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Do Institutions Cause Growth?

By Edward L. Glaeser, Rafael la Porta, Florencio Lopez-de-Silanes and Andrew Shleifer. Reading for week of August 3, 2004

We revisit the debate over whether political institutions cause economic growth, or whether, alternatively, growth and human capital accumulation lead to institutional improvement.  We find that most indicators of institutional quality used to establish the proposition that institutions cause growth are constructed to be conceptually unsuitable for that purpose.  We also find that some of the instrumental variable techniques used in the literature are flawed.  Basic OLS results, as well as a variety of additional evidence, suggest that a) human capital is a more basic source of growth than are the institutions, b) poor countries get out of poverty thought good policies, often pursued by dictators, and c) subsequently improve their political institutions.

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