Reviewing the Empirical Literature of the Politics of Economic Growth

A recent set of papers in the empirical growth literature has tried to go beyond the proximate determinants of economic growth (such as macroeconomic stability and trade openness) to study the fundamental causes of economic growth across countries, and in particular, the importance of economic and political institutions.

Much of this literature has mostly focused on the determinants of long- run per capita income differences and less on determinants of why countries switch from one growth phase to another. Starting with the seminal piece by Acemoglu, Johnson, and Robinson—AJR—(2001), the empirical literature in this tradition shows that institutional quality matters for long-run economic growth, more than other 'deep determinants' of economic growth such as geography or culture. However, while measures of institutional or governance quality used in this body of work may be strong, positive correlates of long-run per capita income, they appear to be less important in explaining why some countries experience economic growth and not others. As Khan (2012) notes, for the same level of institutional quality, we see very different growth experiences among developing countries. Since the measures of institutional quality used in the AJR genre captures in essence how well formal institutions are functioning, what the cross-country econometric work in the AJR tradition establishes is the strong positive relationship between the quality of formal institutions and long-run economic growth, but not necessarily of growth transitions within countries. The implication of this literature from our perspective is that while well-functioning formal institutions may not be important determinants of growth accelerations, these institutions may be important in the growth-sustenance process, and in the long-run evolution of per capita incomes.

Finally, it is worth noting that while the cross-country econometric literature on the institutional determinants of economic growth have gone beyond the earlier focus on proximate determinants of growth such as macroeconomic stability, trade openness, and human-capital formation, and have been able to bring in an emphasis on economic and political institutions as the fundamental cause of economic growth, they still leave open the question: what is the underlying political equilibrium/settlement that generates growth-enhancing institutions, and are there specific characteristics of settlements within which growth-enhancing institutions emerge? To address this question, it will be necessary to both deepen the cross-country quantitative research by analysing the political equilibria around growth regime traverses and to complement the quantitative research with historical case studies that analyse the changes in and within political settlements around growth regime switches, with a specific focus on the political process that shapes the emergence of growth coalitions.

that a narrowly based ruling coalition (led by Suharto) can deliver significant pro-poor growth as a significant proportion of the oil revenues were channelled into a major school-building programme that had a significant poverty reduction impact (Hill 2000).

 
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