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The Middle Institutions Trap: A Parabolic Association Between Institutions and Income For OPEC Countries
Schneider, Jake W
Schneider, Jake W
Abstract
The literature on economic development asserts that institutions are positively associated with economic growth. Empirically I demonstrate this relationship for a sample size of 169 countries of the world when institutions (as measured by the Polity IV index) are regressed upon income (represented by log GDP per capita) in 2010. However, something fascinating occurs when the sample size is restricted to only Middle East North Africa (MENA) and Organization of Petroleum Exporting Countries (OPEC) countries. In these cases, contrary to predicted outcomes posited by the literature, this relationship between income and institutions is, in fact, negative. This means that Middle Eastern and oil-rich countries with worse institutions perform better than nations with stronger institutions. Furthermore, these results persist when income in 2010 is expanded into the average growth rate between 1990 and 2010 and the model is enlarged to include numerous control variables. The coefficient for OPEC is both precisely estimated and large, and implies that a decrease of -0.27% in growth for every one step increase in institutional quality. This translates to a 4.48% decrease in economic growth if Saudi Arabia (-10), the OPEC country with the lowest institutional quality, were to increase its institutional quality to the level of Ecuador (+5), the OPEC country with strongest institutional quality. Consider that Saudi Arabia’s average growth rate was only 5.9% per year for this period, meaning that this would translate to a 75% decrease. Further investigation of this trend demonstrates a Middle Institutions Trap, where oil rich countries on the extremes of the institutional quality spectrum perform better than those in the center. This has many policy implications, including, most fundamentally, how these more extractive oil-rich regimes will transition once their natural resource wealth "dries up.”
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2015-04-01
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Economics