Skip to main content

The growth effects of institutional instability


We study the effects of institutional instability on growth. Using principal components analysis, we construct measures of institutional quality and instability from the political risk index of the International Country Risk Guide. A panel-data analysis of 132 countries during 1984–2004 reveals that institutional quality, especially with regard to the legal system and the protection of property rights, is positively linked to growth. As for institutional instability, we find evidence of a positive relationship in rich countries but a negative link in poor countries, suggesting that instability may reduce problems of institutional sclerosis in the former and that instability primarily entails an increase in transactions costs and uncertainty in the latter.

Corresponding author
Hide All
Abdiweli M. A. and Crain W. M. (2002), ‘Institutional Distortions, Economic Freedom, and Growth’, Cato Journal, 21 (3): 415426.
Acemoglu D. and Johnson S. (2005), ‘Unbundling Institutions’, Journal of Political Economy, 113 (5): 949997.
Acemoglu D., S. Johnson, and Robinson J. A. (2005), ‘Institutions as a Fundamental Cause of Long-run Growth’, in Aghion P. and Durlauf S. N. (eds.), Handbook of Economic Growth: Volume 1A, Amsterdam: Elsevier, pp. 385472.
Aisen A. and Veiga F. J. (2008), ‘Political Instability and Inflation Volatility’, Public Choice, 135 (3–4): 207223.
Aizenman J. and Marion N. P. (1993), ‘Policy Uncertainty, Persistence and Growth’, Review of International Economics, 1 (2): 145163.
Alesina A., Devleeschauwer A., Easterly W., Kurlat S., and Wazciarg R. (2003), ‘Fractionalization’, Journal of Economic Growth, 8 (2): 155194.
Alesina A., Özler S., Roubini N., and Swagel P. (1996), ‘Political Instability and Economic Growth’, Journal of Economic Growth, 1 (2): 189211.
Alesina A. and Perotti R. (1996), ‘Income Distribution, Political Instability, and Investment’, European Economic Review, 40 (6): 12031228.
Aron J. (2000), ‘Growth and Institutions: A Review of the Evidence’, World Bank Research Observer, 15 (1): 99135.
Aysan A. F., Nabli M. K., and Véganzonès-Varoudakis M.-A. (2007), ‘Governance Institutions and Private Investment: An Application to the Middle East and North Africa’, Developing Economies, 45 (3): 339377.
Baliamoune-Lutz M. and Addison T. (2007), ‘Economic Reform When Institutional Quality is Weak: The Case of the Maghreb’, Journal of Policy Modeling, 29 (1): 6579.
Barro R. (1997), Determinants of Economic Growth: A Cross-Country Empirical Study, Cambridge, MA: MIT Press.
Barro R. J. and Lee J.-W. (2010), ‘A New Data Set of Educational Attainment in the World, 1950–2010’, NBER Working Paper no. 15902, Cambridge, MA: National Bureau of Economic Research.
Baumol W. J. (1990), ‘Entrepreneurship: Productive, Unproductive, and Destructive’, Journal of Political Economy, 98 (5): 893921.
Beck T., Clarke G., Groff A., Keefer P., and Walsh P. (2008), Database of Political Institutions, The World Bank, (accessed 20 May 2008).
Beck T. and Laeven L. (2006), ‘Institution Building and Growth in Transition Economies’, Journal of Economic Growth, 11 (2): 157186.
Berggren N. (2003), ‘The Benefits of Economic Freedom: A Survey’, Independent Review, 8 (2): 193211.
Berggren N. and Jordahl H. (2006), ‘Free to Trust: Economic Freedom and Social Capital’, Kyklos, 59 (2): 141169.
Bergh A. and Henrekson M. (2011), ‘Government Size and Growth: A Survey and Interpretation of the Evidence’, Journal of Economic Surveys, doi:10.1111/j.1467-6419.2011.00697.x.
Bergh A. and Karlsson M. (2010), ‘Government Size and Growth: Accounting for Economic Freedom and Globalization’, Public Choice, 142 (1–2): 195213.
Beugelsdijk S., de Groot H. L. F., and van Schaik A. B. T. M. (2004), ‘Trust and Economic Growth: A Robustness Analysis’, Oxford Economic Papers, 56 (1): 118134.
Bjørnskov C. (2007), ‘Determinants of Generalized Trust. A Cross-Country Comparison’, Public Choice, 130 (1–2): 121.
Bjørnskov C. and Kurrild-Klitgaard P. (2008), ‘Economic Growth and Institutional Reform in Modern Monarchies and Republics: A Historical Cross-Country Perspective 1820–2000’, Working Paper 08–15, Aarhus: Aarhus School of Business.
Blanchard O. and Kremer M. (1997), ‘Disorganization’, Quarterly Journal of Economics, 112 (4): 10911126.
Bleaney M. and Nishiyama A. (2002), ‘Explaining Growth: A Contest between Models’, Journal of Economic Growth, 7 (1): 4356.
Brambor T., Clark W., and Golder M. (2006), ‘Understanding Interaction Models: Improving Empirical Analyses’, Political Analysis, 14 (1): 6382.
Brunetti A. and Weder B. (1998), ‘Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures’, Review of World Economics, 134 (3): 513533.
Butkiewicz J. L. and Yanikkaya H. (2006), ‘Institutional Quality and Economic Growth: Maintenance of the Rule of Law or Democratic Institutions, or Both?’, Economic Modelling, 23 (4): 648661.
Campos N. F. and Nugent J. B. (2002), ‘Who Is Afraid of Political Instability?’, Journal of Development Economics, 67 (1): 157172.
Chatterjee P. and Shukayev M. (2006), ‘Are Average Growth Rate and Volatility Related?’, Working Paper 2006–24, Ottawa: Bank of Canada.
Chong A. and Calderón C. (2000), ‘Causality and Feedback Between Institutional Measures and Economic Growth’, Economics and Politics, 12 (1): 6981.
Claessens S. and Laeven L. (2003), ‘Financial Development, Property Rights, and Growth’, Journal of Finance, 58 (6): 24012436.
Coates D., Heckelman J. C., and Wilson B. (2010), ‘The Political Economy of Investment: Sclerotic Effects from Interest Groups’,European Journal of Political Economy, 26 (2): 208221.
Coates D., Heckelman J. C., and Wilson B. (2011), ‘Special Interest Groups and Growth’, Public Choice, 147 (3–4): 439457.
Collier P. (2008), The Bottom Billion, New York: Oxford University Press.
Craine R. (1989), ‘Risky Business: The Allocation of Capital’, Journal of Monetary Economics, 23 (2): 201218.
Daude C. and Stein E. (2007), ‘The Quality of Institutions and Foreign Direct Investment’, Economic and Politics, 19 (3): 317344.
de Haan J. (2007), ‘Political Institutions and Economic Growth Reconsidered’, Public Choice, 131 (3–4): 281292.
de Haan J. and Siermann C. L. J. (1996), ‘Political Instability, Freedom, and Economic Growth: Some Further Evidence’, Economic Development and Cultural Change, 44 (2): 339350.
de Haan J. and Siermann C. L. J. (1998), ‘Further Evidence on the Relation between Economic Freedom and Economic Growth’, Public Choice, 95 (3–4): 363380.
De la Escosura L. P. and Sanz-Villaroya I. (2004), ‘Institutional Instability and Growth in Argentina: A Long-Run View’, Working Paper 04–67, Madrid: Universidad Carlos II de Madrid.
Demsetz H. (1967), ‘Towards a Theory of Property Rights’, American Economic Review, 57 (5): 347359.
Doucouliagos C. and Ulubasoglu M. A. (2006), ‘Economic Freedom and Economic Growth: Does Specification Make a Difference?’, European Journal of Political Economy, 22 (1): 6081.
Dunning T. (2008), ‘Model Specification in Instrumental-Variables Regression’, Political Analysis, 16 (3): 290302.
Durham J. B. (1999), ‘Economic Growth and Political Regimes’, Journal of Economic Growth, 4 (1): 81111.
Fatás A. and Mihov I. (2011), ‘Policy Volatility, Institutions and Economic Growth’, Review of Economics and Statistics, forthcoming.
Ferderer J. P. (1993), ‘The Impact of Uncertainty on Aggregate Investment Spending: An Empirical Analysis’, Journal of Money, Credit and Banking, 25 (1): 3048.
Freedom House (2007), Freedom in the World 2005: The Annual Survey of Political Rights and Civil Liberties, Lanhamn, MD: Rowman and Littlefield.
Friedman M. (1962), Capitalism and Freedom, Chicago, IL: University of Chicago Press.
Glaeser E. L., La Porta R., Lopez-de-Silanes F., and Shleifer A. (2004), ‘Do Institutions Cause Growth?’, Journal of Economic Growth, 9 (2): 271303.
Gwartney J. D. and Lawson R. A. (2007), Economic Freedom of the World: 2007 Annual Report, Vancouver: The Fraser Institute.
Hayek F. A. (1973), Law, Legislation and Liberty: Rules and Order, Chicago, IL: University of Chicago Press.
Hayek F. A. (1978), ‘Competition as a Discovery Procedure’, in Hayek F. A. (ed.), New Studies in Philosophy, Politics and Economics, Chicago, IL: University of Chicago Press, pp. 179190.
Henisz W. J. (2000), ‘The Institutional Environment for Economic Growth’, Economics and Politics, 12 (1): 131.
Henisz W. J. (2002), ‘The Institutional Environment for Infrastructure Investment’, Industrial and Corporate Change, 11 (2): 355389.
Heritage Foundation (2007), 2007 Index of Economic Freedom: The Link Between Economic Opportunity and Prosperity, Washington, DC: The Heritage Foundation.
Heston A., Summers R., and Aten B. (2006), Penn World Tables Version 6.2, Philadelphia: Center for International Comparisons of Production, Income and Prices, University of Pennsylvania.
Hopenhayn H. A. and Muniagurria M. E. (1996), ‘Policy Variability and Economic Growth’, Review of Economic Studies, 63 (4): 611625.
Horgos D. and Zimmermann K. W. (2009), ‘Interest Groups and Economic Performance: Some New Evidence’, Public Choice, 138 (3–4): 301315.
International Country Risk Guide (2008), International Country Risk Guide, Syracuse: The PRS Group.
Jong-A-Pin R. (2009), ‘On the Measurement of Political Instability and Its Impact on Economic Growth’, European Journal of Political Economy, 25 (1): 1529.
Kaufmann D., Kraay A., and Mastruzzi M. (2008), ‘Governance Matters VII: Aggregate and Individual Governance Indicators 1996–2007’, Working Paper 4654, Washington, DC: The World Bank.
Keefer P. and Knack S. (1997), ‘Why Don't Poor Countries Catch Up? A Cross-National Test of an Institutional Explanation’, Economic Inquiry, 35 (3): 590601.
Kingston C. and Caballero G. (2009), ‘Comparing Theories of Institutional Change’, Journal of Institutional Economics, 5 (2): 151180.
Knack S. (2002), ‘Social Capital and the Quality of Government: Evidence from the States’, American Journal of Political Science, 46 (4): 772785.
Knack S. and Keefer P. (1995), ‘Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures’, Economics and Politics, 7 (3): 207227.
Knight J. and Johnson J. (2007), ‘The Priority of Democracy: A Pragmatist Approach to Political-Economic Institutions and the Burden of Justification’, American Political Science Review, 101 (1): 4761.
Lorentzen P., McMillan J., and Wacziarg R. (2008), ‘Death and Development’, Journal of Economic Growth, 13 (2): 81124.
Marshall M. G. and Jaggers K. (2004), Polity IV Project: Political Regime Characteristics and Transitions, 1800–2002: Dataset and Codebook, (accessed 10 November 2006).
Méon P.-G., Sekkat K., and Weill L. (2009), ‘Institutional Changes Now and Benefits Tomorrow: How Soon is Tomorrow?’, Economics and Politics, 21 (2): 319357.
Merlevede B. and Schoors K. (2007), ’On the Speed of Economic Reform – A Tale of the Tortoise and the Hare: Evidence from Transition Countries’, Journal of Economic Policy Reform, 10 (1): 2950.
Munck G. L. and Verkuilen J. (2002), ‘Conceptualizing and Measuring Democracy: Evaluating Alternative Ideas’, Comparative Political Studies, 35 (1): 534.
North D. C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press.
Olson M. (1982), The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, New Haven, CT: Yale University Press.
Pierson P. (2006), ‘Public Policies as Institutions’, in Shapiro I., Skowronek S., and Galvin D. (eds.), Rethinking Political Institutions: The Art of the State, New York, NY: New York University Press, pp. 114131.
Pitlik H. (2002), ‘The Path of Liberalization and Economic Growth’, Kyklos, 55 (1): 5780.
Przeworski A. and Limongi F. (1993), ‘Political Regimes and Economic Growth’, Journal of Economic Perspectives, 7 (3): 5169.
Ramey G. and Ramey V. A. (1995), ‘Cross-Country Evidence on the Link Between Volatility and Growth’, American Economic Review, 85 (5): 11381151.
Rodrik D., Subramanian A., and Trebbi F. (2004), ‘Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development’, Journal of Economic Growth, 9 (2): 131165.
Rothstein B. (2000), ‘Trust, Social Dilemmas, and Collective Memories’, Journal of Theoretical Politics, 12 (4): 477501.
Sala-i-Martin X. (1997), ‘I Just Ran 2 Million Regressions’, American Economic Review, 87 (2): 178183.
Schaltegger C. A. and Torgler B. (2006), ‘Growth Effects of Public Expenditure on the State and Local Level: Evidence From a Sample of Rich Governments’, Applied Economics, 38 (10): 11811192.
Seldadyo H., Nugroho E. P., and de Haan J. (2007), ‘Governance and Growth Revisited’, Kyklos, 60 (2): 279290.
Smith A. (1776) [1930]), The Wealth of Nations, Book I, London: Cannan.
Sobel R. S. and Coyne C. J. (2011), ‘Cointegrating Institutions: The Time Series Properties of Country Institutional Measures’, Journal of Law and Economics, 54 (1): 111134.
Sturm J.-E. and de Haan J. (2005), ‘Determinants of Long-Term Growth: New Results Applying Robust Estimation and Extreme Bounds Analysis’, Empirical Economics, 30 (3): 597617.
Temple J. (1999), ‘The New Growth Evidence’, Journal of Economic Literature, 37 (1): 112156.
Toft S. (2008), ‘Project Finance and Political Risk – An Empirical Study of the Relationship Between Project Finance and Political Risk’, Master's Thesis, Aarhus School of Business.
Voeten E. (2004), Documenting Votes in the UN General Assembly, Database, Washington, DC: George Washington University, (accessed 18 January 2009).
World Bank (2011), Wold Development Indicators Database, Washington, DC: The World Bank.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Institutional Economics
  • ISSN: 1744-1374
  • EISSN: 1744-1382
  • URL: /core/journals/journal-of-institutional-economics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 1
Total number of PDF views: 60 *
Loading metrics...

Abstract views

Total abstract views: 322 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 22nd November 2017. This data will be updated every 24 hours.