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Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships | CFSP | Consortium on Financial Systems and Poverty

Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships

Roberto Rigobon
Dani Rodrik
Publication Type: 
Working Papers
Publication Year: 
2005

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East-West versus those aligned on a North-South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

JEL Codes: 
O10
Region: 
Global
Country: 
Global
Topic: 
Growth
Topic: 
Financial Institutions