Exploring the causal link between institutions and economic growth has proved extremely
difficult. Despite creative and insightful efforts, the existing research strategy does not establish
this link, due to both conceptual problems with the measurement of institutions and the limitations
of econometric techniques. In particular, the existing research does not show that political
institutions rather than human capital have a causal effect on economic growth. Indeed, much
evidence points to the primacy of human capital for both growth and democratization.
Our results are consistent with a perspective on institutions outlined by Djankov et al.
(2003). According to that paper, each community faces a set of institutional opportunities,
determined largely by the human and social capital of its population. The greater the human and
social capital of a community, the more attractive its institutional opportunities. Institutions, in this
framework, are points on this opportunity set, determined by efficiency, history, and politics.
Institutions are highly persistent because history, including colonial history, shapes social choices.
But institutional outcomes also get better as the society grows richer, because institutional
opportunities improve. Importantly, in that framework, institutions have only a second order effect
on economic performance. The first order effect comes from human and social capital, which
shape both institutional and productive capacities of a society.
Our results have some implications for economic research and for economic policy. They
suggest that research in institutional economics, and in particular on the consequences of alternative
institutional arrangements, must focus on actual rules, rather than on conceptually ambiguous
assessments of institutional outcomes. The results of this paper do not show that “institutions do
not matter.” That proposition is flatly contradicted by a great deal of available empirical evidence,
including our own. Rather, our results suggest that the current measurement strategies have 27
conceptual flaws, and that researchers would do better focusing on actual laws, rules, and
compliance procedures that could be manipulated by a policy maker to assess what works .
With respect to policy, our results do not support the view that, from the perspective of
security of property and economic development, democratization and constraints on government
must come first. In many poor countries, such security came from policy choices made by
dictators. The economic success of East Asia in the post war era, and of China most recently, has
been a consequence of good-for-growth dictators, not of institutions constraining them. Indeed,
the Chinese example illustrates this point forcefully: there was nothing pre-destined about Deng,
one of the best dictators for growth, succeeding Mao, one of the worst. More generally, it might
be less profitable to look for the “deep” factors explaining economic development than for policies
favoring human and physical capital accumulation (see also Przeworski 2004a,b).
None of this is to deny the merits of democracy and the constraints on government as
essential human values in their own right. Mulligan, Gil, and Sala-i-Martin (2004) present
compelling evidence that in such policy areas as freedom of the press, torture, death penalty, and
regulation of religion, democracies are significantly more benign than dictatorships. But our
evidence suggests some skepticism about the viability of democracy in countries with low level of
human capital – there have been few examples of such democracies in the world. Our evidence
suggests in contrast that the Lipset-Przeworski-Barro view of the world is more accurate: countries
that emerge from poverty accumulate human and physical capital under dictatorships, and then,
once they become richer, are increasingly likely to improve their institutions.