Department of Economics

INSTITUTIONAL QUALITY AND ECONOMIC GROWTH: MAINTENANCE OF THE RULE OF LAW OR DEMOCRATIC INSTITUTIONS, OR BOTH?

Department of Economics

University of Delaware

Working Paper #2004-03

INSTITUTIONAL QUALITY AND ECONOMIC GROWTH: MAINTENANCE OF THE RULE OF LAW OR DEMOCRATIC INSTITUTIONS, OR BOTH?

James L. Butkiewicz and Halit Yanikkaya

Analysis of the factors determining rates of economic growth has found that country-specific characteristics have important effects on growth performance. Empirical evidence to date suggests that maintenance of the rule of law promotes growth, while adopting democratic institutions does not appear to improve growth performance. We find that these conclusions are very sensitive to sample selection and to estimation technique. When an identical sample of countries is used, we find that countries with democratic institutions do enjoy superior growth performance. The relationship between growth and democratic institutions is also sensitive to the estimation technique used. Estimates using instrumental variable techniques suggest that democratic institutions do experience better growth performance. These results are especially relevant for developing nations.

JEL Classifications: O40, P16

Keywords: Rule of Law, Democracy, Economic Growth

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