The Growth Effects of Institutional Instability

40 Pages Posted: 17 Jun 2009

See all articles by Andreas Bergh

Andreas Bergh

Research Institute of Industrial Economics (IFN); Lund University - Department of Economics

Niclas Berggren

Research Institute of Industrial Economics (IFN); University of Economics, Prague - Faculty of Economics and Public Administration

Christian Bjørnskov

Aarhus University - Department of Economics and Business; Research Institute of Industrial Economics (IFN); Center for Political Studies; Institute for Corruption Studies

Date Written: June 16, 2009

Abstract

Both institutional quality and institutional stability have been argued to stimulate economic growth. But to improve institutional quality, a country must endure a period of institutional change, which implies at least a little and possibly a lot of institutional instability. We investigate the growth effects of institutional quality and instability, using the political risk index from the ICRG in a cross-country study of 132 countries, measuring instability as the coefficient of variation. Using the aggregate index, we find evidence that institutional quality is positively linked to growth. While institutional instability is negatively related to growth in the baseline case, there are indications that the effect can be positive in rich countries, suggesting that institutional reform is not necessarily costly even during a transition period. Sensitivity analysis, e.g., decomposing the political risk index by using both its constituting components and the results of a principal components analysis, using other measures of institutional quality and excluding outliers, confirm the general results, with qualifications.

Keywords: Institutions, Instability, Growth, Transaction costs, Uncertainty

JEL Classification: B52, D80, O11, O17, O43

Suggested Citation

Bergh, Andreas and Berggren, Niclas and Bjørnskov, Christian, The Growth Effects of Institutional Instability (June 16, 2009). Available at SSRN: https://ssrn.com/abstract=1420876 or http://dx.doi.org/10.2139/ssrn.1420876

Andreas Bergh

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
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Sweden
0707790734 (Phone)

HOME PAGE: http://www.ifn.se/web/AndreasB

Lund University - Department of Economics ( email )

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Lund
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HOME PAGE: http://www.nek.lu.se/

Niclas Berggren

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
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Stockholm, SE-102 15
Sweden

HOME PAGE: http://www.ifn.se/nb

University of Economics, Prague - Faculty of Economics and Public Administration ( email )

nám. W. Churchilla 4
Praha, 130 67
Czech Republic

Christian Bjørnskov (Contact Author)

Aarhus University - Department of Economics and Business ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Center for Political Studies

Landgreven 3
Copenhagen K, DK-1301
Denmark

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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