that only a cooperative ownership approach towards land and water resources management will give any future prospect for an improvement in the standard of living for the mass of the people and the resources situation in India. Consequently, research activities in resources management ought to be directed towards cooperative solutions and experiences in India.     

Growth Patterns in the CIS-8: A Political Economy Approach

On the whole GDP growth is usually considered robust in the CIS-8. However, there are remarkable differences in the quality of growth performances between the countries in the region. These differences cast doubts on the sustainability of the recent growth performance in some Caspian/Caucasian countries. This paper tries to develop a basic understanding of the different qualities of growth performance other than GDP growth rates. Therefore, we distinguish between volume-driven and efficiency-driven growth. Taking into account different resource endowments, we identify different patterns of physical capital accumulation and development of Total Factor Productivity (TFP) growth. The results of our fixed effects model indicate that governance has a significant positive effect on TFP and GDP per capita growth, whereas our results for regime type indicate a non-linear relationship. Therefore, we conclude that institutional quality seems to be the major determinant causing efficiency-driven growth and is thus of major importance when assessing the sustainability of growth paths in the region.     

A clash of civilizations? Examining liberal‐democratic values in Turkey and the European Union1

Turkey's proposed entry into the European Union (EU) has been undermined by Europeans’ perceptions of Turkish–European cultural differences, particularly regarding the liberal‐democratic values that the EU promotes (democracy, rule of law, and respect for and appreciation of minority/human rights). Yet, cross‐national research on values has not focused on Turkey, the EU, and these liberal‐democratic values, leaving assumptions of cultural differences and their explanations untested. Through analyses of World and European Values Survey data (1999–2002), this article asks whether people in Turkey have the same values regarding democracy, rule of law (versus religious and authoritarian rule), and minority/human rights as people in EU member and candidate states (as of 2000)? What factors explain these values? I find that people in Turkey support democracy to the same extent as people in EU member and candidate states, but people in Turkey are more supportive of religious and authoritarian rule and are less tolerant of minorities. Although the ‘clash of civilizations’ thesis expects liberal values to be ordered according to countries’ religious traditions, with western Christian the most supportive and Islamic the least, only for tolerance of minorities values is this pattern found. Instead, economic development most consistently explains differences between Turkey and EU member and candidate states in support for these values. I conclude with calls for theoretical refinement, particularly of the clash of civilizations thesis, along with suggestions for future research to examine more Muslim and Orthodox countries; I discuss the debate over Turkey's EU entry.     

Foreign Direct Investment and Institutional Environment in Transition Economies

We analysed the relation between foreign direct investment and the quality of the institutional environment in transition economies. The analysis confirmed a significant impact of various institutional aspects on the inflow of foreign capital. To isolate the importance of the institutional environment from the impact of other factors, a panel data analysis was performed using the data of 24 transition economies in the period 1995–2002. The results showed that in the observed period the quality of the institutional environment significantly influenced the level of foreign direct investment in transition economies. Other variables that proved to have a statistically significant influence were budget deficit, insider privatization, and labour cost per hour.     

The Impact of Europeanization upon Party Systems in Slovakia and Romania

Usually the concept of Europeanization refers to processes that download the European Union (the EU) regulations and institutional structures to the domestic level. Moreover, in the last few years the specialized literature has become increasingly preoccupied by the development of national patterns of government through the impact of European policies, processes and institutions. The developments and changes in domestic systems—much more visible in the new member states—suggest that the EU has enormous political and institutional influence. In line with this view, the paper examines the different degrees in which Europeanization has become a transforming political process, particularly in two new post-Communist democracies: Slovakia and Romania. More specifically, the interest is to survey the impact and the way in which Europeanization was incorporated in the rationale of party discourse, identity and policies in the Central-Eastern countries in the pre-accession period.      

Labor laws: Then and now

Our thesis is that the statutes governing labor market behavior were passed in a vastly different economic and institutional environment from that which prevails today. The underlying assumptions used to justify those laws are for the most part unrealistic in today’s altered economic climate. The problems of the 1930s or the 1960s are not the problems of the 1990s, and the solutions have changed as well. We show this by exploring four areas of labor law: collective bargaining, wages and hours, income security, and civil rights. The authors gratefully acknowledge research support provided by the John M. Olin Institute for Employment Practice and Policy.     

CORRUPTION,PRODUCT MARKET COMPETITION,AND INSTITUTIONAL QUALITY: EMPIRICAL EVIDENCE FROM THE U.S. STATES

This article argues that the effect of corruption on competition is dependent on the institutional environment. When institutions are relatively efficient, observed corruption is likely to be associated with relatively less competition. Conversely, in areas with low quality institutions (e.g., excessively burdensome regulations), corruption may lead to relatively more competition. I employ unique data on competition, corruption, and institutional quality across U.S. states from 1997 to 2009 and report that a higher level of corruption is associated with relatively more competition in states with low levels of institutional quality. However, as institutional quality improves, the effect of corruption worsens. Thus, institutional quality is a fundamental determinant of the corruption‐competition relationship. Improving institutional quality, while at the same time reducing corruption, will increase competition and likely improve economic outcomes. (JEL D73, O17, L26)     

The microfinance promise—can it be kept? A macro perspective

After five decades of rapid expansion of microfinance worldwide, little is known about its aggregate effects and whether the “microfinance promise” of poverty reduction holds at the macro level. Challenging questions have arisen. Here we explore the dynamic response of microfinance on economic growth, financial deepening and income inequality. Countries are grouped into three broad clusters (stable, moderate and poor) based on macro‐institutional variables. Our results show that microfinance has a significant long‐term ability to affect the broader economy. However, the impact and dynamics of microfinance differ substantially across macro‐institutional environments. It grows in weaker environments, reaches its peak in developing economies, and then gradually “dies out” in more stable economies. While there is evidence of a positive impact of microfinance at the aggregate level, the response is different depending on whether countries are poor, moderately developed or economically stable. Once countries climb up the macro‐institutional “ladder,” microfinance can take a different shape and its relationship with other macroeconomic fundamentals can change. Our results indicate that microfinance has the strongest effect when the external environment is supportive and proactive; in weak environments, microfinance cannot grow sufficiently. Therefore, more attention should be given to supporting the socioeconomic dimensions of economies.     

How people experience and change institutions: a field guide to creative syncretism

This article joins the debate over institutional change with two propositions. First, all institutions are syncretic, that is, they are composed of an indeterminate number of features, which are decomposable and recombinable in unpredictable ways. Second, action within institutions is always potentially creative, that is, actors draw on a wide variety of cultural and institutional resources to create novel combinations. We call this approach to institutions creative syncretism. This article is in three parts. The first shows how existing accounts of institutional change, which are rooted in structuralism, produce excess complexity and render the most important sources and results of change invisible. We argue that in order to ground the theory of creative syncretism we need a more phenomenological approach, which explains how people live institutional rules. We find that grounding in John Dewey’s pragmatist theory of habit. The second part of the article explains Dewey and shows how the theory of habit can ground an experiential account of institutional rules. The third part presents a field guide to creative syncretism. It uses an experiential approach to provide novel insights on three problems that have occupied institutionalist research: periodization in American political development, convergence among advanced capitalist democracies, and institutional change in developing countries.     

Local Institutional Quality and Return Migration: Evidence from Viet Nam

This article examines the link between local institutional quality in the home country and locational choices of international return migrants. We scrutinize the locational choices of Vietnamese return migrants to the south central and the south regions of Viet Nam in 2014. Binary and multinomial regression models are fitted to identify the influence of migrants’ individual attributes and the characteristics of regional destinations within Viet Nam. Our analysis reveals that both individual‐specific and region‐specific variables are significantly related to Vietnamese return migrants’ choices when registering for permanent residency back in their home country. More remarkably, we provide compelling evidence of the positive role of institutional quality at the local level in these migration decisions. Moreover, the effect of institutional quality differs with the characteristics of migrants: regions with better institutional quality are more attractive both to younger return migrants and to those who returned from host countries with better institutional quality.     

Private Provision of Infrastructure in Emerging Markets: Do Institutions Matter?

Governments in developing countries have encouraged private sector investment to meet the growing demand for infrastructure. According to institutional theory, the role of institutions is paramount in private sector development. A longitudinal dataset of 40 developing economies between 1990 and 2000 is used to test empirically how different institutional structures affect private investment in infrastructure, in particular its volume and frequency. The results indicate that property rights and bureaucratic quality play a significant role in promoting private infrastructure investment. Interestingly, they also suggest that countries with higher levels of corruption attract greater private participation in infrastructure.     

Debt‐Relief Effectiveness and Institution‐Building

This article provides new evidence on the effects of recent debt‐relief programmes on different macroeconomic indicators in developing countries, focusing on the Heavily Indebted Poor Countries (HIPCs). The relationship between debt relief and institutional change is also investigated to assess whether donors are moving towards ex‐post governance conditionality. Results show that debt relief is only weakly associated with subsequent improvements in economic performance but is correlated with increasing domestic debt which undermines the positive achievements in reducing external debt service. There is also evidence that donors are moving towards a more sensible allocation of debt forgiveness, rewarding countries which have better policies and institutions.     

Life Satisfaction and Preferences over Economic Growth and Institutional Quality

This paper demonstrates that institutional factors have differential impacts on subjective well-being of individuals in rich versus poor countries. A lower level of corruption, a more democratic government and better civil rights increase the well-being of individuals in rich countries, whereas an increase in per capita income has no impact. On the contrary, in poor countries the extent of corruption, democracy or civil rights has no influence on happiness, but an increase in per capita income impacts happiness positively. We provide evidence that this stark contrast may be due to the difference of preferences over economic growth and institutional factors.     

Verteilungskoalitionen und Demokratische Staatsstrukturen als Determinanten der wirtschaftlichen Entwicklung?

This comment critically focuses upon Volker Kunz’s (KFfSS Vol. 52, 2000: 195–225) empirical findings concerning the political and institutional underpinnings of economic development in the OECD world. It is argued that a most similar systems design is inappropriate to explore the political sources of economic growth. Reanalyzing the determinants of economic growth rates in a cross-section of 21 OECD countries provides little evidence for a political dimension of economic development. More specifically, I cannot replicate his findings that consensus democracy and distributional coalitions hamper economic growth. It is shown that long-term economic growth rates first and foremost are determined by economic catch-up resulting from differentials in initial levels of economic development.