Guest post by Toke Aidt, Daniel L. Bennett, and Boris Nikolaev*
For many years, the received wisdom among economists has been that the drivers of economic growth and development are investment in physical capital (machines, buildings, etc.), human capital (education), public infrastructure (roads, rail, etc.) and R&D. Today, however, many think that these investments, important as they may be, are only proxies for rather than fundamental causes of growth. The fundamental cause is institutions – the rules, norms and beliefs that structure economic and social interactions. The new mantra is that “institutions matter” and that the reasons why some societies have managed to grow rich while others remain poor can be traced back to the institutions they did or did not adopt along the way. The seminal work by the late Nobel Laureate Douglas North has contributed significantly to this shift in perspective and has been largely responsible for energizing the rapidly growing new institutional economics literature.
We recently dedicated a Special Issue (SI) of the European Journal of Political Economy to the work of North and the important research agenda that he initiated. The SI features 10 cutting-edge articles centered on the topic “Institutions & Well-Being,” all of which are available with open access, thanks to a generous grant from Patrick Henry College.
Much of North’s inquiry was concerned with the effect that institutions have on economic performance. Three papers in the SI extend this research. Gründler and Krieger, in their paper “Democracy and Growth: Evidence from a Machine Learning Indicator,” develop a novel way to measure democracy based on a machine learning algorithm. For a panel of 185 countries spanning the period 1981-2011, they find a robust positive relationship between their democracy index and economic growth, and show that the effect runs through more education, higher investment, and lower fertility. In their paper, “Unbundling the Roles of Human Capital and Institutions in Economic Development”, Hugo Faria, Hugo Montesinos-Yufa, Daniel Morales, and Carlos Navarro use genetic diversity as an instrument for economic freedom and find the latter to exert a robust, positive, and possibly causal effect on long-run economic growth. They also provide evidence that human capital may only impact economic development only indirectly through the institutional channel. In his paper, “Economic Freedom and Economic Crises”, Christian Bjørnskov explores the association between economic freedom and several measures of economic crisis for a panel of 175 countries over the period 1993-2010, finding that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter economic recover times.
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*Toke Aidt (University of Cambridge, UK), Daniel L. Bennett (Baylor University, United States), Boris Nikolaev (Baylor University, United States)