Institutions and economic outcomes: a dominance-based analysis

An important issue in both welfare and development economics is the interaction between institutions and economic outcomes. While welfarists are typically concerned with how these variables contribute to overall wellbeing, empirical assessments of their joint contribution are limited. Development economists, on the other hand, have focused extensively on whether institutions cause or are caused by growth yet the relevant literature is still rife with debate. In this article, we use a notion of distributional dominance to tackle both the measurement of multivariate welfare and the evaluation of inter-temporal dependence without hindrance from the mix of discrete (political) and continuous (economic) variables in our data set. On the causality front, our results support the view that institutions promote growth more than growth promotes institutions. On the welfare front, we find that economic growth had a positive impact from 1960 to 2000 but declines in institutional quality over the earlier part of this period were sufficient to produce a decline in overall wellbeing until the mid-1970s. Subsequent improvements in institutions then reversed the trend and, ultimately, wellbeing in 2000 was higher than that in 1960.