Chapter 5: Can we Measure Institutions and Institutional Change?
Measuring institutions turns out to be far more diﬃcult than it sounds. Economists have put considerable eﬀort into deﬁning and testing institutional variables for cross-country growth regressions, but far less eﬀort has gone into measuring institutions in speciﬁc countries. Speciﬁcity is crucial because, as North et al. (forthcoming) argue, the same institutions work very diﬀerently in limited access and open access societies. I describe this problem for democracies later in this chapter. Because they lack speciﬁcity, few current institutional measures are what Steve Knack calls “actionable,” that is, able to help researchers analyze the causal eﬀects of speciﬁc institutions, help citizens demand better institutions and hold leaders accountable, help reformers design successful and sustainable improvements in institutions, and help aid-givers judge when countries are able to use aid more eﬀectively (Knack 2006). In this chapter I ﬁrst consider the evidence that institutions are correlated with growth and how this literature measures institutions. I next discuss speciﬁc problems of measuring democracy. If institutions matter for growth then democracy should matter, since democracy represents a prime subset of institutions. Yet it has proved impossible to ﬁnd a clear relationship between democracy and long-run growth, probably because we cannot measure institutions adequately. Despite such weaknesses, institutional indicators are widely used by aid agencies. The previous chapter concluded that aid can neither improve nor avoid harmful institutions, but at least in theory aid could usefully assist countries that are already improving their...
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