Institutions and Development: The Second Wave

The last decade has spurred a lively (and well-published) literature on the importance of institutions and regulatory reform for economic growth. Some of the best-known articles include Acemoglu and co-authors' Unbundling Institutions, Djankov and co-authors' The New Comparative Economics, Rodrik's Getting Institutions Right, and Djankov and co-authors' The Regulation of Entry.

These studies have opened the field and put some specifics to the vague term institutions. Kuddos for this achievement. However, they are based on cross-country evidence. This raises a number of concerns, most of all that the associations they show may be due to some unobservable reasons (the favorite one of the detractors of this work is "culture").

Enter Rohini Pande (picture 1) and Christopher Udry (picture 2), with their paper Institutions and Development: A View From Below. Pande and Udry laud the success of the cross-country studies in re-vitalizing the moribund development literature and suggest two ways to enhance its robustness.

The first way is to look for institutional variation within countries and see how it affects economic and social outcomes. Since culture is likely to be more homogeneous within a country, the concerns of cross-country work fall out. One recent example of such work is Mohammad Amin's study on the effects of rigid labor regulation across Indian states. A number of such studies have emerged recently, many using either the World Bank Enterprise Surveys or the sub-national Doing Business data.

The second way is to study the response of individuals and firms to specific reforms. Documenting the effects of, say, business start-up reform on entrepreneurs, while controlling for their individual characteristics like education, income, location, may lead to important insights into the design of reforms. One such example is a study by Kaplan and co-authors on Mexico.

Pande and Udry's recommendation is well-timed and hopefully researchers will take heed.