In the first post of this series I described recent work in empirical institutional economics and why I thought the work pursued a virtuous end but was compromised by the use of poor institutional measures. Today I will introduce a specific paper of this type that had drawn my attention and talk briefly about the other types of institutional variables that have been tried in country level regressions.
I had come into the current empirical literature whilst researching the resource curse for my honours dissertation. A Norwegian trio, Mehlum, Moene and Torvik, had created a model that predicted that a resource curse would happen only if institutions were below a certain threshold of quality. The resource curse occurred, they said, because natural wealth provided an easy source of unearned wealth; economic rents. It made becoming or usurping a thief, or a warlord or an oligarch much more attractive (and easier) compared to productive activity such as working or becoming an entrepreneur. This doesn’t help the country grow economically. The attractions towards kleptocracy and rentseeking can be mitigated or averted by good institutions, so that Australia, Norway or even Botswana could avoid the curse and even prosper from their resources, but in places like The Congo or Venezuela the gains from seizing something and sitting on it were just too great relative to alternatives.
This was very interesting, and had strong intuitive appeal. It promised insight into one of the most vexing of development issues and gave a distinct hypothesis. They even crunched data in support of this hypothesis.
Unfortunately of course, they used those damn indices.
This was little enough reason to discard an intriguing hypothesis. So I went hunting for a better measurement of institutions.
(Continued)