The Economic Value of Institutional Reform:

International Evidence Across Regions

 

Economic Growth and Development builds inherently on how institutions manage risk. In the early European voyages of discovery, risk was highly centralized around centralized political authority. While Spain and Portugal had early leads in voyages of discovery, their economic power was eclipsed not long after by rivals in England and Holland, and later by the United States, among others. One reason why this was so was that the Dutch pioneered in the development of the modern corporation and institutional stock exchanges to manage the underlying levels of risk. Since then, other forms of risk have involved the creation of insurance contracts to handle contingencies in a broad array of circumstances.

For emerging and developing economies in the 21st century, successful globalization requires that they create effective institutions to manage risk. Since risk can take on economic, financial, political and environmental dimensions, crafting institutions to handle various types of risk is essential if globalization is to succeed.

We provide here a panel regression analysis of the determinants of aggregate country risk for a sample of 103 countries for the 1980-2002 time period. Dividing the countries into geographic regions, we explore through a nested panel regression model how aggregate country risk affects a country or region's level of per capita income.

Nested Panel Regression Model

Based on the global model, expected regression signs for each independent variable are shown next to the variable label. Below each variable is the 2-lag Granger causality test, followed by the corresponding null probability level in parentheses.

Panel Regression Direct and Indirect Effects of Aggregate Country Composite Risk

on PPP Per Capita Real GDP, 1980-2002 

Determinants of Economic Freedom and Democracy

Determinants of Aggregate Country Composite Risk
Determinants of Trade Dependency and Gross National Savings Rate

One Point Absolute Effects of An Increase in Designated Institutional Variables

One Point Relative Effects of An Increase in Designated Institutional Variables

Present Value Relative Effects of Given Unit Change in Institutional Variable at Real Interest Rate

One Point Net Effects on PPP PC GDP

One Point Net Effects on Present Value of PPP PC GDP

Panel Sample

Variable Descriptive Statistics

(global sample)

Variable Definitions and Sources

References 

Arestis, Philip and Santonu Basu (2003).  “Is Financial Globalization Truly Global?” (Annandale-on-Hudson,  New York:  The Levy Economics Institute of Bard College Public Policy Brief No. 75, December).

Barro,  Robert J. (1999).  “Determinants of Democracy,” Journal of Political Economy 107(6): 301-336.

Barro, Robert J. (1998).  Determinants of Economic Growth.  (Cambridge, Mass.:  MIT Press).

Barro, Robert J. (1996). “Democracy and Growth,” Journal of Economic Growth, 1:1-27.

Bernstein, Peter L. (1998, 1996).  Against the Gods:  The Remarkable Story of Risk.  (New York:  John Wiley and Sons).

Bhagwati, Jagdish (2004).  In Defense of Globalization.  (New York:  Oxford University Press).

Black, Fisher and Myron Scholes (1973).  “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy (May-June) 81: 637-59.

Boko, Sylvain (2002).  “Institutional Reform and Economic Growth in Africa,” Journal of African Finance and Economic Development 5(2): 56-76.

Burnside, Craig and David Dollar (2000). “Aid, Policies, and Growth.” American Economic Review  90(4) (September), 847-68.

Canales-Kriljenko,  Jorge, and Karl Habermeier (2004), “Structural Factors Affecting Exchange Rate Volatility:  A Cross-Section Study”, IMF Working Paper 147.  (Washington, D.C.:  International Monetary Fund,  August).

Cordella, Tito and Eduardo Levy Yeyati (2004).  “Country Insurance,” IMF Working Paper 148.  (Washington, D.C.:  International Monetary Fund, August).

Das,  Udaibir S., Marc Quintyn and Kina Chenard (2004),  “Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis”, IMF Working Paper 89.  (Washington, D.C.:  International Monetary Fund, May).

Dollar, David and Aart Kraay (2003).  “Institutions, Trade, and Growth:  Revisitng the Evidence,” World Bank Policy Research Working paper 3004.  (Washington, D.C.:  the World Bank, March).

Easterly, William (2002, 2001).  The Elusive Quest for Growth.  (Cambridge, Mass.:  MIT Press).

Gasha, J. Giancarlo and R. Armando Morales (2004).  “Identifying Threshold Effects in Credit Risk Stress Testing,” IMF Working Paper 150.  (Washington, D.C.:  International Monetary Fund, August).

Gilson, Marie-Thérèse Camilleri (2004).  “An Institutional Framework for Comparing Emerging Market Currency Boards,” IMF Working Paper 180.  (Washington, D.C.:  International Monetary Fund, September).

Gradstein, Mark (2003). “Governance and Economic Growth,” World Bank Policy Research Working Paper 3098.  (Washington, D.C.:  The World Bank, July).

________(2003).  Global Financial Stability Report – Market Developments and Issues.  (Washington, D.C.:  International Monetary Fund, December).

Huther, Jeff and Anwar Shah (2000). “Anti-Corruption Policies and Programs:  A Framework for Evaluation.”, World Bank Working Paper 2501.  (Washington, D.C.:  The World Bank).

Jones, Geraint, Joel S. Hellman, and Mark Schankerman (2000).  “Measuring Governance, Corruption, and State Capture:  How Firms and Bureaucrats Shape theBusiness Environment in Transit,” World Bank Working Paper 2312. (Washington,D.C.:  The World Bank).

Kaufmann, Daniel, Aart Kraay, and Pablo Zoido-Lobaton (1999a).  “Governance Matters,” World Bank Policy Research Working Paper 2196. (Washington, D.C.:  The World Bank Development Research Group).

Kaufmann, Daniel, Aart Kraay, and Pablo Zoido-Lobaton (1999b). “Governance Matters, II”, World Bank dataset :

      http://www.worldbank.org.wbi/governance/datasets.htm#dataset

Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi (2003).  Governance Matters III:  Governance Indicators for 1996-2002, World Bank dataset:

      http://www.worldbank.org/wbi/governance/govdata2002.html

Kaufmann, Daniel and Aart Kraay (2002).  “Growth Without Governance,” World Bank Policy Research Working paper 2928.  (Washington, D.C.:  The World Bank, November).

Knack, R., (2000).  “Aid Dependence and the Quality of Governance:  A Cross-Country Empirical Analysis”, World Bank Working Paper 2396.  (Washington,D.C.:  The World Bank).

Lee, Jaewoo (2004).  “Insurance Value of International Reserves:  An Option Pricing Approach,” IMF Working Paper 175.  (Washington, D.C.:  International Monetary Fund, September).

Loukoianova, Elena and Anna Univogskaya (2004).  “Analysis of Recent Growth in Low-Income CIS Countries,” IMF Working Paper 151.  (Washington, D.C.:  International Monetary Fund, August).

Markowitz, Harry (1952).  “Portfolio Selection,” Journal of Finance 71(1) (March), 77-91.

Mattoo, Aaditya and Arvind Subramanian (2004).  “The WTO and the Poorest Countries:  The Stark Reality,” IMF Working Paper 81.  (Washington, D.C.:  International Monetary Fund, May).

McKinnon, Ronald I. (1973). Money and Capital in Economic Development. (Washington, D.C.:  The Brookings Institution).

Merton, Robert C. (1973).  “The Theory of Rational Option Pricing,” Bell Journal of Economics and Management Science 4 (Spring), 141-83.

North, Douglass C. (1990).  Institutions, Institutional Change, and Economic Performance.  (Cambridge, U.K.:  Cambridge University Press).

Obstfeld, Maurice (1994). “Risk-Taking, Global Diversification and Growth,” American Economic Review 84: 1310-1329.

Olson, Mancur (1982).  The Rise and Decline of Nations.  (New Haven, Conn.:  Yale University Press).

Ricardo, David (1965,1817).  Principles of Political Economy and Taxation.   (New York:  E.P. Dutton Everyman’s Library).

Sachs, Jeffrey J., et. al. (2004).  Ending Africa’s Poverty Trap.  (Washington, D.C.:  The Brookings Institution).

Samuelson, Paul A. (2004).  “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization,” Journal of Economic Perspectives 18:3 (Summer), 135-146.

Schinasi, Garry J. (2004).  “Defining Financial Stability,” IMF Working Paper 187.  (Washington, D.C.:  International Monetary Fund,  October).

Shaw, Edward (1973).  Financial  Deepening in Economic Development.  (New York:  Oxford University Press).

Shiller, Robert (2003).  The New Financial Order:  Risk in the 21st Century.  (Princeton, N.J.:  Princeton University Press).

Stiglitz, Joseph E. (2003, 2002).  Globalization and Its Discontents.  (New York:  W.W. Norton and Company).

Tokarick, Stephen (2004).  “What Do We Know About Tariff Incidence?” IMF Working Paper 182.  (Washington, D.C.:  International Monetary Fund, September).

Williamson, Oliver (2000).  “The New Institutional Economics:  Taking Stock, Looking Ahead,” Journal of Economic Literature, vol. XXXVIII:3 (September).: 595-613.

Williamson, Oliver (1999, 1996).  The Mechanisms of Governance.  (New York:  Oxford University Press).

Worrell, DeLisle (2004).  “Quantitative Assessment of the Financial Sector:  An Integrated Approach,” IMF Working Paper 153.  (Washington, D.C.:  International Monetary Fund, August).

______”How to Save the World,” The Economist, 30 October 2004, p. 80. 

This website has been visited times since February 25, 1999.

Select an Option: